This Report on Sales Incentives and Responsible Lending represents the output of a detailed survey of regulators in 24 jurisdictions across a range of consumer credit products, as well as a review of international literature published on this topic to date. It forms part of FinCoNet’s continuing work on responsible lending, building on the 2014 FinCoNet report on responsible lending: Review of supervisory tools for suitable consumer lending practices.
The Report finds ample evidence that poorly designed sales incentives can cause harm to consumers, individual firms and the financial system. Such harm can include not only unsuitable sales to individual consumers but also a more general erosion of a consumer-focussed culture within individual firms and across an entire sector or industry. The Report also highlights that poorly designed sales incentives are especially prone to cause harm in the case of credit, where the consumer gets the financial benefit of the product up-front (giving rise to particular behavioural risks).
The Report finds that the nature of incentives for sales staff appears to be relatively uniform across jurisdictions. It also finds few specific rules and standards on sales incentives. This uniformity in industry practices, coupled with a relative absence of specific rules and standards, marks sales incentives as a subject where regulatory intervention has the potential to make a significant positive contribution to how credit is sold to consumers.
Based on these findings, FinCoNet will continue its work towards publication of a consultation paper on this topic. This work will draw on the findings of this Report, focusing on the Public Consultation Topics identified (collated on page 7 & 8 of this Report). These include the oversight of sales incentives as a driver of a more consumer focussed culture in financial services and specific areas where, based on these findings, it would appear that regulatory focus might have most impact. This includes seeking to ensure a holistic approach that transcends appropriately the architecture of any given distribution network, issues arising from cross-selling, the role of product oversight and governance, the effectiveness of consumer disclosure and the respective merits of both general obligations and specific requirements.
Through this work, FinCoNet seeks to provide a platform for regulatory authorities to exchange views through the auspices of FinCoNet regarding effective approaches for addressing issues arising from sales incentives and their impact on responsible lending practices. This FinCoNet Report represents therefore an important contribution to the development of consumer protection globally and to safeguarding the stability of financial markets into the future.
