UK FSA warns firms over incentive-based remuneration
The UK Financial Services Authority (FSA) has warned adviser businesses they risk mis-selling to consumers, even with the abolition of commission, if they remunerate their staff based on the revenues they earn.
In a guidance consultation issued this morning, the regulator has set out how its successor, the Financial Conduct Authority (FCA), will seek to minimise the risks to customers from financial incentives.
The proposed guidance tells firms they need to properly consider the risks of mis-selling as a result of their own schemes, review whether their governance and controls are adequate, and make changes to address any inadequacies.
“This guidance applies to all firms in retail financial services with staff who are part of an incentive scheme and deal directly with retail customer transactions,” the FSA said.
“Firms affected by the Retail Distribution Review (RDR) will need to consider how their incentives increase the risk of mis-selling, even where they are based on fees.”
Among the risks identified for small firms is variable pay, where advisers are remunerated purely based on the revenue they earn.
“This is a form of 100% variable pay, so these firms should be aware of the increased risk of mis-selling and have adequate controls to mitigate the risk,” the FSA said.
“Advisers can also receive additional bonuses for exceeding a revenue threshold, which acts like an accelerator on their earnings.”
Where a recurring problem is identified, the FSA said firms will need to investigate, take action and pay redress where consumers have suffered detriment.
Elsewhere in the paper, the FSA added 100% variable pay “significantly increases the risk of mis-selling”.
The FSA also raised concerns that compliance costs are sometimes reduced if the adviser’s revenue passes a certain threshold.
“This can create a disproportionate reward for marginal sales if advisers are trying to reach the threshold towards the end of any qualifying period, as the reduced compliance costs effectively increase future earnings,” it said.
In a speech introducing the paper later this morning, Martin Wheatley (pictured), the CEO-designate of the FCA, will focus on mis-selling by banks and call for a change of culture across the industry.
This article continues…