The International Financial Consumer Protection Organisation (FinCoNet) has published a report on the impact of sales incentives on responsible lending culture in the financial services industry. It covers 24 jurisdictions, including Ireland, France and the UK.
As part of the survey, FinCoNet sought case study examples from the various Respondent Authorities to illustrate circumstances where the incentive structure for the sale of a consumer credit products led to potential or perceived consumer detriment.
Incentive structures can include both the employee remuneration structure as well as non-financial rewards (such as the distribution of league tables based on sales performance or career progression opportunities). Undue pressure in the incentivisation of staff leads to a greater risk for the consumer of being mis-sold a financial product.
The Report specifically refers to the Central Bank of Ireland's themed inspection results relating to variable remuneration arrangements of direct sales staff in banking, insurance and investment sectors. The Central Bank identified the risks posed to the consumer where there was a focus on the quantity rather than the quality of financial products sold to consumers. It also highlighted the widespread use of targets and thresholds by the industry to measure employees' variable incentives.
The FinCoNet Report has outlined the following key categories of consumer detriment which has been caused by poorly designed sales incentives:
- Unsuitable lending;
- Unsuitable cross-selling;
- Eroding a Consumer-Focused Culture;
- Conflicts of interest between the lender and its sale force;
- Influencing bad behaviours across a firm, sector or industry; and
- Incentives potentially beneficial or perceived to be beneficial to the consumer.
"The Survey results highlight that poorly designed incentives can result in unsuitable credit sales. This can include cases where a salesperson is encouraged to cross-sell, resulting in the purchaser of a product (financial or non-financial) borrowing money which they did not set out to borrow and which may be unsuitable."
The Report also highlights how the mis-selling of financial products can lead to large-scale monetary penalties. For example, as at June 2015, £20.5billion redress has been paid to consumers who were mis-sold Payment Protection Insurance in the UK.
Ireland comes across in a very positive light in the Report in terms of the measures which have been implemented by the Central Bank over the last number of years. The Central Bank has consistently sought to highlight the need for transparency in the dealings between financial Institutions and its consumers.
The core principles of consumer protection should form the basis for all sales policies. The various codes require regulated entites to:
- act honestly, fairly and professionally in the best interests of its customers;
- act with due skill, care and diligence; and
- not act recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of any product or service.
Always refer to the Central Bank's codes and ensure your sales staff are trained in the implementation of those.
Leman Solicitors advises regulated entities on their obligations pursuant to the Central Bank's Regulatory and Compliance codes. Speak to our specialist financial services team to find out how we can help you.
Last week, FinCoNet, the International Financial Consumer Protection Organisation, published a report outlining key findings on the topic of Sales Incentives and Responsible Lending.