It might have put paid to product bias towards one provider over another but does not alone aid intermediaries in courting a better public image.
For this reason, rewards for the number of products IFAs recommend and sell are next in the FSA’s firing line.
The judgement that most incentive schemes are likely to drive advisers to mis-sell financial products is not in itself surprising.
Neither are the widespread failings the FSA revealed as part of its review of incentive schemes across a variety of authorised firms.
Playing blind
The regulator found firms turning a blind eye to risks of mis-selling because of incentive schemes. It also found companies that failed to understand their own incentive schemes because they were so complex.
Firms were also seen not doing enough to control the risk of mis-selling in face-to-face situations, the FSA said.
An example it gave of an incentive scheme that significantly increases the risk of mis-selling read as such:
“A firm excessively incentivised one product type over another, where that product was more profitable. The high difference in value meant that staff could only earn a significant bonus by selling the more highly incentivised products. The firm claimed to offer holistic advice, but there was a clear risk that advisers would sell one product over another because there was no prospect of earning large bonuses from selling the other product range. The firm did not seem to have considered the risk to customers.”
So much for the ban on commission removing product bias.
Dos and Don’ts
Following its initial publication in September 2012, the FSA has issued final guidance on incentive schemes, taking into account feedback and comments. It has clarified the wording in some areas and provided further examples of good and bad practice (as above).
While its initiative on incentive schemes should be applauded and gives an idea of the type of work the Financial Conduct Authority (FCA) will undertake when it is formally launched, it is not without confusion. (No communication from the FSA ever is, after all.)
The oddest comment within the document says the FSA does not have “a problem” with incentive schemes, but that they must never be at the customer’s expense. The regulator then goes on to say its review found most incentive schemes were likely to drive people to mis-sell.
Surely if incentive schemes that did not drive employees to mis-sell existed they would already be used by firms.
“The way sales staff are paid influences how and what they sell to consumers,” the FSA points out, as if that is a genuine revelation.
As long as staff are employed in a ‘sales’ function and are allowed to be remunerated depending on the number of sales the make there will be mis-selling.
Sales force vs. IFAs
This makes L&G’s repeated reference to its advisory ‘sales force’ under its new financial consultancy proposition interesting.
Through partnerships with building societies L&G has more than 150 employees deployed across the country to offer “full advice” (albeit restricted to L&G products) to members the building society recommends need it.
A representative for Leeds Building Society was keen to stress that only those members it was appropriate for would be referred to an L&G adviser. L&G also said that the way it paid its advisers meant they would not get greater rewards for selling a client one product over another.
They do, however, get rewards based on productivity, which we can take to mean number of clients seen or number of products sold, on top of a generous basic salary.
Clients do not have to pay for the advice at all if there is no product taken out, which does not really embrace the idea of paying for the service and not just the products.
Calling its advisers a sales force might anger some, but others will approve of the group’s honesty. Before we can expect a wholesale change in linguistics we need to fully accept the spirit of RDR and not just the letter.
The difficulty is in getting clients to accept advice on its own is worth paying for. Until they do incentivised business models that encourage mis-selling will be hard to eradicate.
