Blackfriar: Banking sector finds it so difficult to sell only vanilla flavour

“No, I don’t want to swap my insurer, thank you. Nor do I want a loan. And no, I’m not interested in a critical illness policy.”

It’s not hard to see why lenders are resorting to these tactics. The business of plain vanilla banking is an increasingly difficult one to earn decent margins on.

The low interest environment has pushed down net interest margins – the difference between what a lender makes on loan and pays for a deposit.

So sales of core services and extra products matter all the more.

But that doesn’t mean the City watchdog’s clampdown on sales bonuses is not long overdue.

The Financial Services Authority yesterday blamed incentive schemes for fuelling mis-selling scandals including payment protection insurance (PPI).

“This bonus-based approach has played a role in many scandals we have seen over the years,” said FSA managing director Martin Wheatley.

“Incentive schemes on PPI were rotten to the core and made a bad problem worse.”

Its investigation of sales incentives at 22 firms between September 2010 and September 2011 and found most incentive schemes increased the risk of mis-selling.

One unnamed company had a “first past the post” system where the first 21 sales staff to reach a target could earn a “super bonus” of £10,000.

And at one company, basic salaries for sales staff could move up or down by more than £10,000 per year, depending on how much they sold.

Some firms only pay sales staff commission, with no basic salary. At risk of pointing out the blindingly obvious, the FSA said this significantly increases the risk of mis-selling.

To Blackfriar, it’s another example of why the bonus culture is so rotten. From boardroom to bank branch, from chief executive to teller, staff are paid a basic wage, plus a bonus, to do their job. Others are worse – with 100 per cent commission, staff afford can’t pay their mortgage unless they meet a minimum sales target.

Few other industries have bonuses and incentives so ingrained in their culture. How about simply earning a decent wage for doing your job?

But like it or not, Blackfriar does not believe this heralds the beginning of the end for bonuses. Firms need to sell, and to encourage staff to do so, and incentives are too ingrained to disappear completely.

That’s why the FSA is giving the sector 12 to 18 months to tighten up sales bonuses. And the regulator is also careful to say it is not against incentives per se – it just wants to make sure it’s a “fair” process for the customer. Exactly how that will be determined seems a grey area, but this is a good start.

Further down the line there could be more supervisory work, another review of incentives, penalties and rules imposed.

This sort of action shows a watchdog which is at last not prepared to wait for calamities to occur before policing them retrospectively. Instead, it’s tackling an endemic problem head on. The FSA’s teeth are getting sharper.

Investors may be wondering if there’s something amiss in the waters around Batley.

The area appears to attract a higher than normal number of accountancy black holes.

First we had the infamous sub-prime lender Cattles which was brought to its knees by a long-running accountancy scandal. The proportion of bad debts had been understated for years.

Now a manager at Phoenix IT based in nearby Birstall has been suspended after the group discovered a £14m black hole in its accounts.

Phoenix said it had uncovered accounting irregularities at its Servo division in Birstall over a number of accounting periods.

Phoenix said: “Certain control processes within the finance function at Servo Limited’s Birstall site in Leeds have been repeatedly and deliberately circumvented.”

Phoenix has declined to say whether the police have been called in. It also declined to say whether the money was taken for personal gain or to boost the company’s accounts. Following the discovery analyst George O’Connor, at Panmure Gordon, said: “For a company where credibility is already at a low ebb, this news will test investors’ patience.

“The news, which brings fresh downgrades, will act like a deadweight on the share price,” he added.

Several years after the Cattles scandal we’re still waiting to hear exactly what went wrong.

Hopefully, auditor PwC and legal firm Nabarro LLP, which have been appointed to carry out independent forensic investigations at Phoenix, can come up with some answers quickly. Obviously, these are two separate firms with no connection other than a shared postcode, but Batley will not want to be lumbered with a reputation for financial black holes.