The FCA is also looking out for incentive structures that create inappropriate biases towards certain products. Rewarding the sales of add-on products can create the risk of poor conduct and inappropriate sales.
Deterrents for poor behaviour
Firms need to ensure that their remuneration practices contain sufficient deterrents to penalise poor behaviour.
Bonus measurements should go beyond sales numbers, and reflect whether customers have been treated fairly.
Metrics such as customer satisfaction, cancellation rates, complaints and the mix of products sold can all be helpful in determining the quality of sales made.
This needs to be calibrated carefully, as a customer being treated fairly and a customer being satisfied are not always the same thing.
Firms can also implement specific measures that mitigate against incentivising poor behaviour.
Clawbacks, where bonuses can be withdrawn in certain circumstances, like a customer cancelling a service, can be a powerful disincentive for mis-selling.
Firms should monitor clawback levels closely, in particular the reason for cancellation, as this can provide insights on what is going wrong.
Capital decreasing incentives, where bonuses are capped or reduced beyond a certain sales volume, reduces the risk that sales staff will be tempted to rush a number of sales to hit targets before a certain date.
With regulators increasingly focused on ensuring that firms act in the interests of their consumers, misaligned incentive schemes are a clear hazard and firms will be picked up on their failures.
The challenge for some firms will be to move from a system that rewards sales volumes, towards something that takes a more holistic view of sales quality.
Stephen Edmonds is a consultant at Bovill
