This year has seen a number of leading financial services providers pushed into the spotlight for their employee incentive schemes, which in some cases have led to large FCA fines. But reward is not a straightforward issue – bonuses have always been part of the sector, even if firms should ensure they are mindful of future risks while also looking to meet business objectives.
Most recently, the spotlight shone on wealth management firm, St James’s Place, which was exposed in the Sunday Times for its ‘cruise and cufflinks culture’ where top performing employees received overseas holidays and expensive jewelery. The business has since defended its right to offer staff incentives, but announced a different way of rewarding employees will be revealed in early 2020.
Certainly, to date, St James’s Place has only been impacted by some negative publicity and the FCA has not chosen to comment. But this was not the case with Prudential, which was fined nearly £24 million for mis-selling via its non-advised division.
It was found that from 2008 to 2013, the firm gave staff a range of incentives, including spa breaks and bonuses of up to 40%, for selling annuities without telling customers they could shop around for better deals. Overall, although the same incentives were not on offer, mis-selling occurred up to 2017 and the company has apologized and will be paying compensation that could total £250 million. The company also now refers annuity clients to a panel of providers.
Meanwhile in July, Standard Life was fined £31 million (reduced from £44 million for early settlement), again linked to non-advised sales of annuities between 2008 and 2016. The regulator also noted that the company had instructed a third party to review sales processes but largely failed to implement recommendations, with customers not being told about alternatives such as enhanced annuities if appropriate. Incentives were also connected to the mis-selling and it was reported that almost 22% of agents gained more than 100% of their basic pay in bonuses. It is estimated the total redress payable will be in the region of £61.2 million and according to Mark Steward, the FCA’s executive director of
“Standard Life’s controls needed to place fairness to customers at their heart. Here, the financial incentives available to staff for selling non-advised annuities by telephone created conflicts which led to unfair outcomes for some customers. Firms must have controls in place to ensure they are prioritizing fairness to customers.”
The FCA is well aware that since pension freedoms were introduced in 2015, that the scope for poor advice and mis-selling increased, and it put in place measures to stop individuals transferring against their best interests including a ban on contingent charging in most cases. Even so, there remains concern that rules are not always heeded and while the FCA does not tell firms to outlaw incentives, it will look at these closely if they are contributing to poor customer outcomes.
Clearly, this is an area that firms should be aware of and having a good basic salary with incentives capped at a reasonable level, particularly for company and team targets, rather than individual ones, is a sensible strategy. Seeing advisers as a sales force and exerting too much pressure on them bringing in business could well result in regulatory censure if there is associated mis-selling.
In October, the FCA announced it would be cracking down on commission arrangements in the motor finance sector. The FCA has banned commission arrangements that incentivize brokers, including motor dealers, to increase a customer’s interest rate.
Currently, brokers can often set or adjust the interest rate and it has been found that some do so simply to boost their earnings and that despite being required to disclose commission, this is not always happening. So, the FCA is proposing a ban on discretionary commission models and to ensure customers receive information about commission, which is something that will also apply to all credit brokers. The new rules are expected to come into force at the start of Q2 2020, with a three-month period to implement the changes.
There is no doubt that getting the salary package right so that employees are motivated matters – but if the commission pendulum swings too far in favor of short-term gain then the consequences can be extremely serious.