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FSA publishes guidance on incentive schemes for mis-selling

FSA produces guidance on how financial firms can mitigate the risk of mis-selling financial products, including tax avoidance schemes

18 Jan 2013 Accountancy Age

By Calum Fuller

FSA building

THE FINANCIAL SERVICES AUTHORITY has published guidance on the mis-sale of financial products, including tax avoidance schemes, after it discovered some financial firms had incentive schemes that could encourage staff to mis-sell.

In November last year, Accountancy Age reported that accountancy firms are among 90 advisory companies where claims of alleged negligence are currently being prepared over the mis-sale of tax avoidance schemes.

After conducting a review, the FSA found that authorised firms including banks, building societies, insurance companies and investment firms were using significant bonuses and targets to encourage the sale of financial products, with no effective systems and controls in place to manage the process and prevent mis-selling.

Findings included firms' failure to understand how incentivising sales might encourage staff to mis-sell and, in some cases, did not understand the nature of the investment they were selling as it was so complex.

The guidance produced this week expects firms to properly consider if their incentive schemes increase the risk of mis-selling, review whether their governance and controls are adequate, and take action to address any inadequacies.

Where risks cannot be mitigated, they are urged to take action to change their schemes. Where a recurring problem is identified, firms are to investigate, take action, and pay redress where consumers have suffered detriment.

Tax avoidance schemes are often mis-sold when the schemes promoted are deemed to be contrived, with little or no chance of functioning.

Avoidance schemes frequently fall within the definition of what the FSA describes as an "unregulated collective investment scheme (UCIS)". Under its rules, regulated collective investment schemes are those recognised by the FSA, and can be sold to investors in the UK. UCIS are described as unregulated because they are not subject to the same restrictions as a regulated CIS.

Richard Rhys, founder of Rebus Investment Solutions, which acts for the victims of mis-sold tax avoidance schemes, said he welcomed "any form of guidance in order to prevent mis-selling of aggressive tax avoidance schemes".

However, he added the FSA's guidance "merely addresses one element of a much larger issue of mis-selling".

He said: "Generous commissions remain a major reason for mis-selling – if financial incentive is not a major drive for the mis-selling of such products, it is hard to explain why UCIS were sold on such a major scale to so many unregulated investors – where commissions were considerable."

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