One should not be surprised to see an enormous amount of column inches taken up by headline grabbing statements when the Financial Conduct Authority [FCA] issues a record fine. The record fine of £28,038,844 dished out to Lloyds Banking Group firms for serious sales incentive failings was no exception. I am not sure whether it was the size of the fine or the almost unbelievable examples of poor practices that generated so much media attention. Sadly many of the articles, even in the trade press, focused on the ludicrous examples rather than what other businesses should learn from the fine and FCA decision notice. Clearly, the decision notice shows us how a sales team should not be incentivised, but what should firms learn from this episode which, frankly, has cast a dark shadow over all of the financial service industry?
Clearly, the decision notice shows us how a sales team should not be incentivised
Firstly, any thinking compliance officer will know exactly what the FCA expects both generally and specifically. The FCA and its predecessor has for many years been warning firms of the need to manage and control risks to customers arising from financial incentives given to sales staff, in particular in publications relating to the Authority’s work on treating customers fairly and payment protection insurance. The FCA lists, in the decision notice, seven publications that it suggests should put any bank on notice of its intentions. These are:
- ‘Treating customers fairly – building on progress’ (July 2005);
- ‘The sale of payment protection insurance – results of thematic work’ (November 2005);
- ‘The sale of critical illness cover: results of thematic work’ (May 2006);
- ‘Treating customers fairly – culture’ (July 2007);
- Liverpool Victoria Banking Services – Final Notice (July 2008);
- Alliance & Leicester – Final Notice (October 2008);
Frankly, these are core resource documents which should always be in the forefront of any compliance officer’s thinking, but the FCA was even more specific in terms of sales incentives and possible consumer detriment in the document issued in January 2013 titled, “Risks to customers from financial incentives” [http://www.fca.org.uk/static/fca/documents/finalised-guidance/fsa-fg13-01.pdf]. I cannot understand why this document was not referenced in the Lloyds Bank Group decision notice, but I would suggest that a good way of avoiding a similar fine is to follow the guidance in this document. It should be clear to anyone that the likelihood of mis-selling increases when the value of incentives available to sales staff increases, or when incentives make up a high proportion of a remuneration package for sales staff.
As we enter a New Year it is hopefully not too late for firms to re-assess the risk arising from the features of incentive schemes, firms should consider a wide range of mis-selling risks that may arise. Having put appropriate schemes in place firms should also consider the wider aspect of who controls such schemes. Clearly, those who manage quality failures or ‘quality gateways’ should not be sharing in the same sales incentives, as any thinking person would accept there would be a conflict in interests in such an arrangement.
As painful as the last month has been, not just for the firm directly involved, the wider industry should learn from the scandal and enter 2014 in better shape than it left 2013.
