The Financial Services Royal Commission continues to reveal startling examples of questionable and even potentially criminal behaviour by various companies in the financial services sector.
And this week’s hearings on insurance really upped the ante.
Whether it is potential breaches of the anti-hawking laws or selling life insurance to someone with Down Syndrome, the actions of companies within the insurance sector have possibly been even worse than that of the big banks.
But whatever inappropriate behaviour within the financial services sector we’re discussing, why is anyone surprised?
Putting aside all the well-deserved condemnation of these companies, the simple reason for all this bad behaviour is bad incentives.
That is, if a salesperson is incentivised to, er, make sales, then that is exactly what they will proceed to do.
As we’ve seen at the Royal Commission, often these incentives encourage salespeople to push the boundaries of what most people would view as ethical and moral behaviour. And even, in many cases, to cross those boundaries.
Where was ASIC?
No doubt the result of the Royal Commission will be even more regulation of the financial sector, which is what those who argued for the Royal Commission in the first place always wanted.
Yet this is despite the regulators already having all the powers they needed to identify and stop these problems before the Royal Commission began.
Unfortunately we haven’t yet invented a regulation that forces regulators to actually do their jobs.
A better solution
Instead, the better solution is to change incentives so that customers rather than salespeople come first.
Unfortunately, this is more difficult than it sounds.
A company needs to motivate salespeople to earn income for their employer – which, after all, isn’t a charity but in business to make a profit – while at the same time avoiding incentivising them to push the boundaries and resort to unethical (or worse) actions to make the sale.
Perhaps a base salary plus a bonus based on a combination of sales made and customer satisfaction might be an appropriate way to structure salespeoples’ compensation. This structure would consider whether the product sold was appropriate for the customer in question, along with how the salesperson dealt with the customer in winning the sale.
In determining the amount of any bonus, some of the things the salesperson’s manager could consider are whether the salesperson fully explained the cost of the product, whether he or she considered whether the customer could actually afford it, whether the salesperson explained its various conditions (for example, what an insurance policy covers and doesn’t cover) and the potential alternatives, and whether he or she did so without unduly pressuring the customer to make a purchase.
Readers might have better ideas on how to properly structure compensation. But whatever the structure adopted, if you get the incentives right, most of the problems raised by the Royal Commission disappear (or are at least, are minimised).