The Financial Services Authority (FSA) is to scrutinise the reward structures firms employ for in-house sales staff as part of a crackdown against mis-selling.
FSA chairman Lord Adair Turner (pictured) told delegates at the British Bankers' Association annual conference that as part of the regulator's interventionist approach it will later this year examine whether firms' sales incentives are well-designed to guard against mis-selling.
It will also investigate whether firms' product development and approval processes are strong enough to weed out inappropriately-marketed products.
'We are examining firms' business models - following the money - to understand the drivers of profitability and the implications of firms' strategies,' said Turner.
'Where we find incentives, structures or products that are likely to lead to poor customer outcomes, we will take tough action, including using our enforcement powers, to ensure that customers are protected.'
Turner said that the FSA's previous approach, which concentrated on enforcing fair disclosure in sales processes, had failed to stop mis-selling and large numbers of complaints about financial products, and that a more pro-active regulatory regime was necessary.
'It became increasingly obvious that there are problems in retail financial services which were not going to be solved simply by demanding fair disclosure in the sales process,' he said.
The FSA's focus on sales incentives will form part of the regulator's increasing examination of 'industry economics' as it moves towards the UK's new financial regulatory system imposed by the coalition government.
Financial regulation will be split between the Prudential Regulatory Authority and the Consumer Protection and Markets Authority (CPMA), and Turner said that as the FSA moves to the CPMA it will look at pricing issues.
'The FSA has in the past stressed that "we are not a price regulator". But we have always known that high margins can be a warning sign of customer detriment,' he said.
'We intend to do more systematic analysis of industry economics in future. How far that analysis should go and what policies should follow, is again a subject worthy of debate.'
Turner added that the CPMA could also have a role in encouraging competition in the financial services sector, an area not traditionally within the FSA's remit.