The FCA’s final notice against Axa Wealth Services published on 13 September 2013 and dealing with failings concerning the sale of investment products to retail customers, makes interesting reading for a number of reasons.
It would be easy to regard this as an unsurprising case of systemic mis-selling, but some of the findings bear greater scrutiny both because of the significant nature of some of the failings (there are always some lessons to be learned) and the potentially wider implications.
Between 15 September 2010 to 30 April 2012 Axa was found to have had inadequate systems and controls to ensure that suitable sales of investment products were made to customers. The sales concerned were all made to customers of Yorkshire and Clydesdale Banks and West Bromwich Building Society. Axa directly employed sales advisers in branches of both banks and an Axa AR, West Bromwich Financial Planning, employed the sales advisers in the building society branches.
The litany of failings by Axa makes pretty grim reading. Despite the FSA issuing clear and robust guidance on assessing suitability over the period concerned, Axa’s advice processes fell down in several key areas.
Axa used five standard risk categories to assess customers’ attitude to risk. There is nothing inherently wrong with that but it is clear from the Final Notice that firms have to give careful consideration to such categories and they should only ever form the starting point for a more detailed discussion with the client about understanding investment risk.
Axa appears to have placed the customer into one of the categories and done little more – the FCA expected Axa to go much further and demonstrate that a discussion on risk had taken place with the customer and that the customer properly understood the investment risk associated with the selected category and the investments being recommended – there was very little evidence that this had taken place.
It is also clear that Axa did (through its own compliance unit and external consultants) identify some of the failings for which it has now been fined. Furthermore, Axa put in place training to address some of these failings. It has been heavily criticised, however, for devoting insufficient time and resources to the training and failing to follow up the training with robust monitoring to see if the training had addressed the identified failings.
The FCA noted that the pass rate on the role plays following the training was too high to be credible. Sadly it appears that although a need for training was identified, it was not taken seriously enough by Axa and may have been seen as a box that needed to be ticked rather than a genuine attempt to address the issues identified;
Axa did carry out its own mystery shopping exercises which again identified significant failings in the advice being given to customers. There was evidence of very basic suitability failings such as a failure to understand customers’ investment objectives (and some explicit guidance around encouraging customers to “buy on emotion”), failure to discuss and assess capacity for loss and even failing to understand how long a customer wished to hold an investment for.
However, whilst Axa had sufficient information to identify that there were clearly widespread and systemic advice failings throughout the business, it simply did not “join the dots” by consolidating the results of the mystery shopping exercises to draw such a conclusion.
Again this points to a “box ticking” culture. It thought it would be a good idea to conduct a mystery shopping exercise but did not follow it through properly and use the results to make the required changes to the business.
On top of all the above the FCA has found that throughout the period concerned Axa’s sales incentives schemes for advisers were inappropriate and allowed advisers to qualify for bonuses when up to 40 per cent of their files failed an initial suitability review. Axa was including various quality KPIs in the sales incentives schemes but again this appears to have been “window dressing” as the KPI targets required to be satisfied to qualify for a bonus were nowhere near robust enough.
So what can we learn from the above?
Firstly, this emphasises the need for the compliance function of any firm of any size to be properly engaged with the business. On the surface Axa’s own compliance function (and the unnamed external consultants used) appeared to be doing some good things. But when the FCA scratched the surface it appears that the business as a whole was not taking its own findings seriously enough – it is as if it wanted to appear to be doing the right things but in the end what it was really concerned about was hitting sales targets – not good enough.
Secondly, the FCA specifically state in the Final Notice that there is no criticism or finding of a regulatory failing against either bank or West Bromwich Building Society in this Notice. That is an interesting finding in light of the fact that we would expect that all three would have had commercial arrangements in place with Axa in relation to the advisers deployed in their branches.
How long will it be before the FCA makes a finding that both authorised firms in that type of arrangement have a duty to ensure that the advice being given is suitable ie if you allow another firm into your branches to sell to customers you should take your own steps, over and above the initial agreement entered into, to ensure that those customers are being treated fairly by your commercial partner? It cannot be too long before that happens and the TCF principle is drafted widely enough to allow it.
Finally, the customer profile of those affected was that 57 per cent were over 60, 47 per cent were retired and the average investment amount was £17,000. This again highlights one of the unintended consequences of the RDR.
These type of customers fall squarely within the potential “advice gap” that the RDR may have created. Many firms may look at the average amount invested and determine that they are not chasing this type of customer as they cannot advise them profitably. Yet these people were potentially vulnerable and the amounts invested may have represented a significant portion of their non-pension savings. They need good advice on how to invest their money but where are they going to get it?
Alan Hughes is a partner at Foot Anstey