According to the Financial Ombudsman Service (FOS) back in 1988, “if a financial business provided a recommendation, it had to be advice with reasonable care and skill.” Since then, complaints for mis-sold investment have continued to pour in, many related to poor financial advice and pressure selling tactics.
A growing problem?
From around 2010 to 2012, banks across the UK began hitting the headlines for all the wrong reasons. Increasingly it came to light just how many financial products (including investments) they had mis-sold to their customers.
According to a Guardian report, the number of consumers complaining to the Financial Ombudsman Service (FOS) about financial mis-selling soared to over 3 million in 2013, doubling the number of complaints on the previous year.
The situation calmed down somewhat last year, and the most recent figures taken from the FOS show that complaint numbers reduced to just over 2 million in 2014. Despite the improvement, however, there are still a large number of people unhappy with the way in which they were sold their investment product.
How many mis-sold investments?
Mis-sold investment products tend to take something of a back-seat in the media, but their mis-selling affects thousands of people across the country every day, and it’s a problem that deserves to be brought more into public awareness.
According to a 2013 study, as many as two-thirds of all people asked were completely unaware it was even possible to be mis-sold an investment product. The survey found that only 35% of people had been asked about their attitude to risk when being sold their investment, and under 20% had been offered any alternative products. Only 20% felt that the advantages and disadvantages of the investment had been explained adequately to them.
Despite the fact that a third of people asked said that they would be forced to work beyond retirement age if their investment failed to perform, 50% said that they would be unlikely to seek compensation. The fact that financial regulators awarded at least £49.5 million in redress in 2012 alone shows that claiming compensation for a mis-sold investment is not only possible, but gets results.
Making the pay-outs
In recent years, banks such as HSBC, Lloyds and Barclays have paid out record amounts in fines and compensation for mis-sold investment products. In fact the money paid out has been so dramatically high that that The Telegraph speculated: “Britain’s financial giants in the past relied heavily on the maltreatment of customers to secure lucrative revenue streams.” Now, it seems they are paying the price.
In 2013, the Financial Conduct Authority launched a compensation scheme to tackle the problem. The scheme was met with criticism from Sajid Javid, former Financial Secretary to the Treasury, who commented that “progress had been too slow” and was causing “undue stress” to the people affected.
The heart of the problem
The reality of working in a pressurised bank environment makes acting with care and skill challenging. Most banks, like many businesses, are sales-driven and rely on investment products to boost finances. As a result, incentivising staff to close sales by offering commission-based pay and bonuses is still a common-place practice.
A ‘points score card’ was leaked to the press in 2012, showing how Scottish Widow staff were rewarded for each investment-related sale. They were required to achieve 42,000 points per quarter. Opening a basic savings account equalled just 25 points, whereas selling an investment product was worth 7,000. It’s clear to see which products the staff would be most eager to sell to their customers.
The reality of the situation
A Financial Services Authority mystery shopping review in 2012, featuring 231 visits to financial institutions, found customers were receiving good advice overall about their investment products. But it highlighted that 25% were being given poor quality advice, with 11% being considered completely unsuitable for the customer, and 15% dealing with advisers who didn’t take the time to gather enough information before recommending a product.
Clive Adamson, former director of supervision at the FSA, commented: “This review shows that customers are not consistently getting the quality of advice on their investments that they should expect… Whilst we are disappointed by the results of this review, we are encouraged by the actions that the firms involved have taken to rectify the situation for their customers.”
Resolving the problem
While many investment salespeople practice with integrity and honesty, there are still some instances where investments are sold that are unsuitable for the investor. If you’d like to read more about mis-selling, check out our Was I Mis-Sold My Investment? page.