Last week the Financial Services Authority (FSA) issued final guidance to the banks and other regulated firms with retail sales forces on the structure of sales incentive schemes.

This followed a year-long review into incentive schemes that found that most sales schemes encouraged the salesmen to mis-sell products to consumers.

I doubt those findings were a surprise to anyone inside the financial services the industry. Almost inevitably firms (and we’re not just talking about firms in financial services here) will structure incentive schemes to promote products and services that make them the most profit. Those products may not be the ones that are the best for their customers.

An extreme example is, of course, payment protection insurance (PPI) where millions of unsuitable policies were mis-sold to customers who didn’t really need them and paid hugely inflated premiums for limited or no benefits.

The firms selling PPI could earn up to 80% of the premium immediately as commission so it’s no surprise that their sales incentive schemes encouraged the selling of PPI. I worked for part of one of the largest banks where, unless their sales agents sold PPI to a certain minimum percentage of customers, they earned no bonus at all, irrespective of how many loans they sold. When you bear in mind that as much as 80% of the income for the top sales agents would be their bonus, you can understand the pressure they were under to sell you PPI.

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The way many large regulated firms built their schemes in the past was to identify the products with the best margins, develop an incentive scheme that promoted them and then look for the reasons to justify why that product was good for their customers. You’d be amazed (or, possibly, not) how many senior managers in the banks convinced themselves that PPI was great for consumers despite the overwhelming conclusions of the Competition Commission to the contrary.

But incentivising salespeople to sell the wrong products is hardly a new issue. There have been concerns about sales bonus and commission schemes since statutory regulation was first introduced way back in 1988, indeed it was one of the reasons for introducing formal regulation in the first place.

Now we have the Retail Distribution Review (RDR) which bans the payment of commission for selling some products. So does this mean the public are now safe from predatory sales people flogging unsuitable financial products?

Well, no actually. Firstly the commission ban only covers a small proportion of retail financial services products (basically pensions and investments) and secondly, whilst it makes the process more transparent and may level out fees payable at the firm level between products, it doesn’t prevent firms developing internal bonus and commission schemes that encourage salespeople to sell products that suit the firm rather than the customer ( a good example would be products where the firm can charge annual management or administration fees such as Self Invested Personal pensions or Platform products).

So the FSA has now issued guidance on the types of incentive scheme structures that can increase or reduce the risk of mis-selling. However a lot of the emphasis remains on the firms themselves having effective internal controls to prevent mis-selling. And, quite frankly, the banks in particular don’t have a great track record of doing that.

Steve Bloor is managing director of www.openresolution.co.uk, specialists in resolving consumer disputes related to financial products and services.