The Association of Private Client Investment Managers (Apcims) has called for greater clarity from the regulator on how wealth management firms should apply the FSA’s finalised guidance on financial incentives.
While the trade body supports measures to ensure incentive schemes do not promote mis-selling, it said the FSA’s final guidance on incentives lacked clarity on its exact application to the wealth management sector, and appears geared towards bank staff.
The guidance is based on a review of schemes across 22 firms – including banks, building societies, insurers and investment businesses – that uncovered a range of serious failings. These included the failure to recognise that staff are being driven to mis-sell; not managing those risks properly; and sales managers having clear conflicts of interests.
Ian Cornwall, director of regulation at Apcims, pointed out that a large portion of the examples quoted in the guidance are bank-centric, making it hard for wealth management firms to respond.
‘Our main concerns are that the basis of the final guidance is for bank staff selling bank products to customers,’ he said. ‘If there are issues relating to financial incentives in our sector, then we are keen to hear them and address the concerns of the FSA. It is a shame the guidance is not broken down into individual sectors, with the FSA noting what their concerns are in relation to each sector.’
The FSA said its guidance applied to advisers and those in discretionary and non-discretionary investment management roles.
Incentive bias between products, where staff are remunerated purely on the revenue they earn, featured among the structures the regulator was concerned by.
Likewise, the FSA found some schemes deducted compliance costs from sales revenue for future business if revenue passed a certain threshold, effectively increasing earnings.
The guidance noted that pressure at some businesses to hit sales targets was so strong that some staff were mis-selling for fear they would lose their jobs.
How firms are reacting
The FSA also expressed concern about balanced scorecard approaches where a bonus is based not just on sales volumes but also on other measures. It said this approach could be less effective if the element relating to sales results or financial contribution was the most dominant factor.
Barclays Wealth (which operates this approach, based on factors such as client retention and satisfaction, new client trends and compliance governance) declined to comment on the FSA’s concerns, but said if there were ethical breaches, it had robust procedures to ensure they were identified and acted on quickly and effectively.
‘We have a very rigorous approach to our control standards, which are built into our performance review process for all employees,’ a spokesperson said.
Meanwhile Coutts – which was fined £6.3 million for failings in the way it sold the AIG Enhanced Variable Rate fund – said it welcomed the FSA’s guidance. The bank operates a discretionary compensation scheme that assesses financial, customer, risk and people metrics.
In response to the FSA’s concerns about balanced scorecards, a spokesperson said: ‘There are no weightings across the quadrants as no one element is necessarily considered more or less important than the others.’
A spokesperson for Citi said the private bank had already put control mechanisms in place for variable compensation plans and that all employees are expected to understand their clients’ needs. 'We continually seek to improve our practices and will be taking on board the regulator’s guidance as part of our ongoing review,' she added.
Richard Whitehead (pictured), chief executive of Dart Capital, said his firm sought to encourage long-term relationships with clients by paying competitive market matched salaries as the principal remuneration and he disagreed that all staff should earn bonuses.
‘We are considering a long-term share option scheme for staff to reward longevity,’ he said.
‘On looking at the potential mis-selling incentives, one of them really stands out and that is “100% variable pay/commission only”. This is an issue we come across with several large financial institutions where we have witnessed time after time advisers mis-selling products to wealthy clients because these products pay a commission and the advisors are self-employed.
‘You have to ask yourself why these firms have self-employed advisers and the simple answer is that this encourages them to [mis-sell] products to survive.’
Credit Suisse and UBS declined to comment on how they plan to respond to the guidance.