Mis Selling starts in the boardroom
The FSA has repeatedly failed to deal with perverse sales incentives in firms selling financial products directly to the public, even though this was blindingly obvious to everyone else. A new initiative announced today, together with a consultation paper, suggests it is finally on the case.
If misselling starts in the boardroom, where responsibility for remuneration policies lies, it is also where it has to end. Why then did it take the FSA so long to workout that more damage had been done to consumers on its watch by perverse sales incentives in high-street banks, product manufacturers and tied agents than by independent financial advisers? It has always had the hard evidence of upheld complaints to the Financial Ombudsman Service, which point to far greater misselling by large financial entities than can be explained by their size or consumer footfall. The connection between these patterns of misselling and the corrosive culture of remuneration incentives has been blindingly obvious to everyone except, apparently, the regulator. In its last days before the newly-formed Financial Conduct Authority takes over this aspect of the FSA’s responsibilities, it appears to have woken up and smelt the coffee.
In its introduction to its Guidance Consultation, titled Risks to customers from financial incentives, the FSA says:
‘This paper gives examples of how financial incentive schemes can be a key driver of mis-selling and how firms are not adequately managing these risks. It marks the start of a programme of work to reduce these risks. This programme will be taken forward by the Financial Conduct Authority (FCA), which will have the objective of making sure markets work well so that consumers can get a fair deal. This work aligns with the FCA’s new supervisory approach of intervening earlier to reduce the underlying causes of consumer detriment.
The basis of the FSA’s approach combines high-level principles of its rule book and systems and controls, an area of the rules that directly involves the senior management of a firm. The paper has grown out of detailed examination of 22 firms all with direct sales staff exceeding 20 people. It included analysis of those firms’ remuneration incentives to direct sales staff and of the firms’ systems and controls for internal regulation of the sales process and their use of management information to monitor sales processes and detect misselling.’
I have read the Guidance Paper and agree with its findings and with the broad approach. I welcome the emphasis on senior management systems and controls as a means of managing conflicts of interest better rather than an approach of banning sales incentives altogether. However, it will strike many professionals in the industry as naïve or even disingenuous to assume that remuneration that distinguishes between products with similar uses but different profitability can ever, inherently, be anything other than a conflict of interest. It is not obvious how that can be managed better other than by senior management recognising that remuneration incentives and financial products simply don’t work together. Find some other way to make a profit.
In our response to the paper, Fowler Drew will propose some formal procedures that tie marketing strategies to technical skills in the financial products themselves. In our view, a serious oversight in the Retail Distribution Review (RDR) was the necessity to improve (and test for) technical skills not just at at point of sale but, perhaps even more importantly, before that, at ‘point of sales strategy’, where marketing objectives and product design most obviously clash with professional insights into the nature and purposes of products and services.
Regulation needs to restore power to technical experts, qualified by professional exams and practical experience and members of independent professional bodies. These responsible individuals need to report for this purpose to boards or committees formed within boards for the purpose of ensuring marketing never drives financial services. I see no such reforming insight in this paper behind all the right-sounding emphasis in this paper on management systems.