The UK FCA has fined two leading UK banks for wrong incentive schemes that have led to thousands of consumers with wrong and inappropriate products. Below is the report from Consumers International on the subject.

£28m Sales Incentives fine for big British banks

11 Dec 2013

Two leading UK banks, Lloyds TSB and Bank of Scotland (including the Halifax), have been fined £28,038,844 by the UK’s Financial Conduct Authority (FCA) over serious failings in the controls of Sales Incentives schemes which led to thousands of consumers ending up with wrong and inappropriate products.

This is the largest ever fine imposed on UK banks for retail conduct failings.

The FCA said that Lloyds TSB and Bank of Scotland’s sales incentive schemes led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want.

In one instance an adviser sold protection products to himself, his wife and a colleague to prevent himself from being demoted.

In some cases a demotion of two levels could mean a 50 per cent cut in salary.

The regulator also cited one scheme known as the ‘champagne bonus’ which could see an adviser receiving 35% of their monthly salary as a bonus as soon as they reached their sales target.

Other schemes included “a grand in your hand”,  a one off bonus of £1000 for meeting a target.

Improvements

Consumers International has campaigned for changes in Sales Incentives schemes used by banks and an end to the banking culture of ‘profit and sales before service and compliance.’

Regional, branch and individual incentives create a pressure selling environment and a conflict of interest. Sales incentives have been highlighted in a number of mis-selling scandals.

To properly address problems with sales incentive schemes, there needs to be:

• An end to the most aggressive incentive schemes.
• Clear responsibility for incentive schemes at Board Level.
• Enhanced whistle blowing mechanisms to report problems.

Risk

The FCA found that Lloyds TSB and Bank of Scotland (including Halifax) had higher risk features in their advisers’ financial incentive schemes which were not properly controlled. 

This created a significant risk that advisers would maintain or increase their salaries, and earn bonuses, by selling products to customers that they did not need or want.

Stability

The serious failings related to the sales incentives and sales targets policies and practices employed by Lloyds TSB and Bank of Scotland have potentially serious consequences for consumers and bank workers, but this is just one part of the story.

The repeated need for large scale penalties for unsuitable conduct by financial services firms, including the use of inappropriate sales incentives, has implications for the stability of the financial system. 

This case is just one of many that demonstrate the importance of effective consumer protection measures and enforcement as a means of managing risk, promoting trust and contributing to the stability of the banking system globally.

This is an issue that financial regulators and international institutions including the Financial Stability Board (and its members) need to address properly.

The links between what how banks behave and how this affects financial stability need to be clearer.

National and international assessment of risks to the stability of the wider financial system (under prudential regulation) must strike a better balance and be explicit in assessing the behaviour of banks and other providers in the retail sector (market conduct).

In particular, financial consumer protection must be given higher priority in combined efforts nationally and international to secure a stable and sustainable banking system.

Banking culture

Since the financial crisis in 2008 there has been pressure on the financial services industry and Governments and regulators to address the problems in banking culture which have led to a profit and sales before service and compliance.

However, the serious failings by Lloyds TSB and Bank of Scotland (including the Halifax) indicate that more needs to be done to address the underlying causes of misconduct by firms.

In this case, the FCA increased the fine by 10 per cent because its predecessor, “the FSA, had warned about the use of poorly managed incentive schemes over a number of years and the firms’ previous disciplinary record, including an FSA fine on Lloyds TSB Bank plc for the unsuitable sale of bonds in 2003 caused in part by the general pressure to meet sales targets”.

Richard Lloyd, executive director of consumer organisation Which?, said: "This should send a clear message to the banking industry that mis-selling won't be tolerated and that customers, not sales, must come first."

Tracey McDermott, the FCA’s director of enforcement and financial crime, commented:

"The findings do not make pleasant reading. Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, so they must be designed with the customer at the heart. The review of incentive schemes that we published last year makes it quite clear that this is something to which we expect all firms to adhere. 

"Customers have a right to expect better from our leading financial institutions and we expect firms to put customers first – but firms will never be able to do this if they incentivise their staff to do the opposite.”

Consumers International will continue to work on sales incentives in banking in 2014.

Notes:

The FCA’s investigation focused on advised sales of investment products (such as share ISAs) and protection products (such as critical illness or income protection) between 1 January 2010 and 31 March 2012.

Further information on the FCA’s investigation is available here: http://www.fca.org.uk/news/press-releases/fca-fines-lloyds-banking-group-firms-for-serious-sales-incentive-failings