The Financial Services Authority, the regulator of financial services in the U.K., kick-started an initiative to curb questionable sales incentives that hype niche financial products of dubious value to many consumers.

A similar crackdown is already underway in the U.S. as well. In July, in the U.S., the Consumer Financial Protection Bureau leveled its first public enforcement action, an order requiring Capital One Bank to refund approximately $140 million to nearly two million customers. The action resulted from a CFPB examination that identified “deceptive marketing tactics” used by Capital One's vendors to pressure or mislead consumers  into paying for add-on products,  among them  “payment protection,” that, for a fee, allowed them to forgo up to 12 months of minimum payments when facing unemployment or temporary disability.

On Wednesday, the FSA announced initial details of how it plans to tackle the problem of up-selling these sorts of products by banks, insurance companies, and other sellers of financial products. FSA Managing Director Martin Wheatley, who will also head that country's forthcoming Financial Conduct Authority once the current agency is split in two, discussed the initiative at a Thomson Reuters Newsmaker event in London.

“CEO's are ultimately accountable for the way their staffs are incentivized, so we expect them to take a real interest in fixing this,” Wheatley  said, explaining that they will have up to 18 months to show a back-to-basics approach to products and sales incentives lest they face more intrusive, possibly punitive, actions.

A research report the FCA released in conjunction with the speech looked at the sales incentive programs at 22 financial institutions. It showed that many of these firms failed to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them. Some firms didn't understand their own incentive schemes because they were so complex, making it much harder to control them. 

An over-reliance on routine monitoring of staff, rather than taking account of the specific features of their incentive schemes, was a common problem. Having sales managers with clear conflicts of interests, such as managing the conduct of sales staff while simultaneously earning bonuses if their team made more sales," was another issue.

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 that product to at least half their customers. There was also a firm that excessively incentivized one product over another and despite claiming to offer impartial advice there was a clear risk that advisers would sell the product that earned them more money.

“Recent scandals on Libor and the mis-selling of interest rate products to small businesses have added to skepticism about where customers are placed in financial firms' list of priorities,” Wheatley said. “What we are now telling firms is that if you do have an incentive scheme, it has to be structured and managed in a way that treats the people it will affect fairly... Our report today must act as a wakeup call to all firms. It sets out the scale of problems we have found and a roadmap to put this right, with clear expectations and proposed guidance to help firms meet our requirements. “

In response to Wheatley's speech, the Financial Services Consumer Panel, which represents the interests of consumers in the development of U.K. financial regulations, said it is a “great pity that it has taken the FSA so long to act to stamp out this disgraceful phenomenon.”

“The FSA has been slow to respond ,” said Adam Phillips, FSCA's Consumer Panel chairman. “However, 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. The regulator has made a commitment to change the industry's behavior. We hope that this time the industry will get the message and not try to find a way to get around the rules as they have done in the past.”