The financial services industry does not suffer from a lack of trust. If anything, it has enjoyed a surfeit of it. Almost every scandal involves someone handing over money they could not afford to lose into the hands of someone they trust – be it an individual or a large corporate.
A mis-selling scandal the size of the PPI disaster could not have happened without a significant amount of trust in the financial institutions selling it, often by telephone, and the highly-regarded, highly-paid people running these institutions.
It has been described regularly as the biggest financial mis-selling scandal in history, and there have been a few. In remediation costs alone it dwarfs all others.
PPI claims paid out around £28.5bn in remediation from 2012 to mid-2017, with more to come. Indeed, the total amount set aside for such claims is £43.5bn – four and a half times the cost of the London Olympics.
Research by CCP Research Foundation on the five-year period to 2016 shows that this is a global trend, with £264bn in compensation paid out by banks over that time.
RBS and Lloyds Group feature in the top five, with £21.5bn and £20.5bn paid out respectively, although not all of that was for PPI. RBS set aside up to £5.9bn for a forthcoming penalty from the US Department of Justice for the mis-sale of toxic bonds in the run-up to the financial crisis.
In comparison, the last pensions mis-selling scandal, which followed on from new government policy on personal pensions in the early 1990s, chipped in with just £600m in compensation, mostly paid out from 2000 to 2002. It only makes eighth on the list of banking scandals compiled by Dominic Lindley/New City Agenda.
The list also includes Libor fixing, unauthorised overdraft charges, endowment mis-selling and so on. Yet the numbers show we keep going back to banks for more.
And scandal is not the sole preserve of big banks. Pension scammers are individuals or very small businesses, and while their reach is smaller, the damage they can do is arguably far greater.
Classic pensions scam
The recent “truffle tree” scam hit 245 people for an average of £55,000 each, totalling £13.7m, via 11 schemes run by four people.
The sales process was that of a classic pensions scam. A cold call with a promise of better returns for less risk by investing in an asset that did not exist. The stories told by the victims (and we have heard them many times before) provoke both sympathy and the banging of one’s head on the nearest table.
Regulated advisers benefit from this as well. There is no big brand behind an adviser, but face-to-face conversation builds rapport and trust quickly. Well-seasoned advisers regularly report to me a 90 per cent-plus conversion rate from face-to-face meetings and there is no shortage of training available to sharpen the sales axe where necessary.
Amid the speculation about a new defined benefit pension mis-selling scandal developing, revelations about regulated advisers making a quick buck through high-volume DB transfer advice are coming through thick and fast. There is evidence of very poor, highly-conflicted advice given out to people about their most valuable financial asset.
We are quick to label professional sports personalities and musicians greedy when stung by an ill-considered Ucis or embezzled by a dodgy accountant, because of the perception that they are high-risk speculators with more money than sense, but many are bankrupt because of poor, often borderline criminal, professional advice.
As every employee tips more money into their pension each month without thinking, it is worth remembering that pension funds have been regularly picked out as the worst and most opaque funds in an industry with its head down waiting for Mifid II disclosure headlines to go.
The three biggest pension consultancies have recently been reported by the FCA to the Competition and Markets Authority for their part in the problem.
What about the research? All papers, including academic ones, say financial services suffer from a lack of trust. Yet advisers have never had so many clients and all other parts of the industry are booming. What is driving more and more people into the arms of individuals and businesses they purportedly do not trust?
Perhaps trust is a problem but it only appears to be so with hindsight, long after the horse has bolted. I have seen plenty of survey responses from highly satisfied customers of businesses who have been quietly ripping them off for years.
Ignorance is a blissfully satisfied customer. Trust is an emotion – not a fact – and we frequently conflate it with customer satisfaction. When you look at behaviour rather than survey responses, it suggests to me the problem is not consumer trust but industry ethics. A new perspective is required.
Phil Young is managing director of Zero Support