Parliamentary Commission on Banking StandardsWritten evidence submitted by Affinity

Thank you for your letter dated 6 December 2012 regarding the work the Parliamentary Commission on Banking Standards is undertaking into the issues relating to the cross-selling and mis-selling of financial products by the Banks.

Our answers to your questions are as follows:

1. In relation to questions 1–5, I told one of your colleagues that Affinity was in the process of conducting a survey of its members who sold PPI products and a copy of that survey is attached for your information. We will forward the results of the survey to you by the end of next week.

6. Affinity’s position which we set out recently in a paper to the FSA’s Review of Sales Incentives, a copy of which is attached, is that in focusing mainly on incentives, which is what all the main financial services organisations are doing to a greater or lesser degree, we are in danger of missing the biggest influence on the way staff sell: the way they are managed locally on a daily basis. As we have said before in our submissions to both the Commission and the FSA, if you are routinely being threatened with performance improvement plans (quasi-disciplinary action) or you are shouted at or humiliated for alleged under performance then those kinds of managerial behaviours will influence what you sell and how you sell it far more than incentives will ever do. For many staff the value of these bonuses or incentives is negligible and the loss of those incentives on its own is not going to drive the right kinds of behaviours. However, with staff are constantly being badgered every five minutes about their sales performance, is it any wonder that managers and staff sell whatever products they need to sell in order to get their Line Managers off their backs? It is these kind of those behaviours which are more likely to drive mis-selling. Simply changing the names of incentives from “bonuses” to “variable pay” or the nomenclature of the interactions between sales staff and customers from “loan appointments” to “Meeting our customers financial needs” is not dealing with the real issues and is an attempt by the industry to give the impression that things are changing when the reality is that it’s business as usual. This applies to all Retail Banks and not just LBG.

There are predatory sales cultures in most financial organisations and those are driven by short-term, product-led sales performance targets. Incentives are part of the predatory sales culture, but the kind of managerial pressures we have identified in the attached report to the FSA have a major impact on behaviours. It is the culture and ethics of the management of Banks and the way staff are managed on a daily basis which influences their behaviours and that’s what needs to be dealt with by the Commission and the FSA.

Sales Incentives—The Grammar Of Goodness

In respect of the Bank’s culture, the Senior Management team have talked a lot about it over the last few months and they are certainly reviewing cultural issues in the Retail Bank and Affinity is involved that review. In respect of incentives and behaviours, the Bank’s Chief Executive said in a recent speech to the Scottish CBI that: “I have always believed that reward and incentives are a vital influence on how people behave. In recent years the structure of variable pay in banking has focused too much on sales targets. This has had a detrimental impact on behaviour...”.

He says that, but we then see a situation in which a Regional Performance Manager in the Retail Bank recently sent a memo to all Branch Managers which said “Lending—that means we need to help our customers with £751k of personal loan lending each day for every day for the rest of this year, if that was spilt evenly between each group that would be £75k per day, which even in the smallest group would mean we would need to average out at just a loan per group—do you think there is one of your branches that it wouldn’t be beyond reasonable for them to find a customer tomorrow who they can help in this way?” Is that being on the customer’s agenda or is it simply the case of the Bank pushing a particular product line by pointing out how easy it is to sell loans? The words have changed but the message remains the same—sell the products we need to sell to hit our targets.

The Group’s CEO is right of course and incentives do need to be overhauled and recently the Bank announced changes to the incentive schemes which include a greater focus on customer service measures and team performance at the expense of individual performance. However, for Salesforce staff individual performance will still be the key driver of their performance assessment and simply changing incentive schemes will not solve the problems that have led to the sort of mis-selling scandals that have blighted the financial services industry. It’s more than that; which presumably is why in his speech to the Scottish CBI, Antonio Horta-Osorio framed the issue of banking, its future and the culture of Banks in terms of morality.

“At Lloyds we will take a zero tolerance approach to issues of inappropriate conduct … And we will ensure that our staff uphold the highest ethical standards”.

It’s about what is right and wrong both in terms of the way the Bank treats its customers and, just as importantly, how Line Managers in the Bank, from the CEO downwards, treat each other. The Line Manager who constantly threatens staff with action plans if they don’t sell more insurance products would presumably fail the CEO’s morality test. So we assume would the Local Director who threatens the Line Manager and so on. The question for the CEO of LBG and the Commission is how we put that morality test into practice and what it means for the culture of the Retail Banks going forward.

Affinity’s Recommendations

“Timid ignorance” is no longer an option and we have made a number of recommendations to both the Commission and the FSA and those are set out below:

Make it clear that behavioural characteristics in terms of how performance is measured must be part of any performance management system in the future. Simply focusing on outputs (the “what” of performance) at the expense of inputs (the “how” of performance) will drive the wrong kind of behaviours. There should be a clear delineation between the two factors (50/50 split when measuring performance) because without that sales will continue to be the overriding criteria for determining performance ratings and thus pay increases for staff. That preoccupation with sales in turn would encourage mis-selling.

Each financial services organisation should be required to produce a Code of Ethics. The Code of Ethics for each financial services organisation should set out how the Banks will treat their customers but more importantly how staff will treat each other from the CEO downwards. The key issue here is what are acceptable behaviours in seeking to manage sales performance and what are unacceptable behaviours? Without a Code of Ethics then the dominant, predatory sales cultures that exists in all these organisations will flourish again after a period of time and there will be further mis-selling scandals.

Carry out bi-annual thematic reviews amongst sales staff to ensure that cultural change programmes are being adhered to and that the kind of managerial practices we have identified which influence the behaviour of sales staff have been stopped.

All financial products should be rigorously assessed to ensure they meet the requirements of customers. The Banks should be required to show that their products will meet the needs of those customers to whom they will be marketed. If they don’t meet those needs then they must not be allowed to be sold. This is a clear requirement of the FSA’s existing Treating Customers Fairly regime.

All short-term incentive and bonus schemes, linked to the sale of financial services products, should be scrapped altogether.

Banks should be required to undergo cultural change programmes to require them to move away from short-term, target driven, predatory sales cultures to ones based on a more relationship management style of banking. That change is going to be very costly and we believe that in exchange for a new, more customer centric rather than product focused banking model, the Commission should look seriously at ending free banking.

If trust and confidence in banks is to be restored the industry needs to be professionalised. There should be the introduction of industry-wide, portable qualifications for all staff required to sell financial products to customers. At the heart of that qualification should be the requirement to put the customer first at all times and in all circumstances. This is enshrined already in the outcomes required by the FSA’s Treating Customers Fairly regime.

Affinity will provide you the results of our membership survey once it’s been analysed.

2 January 2013