Tough mis-selling laws don't go far enough
At the beginning of September, the Financial Services Authority (FSA), the City watchdog, revealed that tougher rules may be introduced next year to stop banks giving their staff bonuses that encourage mis-selling and leave customers with expensive and unsuitable products.
The announcement followed a review by the FSA, which revealed that bank staff could earn a 'super bonus' of up to £10,000 for pushing certain products.
Sadly, it's hardly a revelation that banks entice their staff to push particular financial offerings. Just look at the endowment or payment protection insurance mis-selling scandals - both products have made the UK high street banks million of pounds in profits, while leaving thousands of customers out of pocket and with unsuitable policies.
The problem here is that the 'names' of the scandals - such as PPI and endowment - make it sound like there are different scandals, with different issues that are completely unrelated. The root cause is, however, exactly the same. These products have been sold to the wrong customers, and for the wrong reasons.
The products themselves are often not inherently 'bad' - PPI, for instance, has been a very useful insurance product for many policyholders, paying out when needed. It's the sales process that is causing them to rot.
'Advisors' are there to sell
So what's going on here, you may ask? What many people don't realise is that 'advisers' at banks are not really there to advise them on what to do with their money. They are there to sell.
In a recent article, Money Mail interviewed a former NatWest private banker, who said: "People were so trusting of us and many of the older people loved the idea of having their own private banker who they believed was offering them a 'Rolls-Royce service'." He added, they "often simply didn't realise we were selling to them".
The whole culture surrounding banking has become about selling as much as possible to as many customers as possible. Just the other day, I rang Northern Rock (now owned by Virgin Money) to make some changes to my ISA and the call centre worker tried to sell me a mortgage - I don't own a house and neither will I in the near future. And last year, my Barclays 'adviser' tried to sell me one of the bank's ISAs despite it not accepting transfer-ins, which I specifically asked for.
None of us like being sold things we haven't asked for, and we certainly don't like ending up with something that doesn't even suit our personal circumstances.
But I don't blame the call centre workers, personal bankers/customer advisers (or whatever fancy name the in-branch sales team has been given) or branch managers of the likes of Barclays, HSBC and Lloyds TSB.
Staff at the high street banks are just as much victims of the flawed banking system as the customer they try to fool. Fail to sell and in the best-case scenario they'll lose a bonus, but in worst they'll get a P45.
I'm glad the FSA is finally highlighting selling incentives. It's about time. However, the news that it 'may' introduce tougher rules doesn't go far enough. Because, until we've got firm rules in place, a slap on the wrist, which is all the FSA announcement amounts to, won't deter banks from continuing this practice - after all, this is BIG business for them.
And as long as the system of rewarding sales remains in place, mis-selling scandals will keep on happening. The banks will continue to trick their staff, who in turn trick their customers, who then end up claiming compensation for being mis-sold. It's a merry-go-round - just one with very few merry riders.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.