September 7th, 2012
The managing director of the Financial Services Authority, Martin Wheatley, has launched a stinging attack on ‘mis-selling’ of financial products by banks, building societies and other financial institutions to their retail customers, even describing the incentive schemes that underpinned the ‘misselling’ of payment protection insurance (PPI) as “rotten to the core”.
In the above video, filmed on September 5th, Wheatley called for a “cultural shift across the industry”. He declared the FSA had done a survey of 22 financial firms of varying sizes, including high street banks, building societies, insurance companies and investment firms and that:-
“what we found is not pretty. Most of the incentive schemes we looked at were likely to drive people to mis-sell to meet targets and receive a bonus, and these risks were not being properly managed.”
Wheatley was followed by Martin Lewis, founder of Money Saving Expert, and the Reuters-hosted session culminated with an enlightening Q&A. In this, Lewis said that he welcomed Wheatley’s commitment to rooting out the endemic shabby practices that have polluted the UK’s banking and financial services sector for years, but warned the regulator that, should it fail to deliver on its pledge to extirpate them out, then “we will come after you, of course we will”.
Wheatley, CEO-designate of the Financial Conduct Authority and a former Hong Kong regulator, seems genuinely determined to wake the regulator up from the two decades of somnambulance and to force through a radical rethink of the sales-mad, unethical culture that has over-run Britain’s financial system. But rather than rule by diktat, Wheatley said he would give the banks a couple of years to get their houses in order, for example by voluntarily winding down the flawed incentive schemes that can encourage retail banking staff to sweet-talk, hoodwink or bully ill-informed customers into taking out often worthless and over-priced financial products.
One could argue this is another case of a UK financial regulator shutting the stable door long after the horse has bolted. Under its former leaders Hector Sants, John Tiner and Howard Davies, the FSA studiously ignored evidence of financial product misselling.
For example Ian Taplin, a former Lloyds TSB executive, who recently jointly founded Whistleblowers UK, alerted the Canary Wharf-based regulator to allegedly illegal sales activity in the retail sales arm of Lloyds Banking Group in 2009-10. But the FSA was uninterested in Taplin’s evidence (it has since changed its stance which may be related to its decision to launch possible enforcement action against Lloyds Banking Group in connection with the bank’s dangerously flawed approach to incentivising its sales staff).
A second warning that got ignored came from financial adviser Alan Steel, founder and chairman of Linlithgow-based Alan Steel Asset Management. He spent £90,000 of his own money on a survey of 18,000 UK consumers via face-to-face interviews. The so-called Financially Blissful Ignorance (FBI) Monitor, revealed that 60% of UK bank customers have no idea how much they were being charged when buying financial products from their bank, and that roughly 60% were happy with this situation. Steel took the findings to the FSA – twice – and to the Association of British Insurers – twice – but he says neither displayed any interest.
In my view, this was a massive dereliction of duty on their part. If Wheatley is serious about reform, maybe he can redeem the situation.
To coincide with the launch the FSA has also published a 32-page report called Guidance Consultation: Risks To Customers From Financial Incentives
Here is Wheatley’s full speech:-
We all know what it is like to walk into a bank to do something simple, like pay a credit card bill, only for the person behind the counter to ask if you would like to extend your credit, take out more insurance or look at their competitive mortgage rates? To be honest, I only have a credit card to shop online, I have all the insurance I need and the mortgage on my house is fixed.
Banks for me were all about making sure my money was safe and my best interests were looked after. The type of place where you would go in, have a pleasant chat with the clerk and go about your daily business. Some time ago, financial institutions changed their view of consumers from people to serve, to people to sell to.
One of the reasons why this happens is obvious – people in our financial institutions are being encouraged to sell to us through incentive schemes, bonuses and rewards. We have found evidence of poor practice and we are concerned that this reward culture is contributing to mis-selling. You can read our concerns in a report published today, which makes it clear this is a problem across the industry.
Why we are here today?
I am here today to talk about how we as the regulator intend to change this culture of viewing consumers simply as sales targets.
This paper marks the start of a programme of work that will be taken forward by the Financial Conduct Authority – an organisation I will lead and that will focus on making sure markets work well so consumers get a fair deal.
Poorly designed incentive schemes are a universal problem across many industries. Financial regulators have struggled to get to grips with them, and many consumers have paid the price. We know dealing with this will not be an easy task – financial incentives are central to how businesses operate and are at the heart of problems we have seen over the years. This is ingrained within firms’ business models, and we need a cultural shift across the industry to deal with it.
The main points that I want you all to take away from today’s speech are:
- we have found that most incentive schemes that we looked at are likely to drive mis-selling, and this risk is not being properly managed;
- while we will be looking at our rules and also the way we supervise, we expect firms to act now to clean up their act in regards to our findings; and
- this work will be taken forward by the FCA and we will be taking a closer look at how firms incentivise their staff.
Why is this so important now?
It has been too easy, for too long, for those selling or giving advice to be motivated solely by the rewards on offer to them, rather than how to enrich their customer.
This paper comes at a time when it’s clear that people no longer believe that they will be treated fairly. Recent scandals on Libor and the mis-selling of interest rate products to small businesses have added to scepticism about where customers are placed in financial firms’ list of priorities.
But what is also still clear is that we need financial services more than ever. Most of us need to save more for our retirements, but many are not doing enough. And all of us need a strong, profitable financial services industry that can give us the advice we need to guide us, that can help to protect us from the unforeseen, and that can deliver the products that will help us achieve our life goals.
But the lack of trust and confidence is amplified each time that someone working for a bank, insurer, or investment firm sells products predominantly driven by financial incentives for themselves and profit for their firms, rather than the needs of their customers.
And while public attention has been on the huge rewards on offer to the few, the effect of more modest rewards on the many needs to be dealt with. We need to deal with how incentives and bonuses are used by firms across financial services to drive sales, and the knock-on effect this has on their customers.
In particular it is how front line staff have to hit performance targets, make sales and sign up customers to make a decent living. Even when – as they sometimes tell us – they do not want to be a part of that type of culture.
This bonus-based approach has played a role in many scandals we have seen over the years. Incentive schemes on PPI were rotten to the core and made a bad problem worse.
This is not like when you go to a fast food restaurant and the server asks ‘do you want fries with that?’, or ‘do you want to go large?’. We all know they ask these questions because they are encouraged to make the most of every sale, and when customers are standing at the counter, they are more likely to say yes. But then we also know what to expect – chiefly lots of salt, calories and a bigger waistline.
But far fewer of us actually have such a clear understanding of financial services. We also mostly trust those selling or giving advice to be acting in our best interests.
These are often complex and long-term products that turn into long-term problems if they go wrong.
The cost of going large may cost us a few pence – the cost of buying the wrong mortgage could see you lose your home.
And while it is annoying that when you buy a TV they only seem interested in selling you the warranty, that is nothing compared to trying to find a safe home for your money, only for the person in the bank to only seem interested in selling you a confusing product that could put your life savings at risk.
When that happens it is often because the person selling has a financial incentive to meet targets or sell a certain product. And based on evidence we will publish today, you will often find the firm is not doing enough to prevent that happening.
What I expect those running firms to do is start looking at what their schemes are set up to do. The dictionary tells us incentives are something that incites an action. Firms need to ask what type of action it is they incite. Is it to get the best deal for the customer, or is it to get the best deal for the person or firm selling it? It is too often the latter. It needs to be more balanced.
Aligning incentive schemes to good consumer outcomes
I need to be clear here that I do not have an issue with firms having incentive schemes. We believe that firms can have incentive schemes that are well managed and can benefit their customers. Where we have identified problematic areas, these firms have already started to change their schemes or systems and controls.
What we are now telling firms is that if you do have an incentive scheme, it has to be structured and managed in a way that treats the people it will affect fairly. As the FCA this will be important to us and we will look at features of incentive schemes and related controls and how they deliver fair consumer outcomes.
And it is obvious firms need to make sure performance incentives are aligned to the goals of an organisation. There is a problem of course if the goals are simply to sell as many products as possible – firms need to make money, but not at the expense of clients and customers.
This is about motivating people to do what is right. It comes back to organisational culture and ethics and the truism that what is good for customers is good for firms. We do not want to keep hearing of instances, such as PPI, where consumers think they had to buy a product or protection on another product when they did not need it.
People parting with their money need to be sure they are being sold a product for the right reasons, rather than just because it makes a lot of money for those selling it.
Firms need to ask – am I getting the best outcome for my customers here?
This has to become part of firms’ culture and part of how they do business.
The customer needs to be truly at the heart of any businesses set on a strategy of sustainable growth for a long-term future. I believe this comes down to those running firms focusing on the delivery of quality products and services and less on reward. We need to break the link between incentives and customers getting a poor deal.
Getting this right is going to be a priority for me, and it should be for all firms as well. The FCA will expect all firms to have a culture that puts their customer first, sorting out incentive schemes seems to me to be a simple way to start doing this, and a solid way of helping the industry to rebuild some of the trust that has been lost in recent years.
We know this isn’t an easy job and we can’t do this alone. Making such a change is going to take time and it’s going to need your full support – ultimately we need you to help us. By making these changes your customers will be happier and ultimately your businesses will do better.
Today we are publishing some disturbing findings from our recent research that illustrate that firms need to start putting their customers first when they set up their financial incentive schemes.
We looked at 22 firms of all sizes, including high street banks, building societies, insurance companies and investment firms. And what we found is not pretty. Most of the incentive schemes we looked at were likely to drive people to mis-sell to meet targets and receive a bonus, and these risks were not being properly managed.
In particular, firms failed to identify how incentives might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them. They also relied too much on the routine monitoring of staff, not taking account of the features of their incentive schemes for example, looking out for spikes in the sales of each individual before the end of a bonus period.
I will give you some illustrations of where firms are going wrong and examples of high-risk incentive schemes we have seen.
Some sales managers earned a bonus based on the volume of sales made by the staff they supervised. This may sound reasonable, until you add in that some of them also played a significant role in checking whether the sales were fair to the customer. This created a clear conflict, yet some of the firms we looked at did not think this was an issue to worry about.
Another is that few firms with face-to-face sales staff had properly considered the risks of bad practice when the salesperson is talking to the customer – such as leaving out important information or pressuring customers to buy a particular product. Our work found that too many firms had not thought about checking what is actually said to customers.
Here are a few of the worst examples:
- One firm operated a ‘first past the post’ system, where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000.
- At one firm the basic salaries of sales staff could move up or down by more than £10,000 a year depending on how much they sold.
- Another firm excessively incentivised one product over another, therefore – despite claiming to offer impartial advice – there was a clear risk that its advisers would sell the product that earned them more money. We also found that the same firm made more money from sales of that particular product than any other, hence the bigger incentives for sales staff.
- And another firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who had sold PPI to at least half their customers.
- And I find it alarming that particularly risky incentive schemes, with the potential for sales staff to earn significant bonuses, without proper safeguards in place, were common across the firms we assessed.
Our report today must act as a wake up call to all firms. It sets out the scale of problems we have found and a roadmap to put this right, with clear expectations and proposed guidance to help firms meet our requirements. We expect all firms to read our paper and think how it affects their firm.
We have made sure the firms where we found failings are fixing their incentive schemes, improving governance and controls and, in the worst cases, checking past sales to identify if mis-selling has occurred.
What firms need to do
And today I am setting out the steps that all financial firms need to take to put this right.
First, look at your incentive schemes to see if they increase the risk of mis-selling, and if so how. Second, review whether your governance and controls are adequate. Third, take action to deal with any weaknesses and flaws identified.
Firms need to change how they incentivise their staff and learn to manage their risks. CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this. Recurring problems need to be investigated, action taken and redress paid to consumers who have lost out.
I want to draw a line in the sand here, and use the report we are publishing today to set out our clear expectations.
This marks the start of a programme of work to reduce these risks, which the FCA will take forward, and that will involve further supervisory work, involving a wider review of incentive schemes, enforcement proceedings and a possible strengthening our rules.
I am going to be personally involved in getting this right. This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.
The reforms the FCA will carry out are the opportunity to do things differently and when we begin our life next year you will see a new approach from us, driven by our new culture and our new way of working.
At the heart of this culture will be the ability and the appetite to protect consumers better. Dealing with behaviour – or people’s conduct – is at the top of our agenda.
From boardroom to point of sale, the behaviour and attitude of financial firms needs to be examined and assessed – especially in terms of what experience and outcomes it offers customers.
This will include pre-emptive regulation that takes a broad and deep look at firms’ businesses individually and across the board. We will look for the bigger issues, find them earlier and deal with them quickly once we spot them.
We will look at how firms make their money, how they pay their staff and whether they are designing, and selling products with customers in mind.
This is a change from the traditional regulatory model, which involved setting standards and then looking back at what firms have done.
We will continue with that, but for far less of our time. Instead, we will be making a judgement on what the businesses we regulate are doing now, and what they plan to do in the future, looking at how they are making their money, and whether they are ‘good profits’. In short, whether they are carrying out their business in a way that is treating their customers fairly.
And when it comes to dealing with problems, regulators in the past just looked at what has happened. We will find out why it has happened. It is obvious to me that you cannot get to the bottom of what is causing harm unless you deal with the root causes of problems and the wider issues that run across firms.
This will be part of a cultural shift for us, so that we are thinking about things from a consumer perspective.
The FCA can be the template and the way forward for a new type of regulator, one that nurtures and applies a fresh set of operational values dedicated to understanding, anticipating and intervening to ensure that the financial markets fulfil their potential and promise to deliver a fair deal for consumers.