The Financial Services Authority (FSA) has recommended that most financial sales that use commission should be banned.
The new FSA managing director, Martin Wheatley, said in a speech this morning that commission based sales should be banned in most circumstances to protect the consumer and stop another potential mis-selling scandal such as payment protection insurance (PPI).
The FSA is to publish a report investigating how banks reward their staff for selling financial products to customers.
Mr Wheatley warned banks that they have 18 months to change the way they sell these products to stamp out incentives that encourage mis-selling or face "intrusive" action from the regulator.
Mr Wheatley said in his speech at a Thomson Reuters Newsmaker event: "If we think in a year to 18 months' time the industry has not cleaned up its act, then we will revisit it in a much more intrusive way.
"The question is how intrusive we need to be."
Mr Wheatley called for payments to salesmen for selling insurance, loans and bank accounts to be based on the benefits to consumers rather than the volume of sales.
He said that some incentive schemes for sales staff at banks result in the wrong outcome for the consumer.
He said: “Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates?
“Banks for me used to be a service. Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”
The FSA has reviewed 21 financial firms and found that in many cases their internal sales schemes do not work for the benefit of the customer.
The FSA requires financial sales staff to provide "clear, fair and not misleading" information about what they were selling. However, in an aggressive sales climate where staff are under pressure to meet sales targets, these standards have not always been adhered too.
Mr Wheatley said: "What we found is not pretty. Most of the incentive schemes we looked at were likely to drive people to mis-sell in order to meet targets and receive a bonus, and these risks were not being properly managed."
With PPI, the system encourages sales for staff who were on commission to promote it but this was sold to consumers without them knowing or without customers being eligible to claim on it.
Mr Wheatley is also to take charge of an investigation into how the Libor system works and how the interbank rate was manipulated by investment bankers.
He will take charge of the newly-formed Financial Conduct Authority next year which will look at how financial companies treat their customers.
Mr Wheatley vowed to change the culture surrounding sales.
He said: “We, as the regulator, intend to change this culture of viewing consumers simply as sales targets and I am going to be personally involved in getting this right. This will be part of the ongoing improvements we make to regulation as we seek to make markets work well and give people a fair deal.”
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