Banks’ ‘all or nothing’ pay schemes ‘too risky’

The "all or nothing" incentive schemes for sales staff that contributed to the collapse of the Irish banks that employed them were not structured in the best interests of consumers and were inherently risky, according to the Central Bank.

These schemes, which prioritised the volume of sales over the quality or suitability of the financial products being sold to customers, were not fit for purpose and had the potential to encourage poor sales behaviours among employees of financial institutions.

The report on variable remuneration of sales staff also found, while all firms had a process in place for the design and approval of incentive schemes, there was a failure to recognise the inherent risks in remuneration arrangement and to mitigate those risks.

Central Bank director of consumer protection Bernard Sheridan said: “The Central Bank expects that, when firms remunerate sales staff on a variable basis, these arrangements focus on encouraging the right culture and behaviour in sales staff, while actively discouraging poor practices.

“It is important that remuneration arrangements are structured in such a way as to ensure that employees, individually and collectively, are acting in the best interests of their customers and providing suitable products which meet their needs.”

The report also found that regular and robust sales quality monitoring was not performed consistently across the banking and investment sectors and that conflicts of interest were present in a number of cases where managers’ bonuses were linked to the performance of their staff, whom they had a role in monitoring and evaluating.

Additionally, penalties and deterrents were not adequately implemented in the majority of situations to militate against poor sales practices.

The report recommends that firms shift the focus of performance-related pay from volume-based measures to those based on the quality of sales such as customer service scores, compliance performance and training and development performance.

Firms covered by the report, which include banks, insurance companies and investment firms, are expected to discourage a short-term sales mindset within their organisation through the use of appropriate remuneration structures. The chairperson of the board of each firm reviewed will be required to report to the Central Bank confirming that they have undertaken a review of the sales incentive arrangements within their firms and that recommended changes have been implemented by January 1, 2015.