Incentive-Driven Mis-Selling in a Bancassurance Channel
Meridian Bank Assurance sells payment protection insurance through branch staff of its parent bank. In the last financial year, complaints rose 40% year on year, 22% of policies were cancelled within the first three months, and an internal compliance review found that 15% of reviewed sales files lacked evidence that affordability and suitability had been discussed. Branch staff earn an incentive equal to 60% of first-year premium, with a monthly sales target that 70% of staff met or exceeded. A whistleblower has written to the board alleging that branch managers pressure staff to sell to customers who do not need the cover, and that the compliance team is 'too close to sales'. The regulator has not yet opened a formal investigation but has requested a meeting. The CEO wants to 'fix the process' by adding a checkbox to the sales system and increasing file review from 1% to 5%. The CRO believes the issue is deeper.
1. Assess the root causes of the conduct risk, distinguishing between process failures, incentive design and culture. Explain which you consider dominant and why.
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The symptoms point to a systemic conduct risk, not a file-review problem. Complaint growth and early cancellations are outcomes; the 15% file failure is a sample of a larger population. The incentive design is a primary driver: 60% of first-year premium with a monthly target creates a hard sell and rewards volume over suitability. The whistleblower allegation that compliance is 'too close to sales' indicates a governance and culture weakness, because independence is compromised. The 'checkbox' fix addresses evidence, not behaviour, and raising file review to 5% improves detection but not prevention. I would classify the root causes as: (i) incentive design, which directly rewards the behaviour; (ii) culture, including tone from branch managers and tolerance of poor conduct; (iii) process, including suitability assessment and oversight. The dominant cause is incentive design, because even well-intentioned staff respond to a 60% first-year commission and a demanding target. Fixing the process without changing incentives will fail, and the regulator will see that.
2. Recommend a remediation programme with measurable outcomes, governance and accountability, and explain how you would communicate it to the regulator and affected customers.
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Remediation should be measurable and owned at board level. Actions: (i) suspend the first-year-premium incentive and replace it with a balanced scorecard covering suitability, persistency and complaints; (ii) independently review all sales over the last 24 months and provide redress where harm is found; (iii) separate compliance from sales, with a direct reporting line to the CRO and board; (iv) introduce pre-sale affordability checks and a cooling-off period; (v) set conduct risk appetite metrics, such as complaints per 1,000 policies, 13-week persistency and file failure rate, with board-level limits. Governance: a conduct committee chaired by a non-executive, monthly reporting and individual accountability. Communication: proactive disclosure to the regulator with the root-cause analysis and plan; customer communication and redress where harm is identified; staff communication that targets are changing and why. Success should be judged by outcomes, not checkboxes, and progress reported publicly or to the regulator at agreed intervals.