Revealed: when not to trust your bank
Out with the swag bags and sawn-off shotguns and in with the business suit and charming sales patter as the banks openly commit daylight robbery against their own customers.
Or at least that's what critics of the UK's big banks are suggesting as customers succumb to pushy sales tactics in the struggle to find a decent home for their money.
"You need to be wary when you go to your bank in case you're mugged at the counter. Don't be fooled by the smart appearance and soothing words of the customer adviser; they're often doing nothing less than committing daylight robbery by flogging you poor-value investment products," warns Justin Modray, former IFA and founder of independent website candidmoney.co.uk.
Sales ploys and hidden charges
The persistently low base rate of 0.5%, which is mirrored in poor interest on savings accounts, is leaving hard-pressed savers vulnerable to high-pressure sales ploys that steer them into buying risky or uncompetitive investment products, when all they want is a decent level of interest paid on their cash.
Time and again customers who deposit large cash sums into their savings accounts from an inheritance, maturing policy or other windfall, are phoned by sales staff or collared at the branch in a bid to persuade them to meet the bank's so-called 'financial advisers'.
They are then encouraged to buy from what is usually a limited range of investment products sold by the bank.
The losers are the customers, whose money often ends up in lacklustre investments, while guess who ends up laughing all the way to the, er... bank?
Banks can rake in fees and commissions of up to 5% or more by shepherding savers into fixed-term stockmarket plans, known as 'structured products', and collective investment funds.
Certain structured products have also been at the centre of mis-selling claims.
For example, in September Norwich & Peterborough Building Society (N&P), which sold policies from provider Keydata to 3,500 mostly elderly customers, was instructed by the Financial Ombudsman Service (FOS) to repay a couple from Suffolk £28,000 because it had mis-sold them a policy considered too risky for their circumstances.
Keydata was put into administration over a year ago and is currently under investigation by the Serious Fraud Office. N&P is appealing against the decision.
Even if the investments themselves are OK, they don't come cheap. This is because the banks slap on a series of charges, ranging from set-up costs and ongoing management fees to commissions paid to the target-driven sales staff and product providers.
Mark Dampier, head of research at independent investment advisers, Hargreaves Lansdown, says: "People flood into bank investment funds because they don't want to pay upfront for advice or don't have time to shop around.
"The poor financial understanding of many customers combined with high-pressure sales is a deadly cocktail."
Adrian Lowcock, senior investment manager of IFA Bestinvest, says bank customers often fail to realise how their choices are restricted.
"The key is to understand what the bank is selling to you. Even if the advice is good, are they giving you access to the whole market or just their own products? You should also ask the adviser whether they have a sales target to meet," he says.
Poor financial advice
The widespread weakness of bank and building society investment advice was exposed earlier this year in an undercover investigation by consumer group Which?.
It found that just four of the 37 branches it visited gave good advice on investing a lump sum. The majority recommended inappropriate products without properly explaining the risks.
Nationwide seemed to fare better than some of its rivals on the high street, with two of the four branches visited meeting Which?'s required standards - but with two others failing to offer decent advice that's hardly much to boast about.
Some banks use subtle techniques to win sales in more lucrative investments by luring you in with a savings account that pays a juicy rate of interest.
But when you read past the headline rates you discover you can only open the account if you take out a riskier investment product as well.
Santander, for example, offers a Super Bond, which pays 4.5% to 5.5% on cash, compared with its standard online savings account (2.75%, dropping to 0.5% after a year).
However, to be eligible, you must put at least the same amount in a 'qualifying' investment, and that's typically a stockmarket-linked plan.
Nationwide, meanwhile, offers a Combination Savings Bond paying 3.25% a year on the one-year plan or 4.1 % on the three-year version – but only if you also invest the same amount (minimum £3,000) in a six-year stockmarket-linked plan.
Many bank advisers routinely tout stockmarket-linked investments, such as structured products, as an alternative to savings accounts. Income-starved savers are attracted by the high annual income or growth promise - and in many cases a guarantee to return all their original capital if stockmarkets fall.
These complex plans are made up of investments typically linked to stockmarket indices rather than invested directly, and use derivatives to help achieve the desired returns.
But even if stockmarkets do plummet and you get your capital back, that doesn't mean you haven't been ripped off.
Dampier warns: "Customers don't always realise that just getting their money back is in effect a loss – a loss of the interest they could have had from a savings account, never mind the effects of inflation."
A Santander spokesperson, however, defends such products: "We recognise that structured products may not be for everybody, however they can play a valuable role as part of a balanced investment portfolio. Santander takes the standard of investment advice it provides to customers very seriously."
Elderly bank customers are particularly vulnerable to the lure of such plans in their bid to boost retirement income. Jennifer Jones, an 81-year-old widow from south-west London, was approached by her bank Abbey (now Santander) four years ago, inviting her in for a chat about her finances.
"I just wanted them to put my money in a better savings account," she recalls. "But they persuaded me to put several thousand in a fixed-term product linked to the stockmarket. I was so worried that when I got home I cancelled the plan. I would have been tied in for several years - I was 77 at the time."
The problem doesn't just lie with complex structured products. The quality of advice on fund investments has come under scrutiny at Barclays.
Rodney 'Bonny' English from Essex is one of scores of customers celebrating winning recompense from Barclays after being sold the wrong type of investment fund.
Four years ago Bonny, now 66, had a £200,000 windfall to invest. "I went to pay the money into my branch and they persuaded me to see someone about where to invest it.
They frankly bamboozled me. My wife Carol and I just wanted a cautious-to-balanced-risk investment. They put us in the Aviva Global Income fund, promising an income of about 7%. They took about £15,000 in commission and made it seem a privilege."
He adds: "The credit crunch hit a year or so later, and although I expected the investment would go down, I couldn't believe it when I found it was down to £91,000 by December 2008."
It emerged that Bonny's 'cautious-to-balanced' fund had in the interim been reclassified by Aviva as 'adventurous', though no one had informed the Englishes.
Barclays refused to admit that it mis-sold the fund, and it was not until Bonny enlisted the help of his local MP, as well as campaigning financial adviser Richard Davis of Park House Financial Services and Paul Cooper of Claims UK, a firm that helps pursue banks for compensation, that the bank finally paid him £97,000 in compensation at the end of August.
He hopes his case will encourage more victims to come forward.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.