City watchdog, the Financial Services Authority (FSA), said it wants firms to clamp down on bonus schemes that encourage mis-selling of financial products.

A review by the FSA uncovered regular examples of incentive schemes that resulted in customers being sold products they did not need or could not use, to boost the earnings of sales teams.

The report, which looked into banks, building societies, insurers, and investment firms, uncovered a range of serious failings.

It found incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed.

It also revealed firms failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them.

Martin Wheatley, managing director of the FSA, said he wanted to work with firms to stop the practise but warned new rules could be imposed if they didn't clean up their act.

"This bonus-based approach has played a role in many scandals we have seen over the years," he said.

"Incentive schemes on payment protection insurance (PPI) were rotten to the core and made a bad problem worse."

Banks are currently paying out around £9bn in compensation to borrowers who were mis-sold PPI.

The review found numerous types of poorly managed incentive schemes, including one firm that operated a 'first past the post' system where the first 21 sales staff to reach a target could earn a 'super bonus' of £10,000.

Basic salaries for sales staff at another firm could move up or down by more than £10,000 per year, depending on how much they sold.

"Today marks the start of a programme of work to reduce these risks," Wheatley told an audience of senior bankers, compliance officers, trade and consumer groups on Wednesday.

"This will involve further supervisory work, a wider review of incentive schemes, enforcement proceedings, and a possible strengthening of our rules."

Wheatley said the work would continue when the FSA is replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013.

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