If you want to better understand the scale of financial mis-selling in British banking, consider this: in the five years from 2011 to 2016, four of the UK’s biggest high street banks will have paid out at least £61 billion in penalties. That’s nearly double the GDP of Luxembourg.
A report by the ratings agency Standard & Poors estimates that Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland will be hit by another £19 billion in conduct and litigation charges by the end of 2016, on top of the £42 billion they’ve already paid out in the four years to 2015.
The damning figures are a direct consequence of the number of people claiming compensation on the mis-selling of financial products, including investment products such as stocks and shares ISAs and bonds.
Hitting the headlines
Some of the major UK banks have hit national headlines for all the wrong reasons in recent years. HSBC set aside £96 million in 2013 to cover compensation to clients who were mis-sold investment products by their advisers, and other banks, such as Lloyds, Halifax and Santander, have been fined heavily.
Who were the worst offenders?
The Financial Ombudsman Service (FOS) received the most mis-sold investment complaints about the following banks from December 2014 throughout the first half
Santander and NatWest received 77 complaints each.
The Financial Conduct Authority (FCA) records the number of investment mis-selling claims opened with each bank. Claims are recorded as open (received but not yet resolved) or closed (resolved, resulting in a rejection or in compensation being paid out). In 2014, Lloyds closed the highest number of mis-sold investment claims, while Barclays received 2,576 open claims in the second half of 2014 alone. Arguably, the overall worst performer was Santander, with 4,278 open claims.
Unsurprisingly, the bank that was fined most heavily by the FCA in 2014 was Lloyds, which paid £28 million for using incentivising schemes for their investment staff. At the time this was the largest fine ever imposed for retail conduct failings. Santander were also fined £12.3 million for failing to provide appropriate advice to customers buying financial and investment products.
Banks: are they really the main culprits?
According to FOS statistics, the major high street banks are the principle offenders when it comes to mis-selling investments. In 2014/15, 58% of new complaints were linked to just four of them, while the FOS overturned 61% of all complaint rejections. For investments specifically, the banks received over a quarter of all complaints.
The figures show there were 15,938 cases relating to investment mis-selling in 2014 overall, and 14,743 in 2015. In 2012/2013, the FOS witnessed a significant rise in cases of mis-sold investments, a 33% increase in the space of a year.
Of the complaints made in 2014/15, the majority (66%) were related to the way in which the product was sold to them – specifically, the poor financial advice customers received.
Going undercover to expose mis-selling
Over the years, various organisations have gone undercover to investigate the way in which high street banks sell investment products to their customers. In 2011, the consumer group Which? investigated 37 banks in total and found that only 5 (13%) offered adequate financial advice when selling their investment products.
18 banks didn’t admit that they gave commission for every investment product secured, and several made mistakes about the level of protection the customer would receive. A year later, the Fincancial Services Authority (FSA) conducted a mystery shopper study, and found that 25% of the banks they visited were giving poor quality investment advice.
The changing face of banking
The combined pressures of the media and undercover investigations is slowly changing the way in which banks operate. Standard and Poors highlighted the fear of racking up even bigger fines in the future as a factor that had altered the way in which banks approach business. They stated that banks are now focusing on “providing evidence that they are doing the right thing for their customers” and that sales practices are “less aggressive or short-termist in nature.”
The introduction of the RDR (Retail Distribution Review) means that advisers will now be given more rigorous training on the products they’re selling. While they won’t be formally tested, they’ll need to provide evidence that they’ve taken part in the necessary work-shops, seminars and e-learning courses to bring their knowledge up to the right level.
That’s reassuring for customers planning to buy investment products from the high street banks, but it doesn’t solve the problems for the thousands who encountered mis-selling in the past and who have lost money as a result. If you think you may have been affected, read our ‘Was I mis-sold my investment?’ guide here.