Massive bonuses paid to bankers for short-term, illusory gains aren't the only faulty incentives in the financial system; much of the industry seems to be badly incentivised.

The bankers were the top of the tree, collecting millions and ignoring the multiplying risks, while nearer the ground salesmen and brokers were riding a financial tsunami because of the way that they were rewarded.

On the Financial Services Authority (FSA) website, you'll find news of the fines and bans on mortgage brokers for encouraging people to borrow more than they could afford — it is still running at about one case a month. And the most recent FSA research into mortgage advice showed that, despite the credit crunch and repossessions up by 40 per cent, too many mortgage advisers were still not taking sufficient account of whether a house buyer could afford their mortgage. The FSA described the results as “disappointing”. I'd use a much stronger word, because this, after all, is exactly why the credit crunch started in the United States.

And why do the brokers and sales staff do it? Could it be anything to do with the £1,000 commission that brokers could pick up for every mortgage sold, or the pressure placed on bank staff to sell? Recently Anthony Smith, the HBOS whistleblower, admitted: “I continued to sell more and more mortgages to people who couldn't afford it and the consequence is an £11 million loss.”

But some house buyers were complicit, opting for so-called self-certified loans, which do not require proof of earnings, and inflating their salary to get a bigger mortgage. When house prices were rising, this was a low-risk gamble and some people who took the chance have become substantially better off; but in today's market, with falling house prices, many have been caught out and now face repossession.

This was all part of the mad scramble to get on the housing ladder and although we may have some sympathy for those desperate for a home, the present system cannot tolerate deception in loan applications. We can see from what has happened that the risk posed by individual loans is crucial for lenders. What must change, along with the top bosses' bonuses, is the system of sales targets put on junior bank staff, which almost forces them to sell mortgages come what may, and the commission payments to brokers, which tempts the unscrupulous to sell someone a mortgage that they cannot afford.

Mis-selling by brokers and salesmen is unacceptable, because lenders end up with a high-risk loan without realising it and the house buyer risks repossession. The broker escapes scot-free with their commission and the bank salesperson collects their annual, non-refundable bonus.

— John Howard is a former chairman of the Financial Services Authority Consumer Panel

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