The regulator will not impose an outright ban on commissions but it is demanding that payments be dependent on the customer benefiting, not on the volume of sales.
Martin Wheatley, managing director of the Financial Services Authority (FSA) and chief executive officer designate of the Financial Conduct Authority (FCA), said cultural change was needed from the top down.
He said: “CEO’s are ultimately accountable for the way their staff are incentivised, so we expect them to take a real interest in fixing this.”
Wheatley added: “We, as the regulator, intend to change this culture of viewing consumers simply as sales targets and I am going to be personally involved in getting this right.
“This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.”
Wheatley pointed out that many, if not all, of the recent mis-selling scandals had dysfunctional incentive schemes at the root of the problems, payment protection insurance (PPI) serving as a good example.
He said: “This bonus-based approach has played a role in many scandals we have seen over the years. Incentive schemes on PPI were rotten to the core and made a bad problem worse.”
Consumer champion Martin Lewis, creator of Moneysavingexpert.com, said: “The problem isn’t that people no longer trust banks and other big financial institutions, it’s they’re right not to.
“While bank staff may be called ‘advisers’, that should read ‘salesperson’.
“Remuneration is based on cross-selling products and often structured to ramp up sales with cliff-hanger rewards. This has led to calculated mis-selling being a constant part of the financial services landscape.
“Martin Wheatley is absolutely right to shift regulatory focus from product criteria and box ticking to the real interaction with customers.
“For too long we’ve had speed-bump financial services, with a product launched, sold heavily, then the brakes put-on with reclaiming campaigns.
“That’s bad for consumers and the industry.
“The bosses of the big banks and insurers need to get behind this, lead by example and prove they’re not just there to make a fast buck.”
Sales incentives
The FSA conducted a review of 22 financial firms' incentive schemes and found a number of cases that caused concern for the regulator
Some of the risks that emerged included:
• One firm operated a ‘first past the post’ system where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000.
• Basic salaries for sales staff at one firm could move up or down by more than £10,000 per year, depending on how much they sold.
• Another firm excessively incentivised one product over another, therefore – despite claiming to offer impartial advice – there was a clear risk that its advisers would sell the product that earned them more money. The FSA also found that the same firm made more money from sales of that particular product than any other, hence the bigger incentives for sales staff.
• One firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who had sold PPI to at least half their customers.
So serious are the failings of one firm that it has been referred to the FSA’s enforcement division.
Craig Lowther, managing director of PPI claims management company, MoneyBoomerang, said: "This declaration of intent from the FSA is long overdue. The financial services industry has been dogged with years of mis-selling scandals, on everything from equity release products to endowment policies.
"It seems that the recent, high profile PPI mis-selling scandal was the straw that broke the camel's back.
"This is a chance for the FSA — and indeed Financial Conduct Authority — to be a knight in shining armour for the many consumers who have already been victims of mis-selling and protector of those who may be at risk in the future.
"Lessons should be learnt and the FSA is right to try to end the extravagant and unbalanced bonus cultures that operate within certain financial firms.”
Craig Donaldson, chief executive of Metro Bank, said: "We welcome the FSA's focus on selling in bank branches. Banks should exist to serve their customers, not the other way around.
"If you incentivise your staff to sell, you shouldn't be surprised when they miss-sell. Put simply, if you tell branch staff that they can double their take home pay by selling a specific product, then they will sell a specific product, regardless of whether the product is suitable. Metro Bank incentivises store staff on giving amazing customer service, measured by regular mystery shopping. This means that our staff focus entirely on problem solving, rather than product pushing.
"This problem is a cultural one, and the change needs to come from the very top of financial institutions. A culture of customer care can't be delivered in a day and can't be a surface fix. Banks need to reconsider every action and ask themselves whether what they do is designed to benefit the customer, or benefit their bottom line.
"Profit should be the by-product of doing something well, rather than the entire reason for a business, and this seems to be something many banks have forgotten. Customers are telling us they are fed up of being seen as cash cows existing simply to feed bank balance sheets. That is why they are joining us.
"Metro Bank delivers a return to service, not sales. It's time to put customers back at the heart of banking; a customer should feel valued every time they interact with their bank, whether they call them up, go online or walk through the door. The fact that we're growing so quickly can attest to the fact that customers are looking for credible banking alternatives. It truly is time for a banking revolution."
BSA Director-General Adrian Coles added: "The BSA welcomes the FSA's consultation on risks to customers from financial incentives.
"The consultation underlines the key problem of mis-selling and what causes it.
"We will examine the proposals carefully and respond in due course but the fundamental point made by Martin Wheatley is perfectly valid - incentive schemes are fine provided they are structured and balanced in favour of the fair treatment of customers."
Adam Phillips, chairman of the Financial Services Consumer Panel, added: “We welcome the publication of the FSA’s guidance consultation and the regulator’s commitment to action. However, the FSA has been slow to respond.
"Consumers continue to suffer from inappropriate pay and bonus practices in banks and other financial institutions. Incentives that encourage client service staff to make a profit at the expense of the customer need to be removed now.
