Britain's banks face new rules to stamp out sales incentives that have encouraged mis-selling of financial products going back two decades, the Financial Services Authority said on Wednesday.
UK banks have been hit by a series of scandals in the last 20 years over sales of unsuitable products, ranging from home loans to pensions, to customers who often did not need them. Compensation for mis-sold loan insurance alone will cost the banks nine billion pounds.
Martin Wheatley, the FSA's managing director, said in a speech to be delivered at a Reuters Newsmaker event at 9am (0800 GMT) that banks used to be a service to help customers.
"Some time ago, this changed - financial institutions have changed their view of consumers from someone to serve to someone to sell to," Wheatley said.
Cultural change is needed at the top of firms to tackle poorly designed incentive schemes that "too often result in customers being sold products they do not need or cannot use, while boosting the earnings of the sales person".
Top management must play its part in fixing this and Wheatley said that if no changes were made, a tougher approach would be taken.
"The introduction of new rules is also being considered to make certain that this new, fairer, approach is hard-wired into the way firms do business, and enforceable if they disregard them," Wheatley said.
The FSA has already shown its teeth in changing culture at the banks. Chairman Adair Turner helped to force the resignation of Barclays chief executive Bob Diamond in July, saying he was not the right person to bring about a cultural change after the bank admitted rigging a global interest rate.
The FSA also published a review of sales incentives at 22 banks, insurers and investment firms with most showing deficiencies that encouraged mis-selling.
"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," Wheatley said.
The review found that many examples of poor sales practices such as "first past the post" where the first of 21 sales staff to reach a target could earn a "super bonus" of 10,000 pounds.
Another firm slapped big incentives on staff to sell the more expensive products to customers, despite claiming to offer impartial advice, the review said.
The watchdog also saw a sales person lie about the price of a product to increase his bonus, while another rushed through sales before the end of a quarter to avoid a pay cut.
Some firms intentionally "turned a blind eye" to mis-selling risks, while others that linked bonuses and other pay to the volume of sales needed to "dramatically" improve their standards, the FSA said.
The FSA review recommended rewarding good compliance with appropriate sales rules. Bonuses could also be reduced when sales volumes approach a certain level so there is no incentive to push through more sales.
The FSA will be scrapped next year and replaced with a Financial Conduct Authority, headed by Wheatley, with a remit to protect customers. It will have powers to ban products and intervene earlier in their design to avoid people being ripped off.
Get all the latest news and videos in your inbox. Register FREE