As reports increase of banking mis-selling and compensation claims against UK banks continue to rise, claims are also increasing against independent financial advisers. These IFAs are finding themselves implicated through their recommendation of certain banking products, and suffering the knock-on effect of heightened Professional Indemnity (PI) rates.
Investment selling has caused a rift between consumers and their advisers, and there is a strong degree of mistrust as a result of high-profile claims and links to the banking scandal. UK company investment is currently the lowest performing sector. A recent Investment Executive study found that 35% of consumers would fire their IFA if they felt confused or pressured. Small business owners are keen to avoid the effects of mis-selling faced by others, and as a result IFAs are having to win back their trust. So what is the future of independent financial advice, and where do IFAs stand now that businesses are finding their voice and speaking out about mis-selling?
What is the banking mis-selling scandal all about?
Between 2008 and 2014, many UK banks found themselves at the centre of a major scandal as it was discovered many customers and businesses had been mis-sold insurance with their financial products. The loan insurance was notoriously hard to claim under, added a premium of up to 56% in some cases, and was sold to many without them even knowing. Mis-selling claims have cost Lloyds at least £14billion so far and this figure is still rising, with a further £100 million disclosed by the banking group in relation to non-insurance mis-selling claims. Other banks have also been hit hard by repayments and fines. Companies exist solely for the purpose of helping customers claim compensation.
Financial mis-selling, including on investment products, has been endemic for decades. But in 2012, a new mis-selling claim trend started to emerge among SMEs throughout the UK. The Financial Conduct Authority (FCA) discovered that some banks were using underhand tactics to deliver interest rate hedging products (IHRPs). Structured financial products were sold to small businesses without those companies being made fully aware of the risks, and the various collars, caps and swaps left many vulnerable to rising interest rates. Customers of those financial institutions are now seeking compensation, with many banks facing another high payout to put things right.
How are Independent Financial advisers being affected by the mis-selling claims?
The rise in claims against IFAs has not gone unnoticed by consumers, and business is suffering as a result. Investment strategies are being approached with much more caution, consumers are wary about making commitments and business investment has dropped. IFAs have come under heavy fire in the national press for some time now, and mis-selling has added fuel to the fire in this sense. A damning report by the Financial Services Consumer Panel suggested that the investment market is “not working in the best interests of consumers”. Unclear fees and charges are being scrutinised more closely than ever, and products identified as mis-sold are leading to a high number of successful claims.
With more than 40,000 IHRPs sold across the UK, small and medium enterprises thought they were safe from the effects of rising interest rates. What many did not realise was how falling rates would affect them. It is this disparity between information supplied by IFAs and understanding of the information by consumers that has led to the fall in confidence across the investment market.
Banks are starting to mend the damage done by their own part in the mis-selling scandal. Between 2012 and 2013, many chains stopped offering financial advice services and stepped away from this aspect of consumer support. This left IFAs to step into the breach and pick up the service, but it also dragged many into the scandal. Many financial products sold in good faith have been made subject to claims of mis-selling through poor communication or lack of expectation setting with the consumer.
What is the future for IFAs in the aftermath of the scandal?
One of the best ways IFAs can rebuild those bridges between themselves and small businesses is through outreach campaigns and online marketing. Consumers are now much more independent thanks to the internet, and many will seek information and advice from online sources instead of asking for professional guidance. This can leave IFAs vulnerable to reduced business. However, making links online is a proven way to get clients excited about financial products – and to give them the information they need to avoid future mis-selling.
Tighter controls on financial product selling have been promised by the Financial Ombudsman Service, who have looked into 329,509 complaints between 2014 and 2015. Of these, more than half (55%) were upheld and resulted in a payout to the consumer. This is likely to mean that IFAs face greater obligation to make every potential risk known and to be upfront about any charges faced by the consumer.
IFAs are also facing their own battle to receive fair insurance, as the scandal has left many facing raised Professional Indemnity charges. With PI underwriters reluctant to take on risky IFAs and issuing restrictive policy cover, IFAs face a struggle to redeem their name and secure the vital financial backing they need, in order to cover future potential claims. On the other hand, confidence in IFAs should be boosted by the Retail Distribution Review, which aims to drive better technical qualifications for financial advisers and to improve the quality of information available to clients. The RDR also requires that advisers give a fully broad range of products and that they make clear any pertinent information before a sale is made.
Reducing the effects for IFAs
Like any financial service industry, independent financial advice has been hit hard by a changing economy in recent years. The issue of clarity over products needed to be addressed and the claims consumers have are sure to keep coming for a while yet, but there is potential for the industry to learn from the experience.
The mis-selling scandal has made one thing very clear – consumers want to know exactly what they are buying into, and all of the risks they could face. A successful IFA will be able to make the most of this wariness and turn information into a selling point. Confidence in IFAs may have been shaken but investment has not fallen completely and many are still putting their faith in their advisers. Prompt handling of claims and a clear response will bring IFAs back from the brink of disaster and create distance between mis-sold products and today’s services.