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Emma Simon: Regulator must get tougher on bank sales

Emma Simon MM blog

Financial advisers might feel aggrieved that in the regulator’s eyes it appears to be one rule for the big banks but another for them.

Last week, the FSA took the banks to task for the staff incentive schemes they run.

It is hard to disagree with the regulator’s conclusion that so long as staff bonuses are linked to sales targets, customers will end up being sold all manner of duff and downright dangerous financial products.

At one end of the scale, this might be overpriced life insurance or paying for a current account you could otherwise get free. Far more seriously, though, this “bonus mentality” has seen banks like HSBC flogging five-year investment bonds to the elderly and infirm and staff in Lloyds selling risky structured products to those in retirement.

Given the catalogue of horrors uncovered by the FSA – which included “super-bonuses” of £10,000-plus and staff seeing their basic salary cut if they did not meet key sales targets – you would have though it would have brought it full regulatory weight down on such corrupting practices.

An outright ban, perhaps. Or new rules stipulating that front-line “advisers” do not get sales-related bonuses. Or at the very least perhaps some convoluted key facts document so consumers have a fighting chance of seeing what the person selling the product stands to gain from the sale.

But none of these things have occurred. The FSA is appealing to the chief executives of the bank to help change the sales culture. Rather than outlawing these incentive schemes, the FSA is calling for them to be “improved” so “customer outcomes” are taking into account alongside sales figures.

This is obviously in stark contrast to what has happened to advisers, where, for the sale of investments and pensions at least, commission will all but disappear within a matter of months

I have never been a fan of commission payments as they can blind advisers to the potential pitfalls of certain types of investment while overlooking others.

Of course, getting rid of commission creates its own problems. I am sure there will be far fewer people getting financial advice because they are reluctant to hand over their hard-earned cash for a service they previously thought of as “free”. (And policymakers should certainly now be looking at what can be done to address this problem).

In recent years, there have been attempts to “improve” the way commission works, with consumers given clearer information about what an adviser will earn as well as being given options about how they pay for this advice.

But the regulator is obviously not convinced that this halfway house has worked. Hence – after what seems like years of foot-dragging – the introduction of the RDR.

So it seems odd to me that the lessons learned here have not been applied to other parts of the financial services industry. This decision seems even more shocking when you consider the sheer number of customers that buy financial products from banks compared with those who visit a traditional IFA. As the recent PPI misselling scandal has shown, the scope for misselling on a grand scale – £9bn in compensation, and counting – should not be underestimated.

Rather than tinkering round the edges with “Dear CEO” letters, the FSA should take a far more robust stance on such practices. Commission and incentive scheme are surely just two sides of the same coin.

While they are at it, there should also be far clearer distinction about the service that “advisers” in bank branches offer. I think woolly terms like “wealth manager” “financial consultant” and planning adviser” should be binned. Anyone selling a financial product – in a bank or otherwise – should either be an adviser, whose services are paid for by the consumer, or else known as a salesmen. Call them a “wealth salesman” if you will. But if there is greater clarity about this, customers are more likely to be on their guard and far less likely to be misled.

Emma Simon is deputy personal finance editor at the Telegraph Media Group


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. “Last week, the FSA took the banks to task for the staff incentive schemes they run.”

    Guys, your 30 years too late!!

  2. Having worked in banks before becoming an IFA I can assure the FSA nothing will change. If the banks do away with ‘incentive schemes’, they will still introduce targets to maintain an advisers salary. Non acheivement will result in the usual range of sanctions ‘performance management/improvemen/development plans’ ‘structured help’etc which are just nice cover words for shortly to be leaving the business/helping them find a career they are better suitred for. Financial Services is run by 50+ somethings whose understanding of staff motivation belongs in the dark ages. Modern companies just don’t run that way ! It would be laughable if the consequences for staff and their families.

    As long as such sanctions exist mis-selling will continue as staff struggle to protect their jobs. Banks should just pull out of providing financial advice completely and go and work in healthcare until they learn how to treat staff, and by association their customers.

  3. When are consumers going to take some responsibility? “Oh the big bad banks sold me an account/loan/credit card I don’t need”! Well that’s your own fault then!! If you were shopping in Morrisons and they tried to sell you 15 loaves of bread and 19 pints of milk to go along with your paper, you would say no! But when it comes to an account that you pay monthly for or a credit card, its the banks fault that I took that!! I suddenly could not make my own decision it was the bank fault! Get into the real world the banks are a business there to make money (like any other business) STOP blaming them for everything! Take some responsibility yourselves!!

  4. Having worked at Santander et al I would be very wary of any adviser receiving a ‘bonus’ or exceeding targets.

    I have had to clear up behind a few of these in the past, a few have later been asked to leave to avoid further ‘bonus related’ activities, possible regulatory sanctions, or further complaints from customers. (All suitably hushed up) A few more have actually been promoted to sales managers as shining examples of how the job should be done. God help us all !!

    Give me a lower achiever who cares about their customers and whose business stays on the books anyday.

  5. Why does everyone keep going on about the incentive schemes? They are an irrelevance and simply a consequence not the problem.
    In a dark boardroom somewhere in Canary Wharf the people charged with running the bank made a decision that they wanted to sell shedloads of a particularly profitable product to as many people as possible. That’s the problem, the culture of the bank not the mechanics applied to get its minions to sell it!!

  6. You’re spot on Emma but as Andy Pandy says, this should have been done more than two decades ago. The collective detriment in pounds and pence and overall confidence and lack of take up of decent, needed products is immeasurable.
    Only this week I have seen a couple sold a series of £10k investment bonds each year by their Building Society, no trail just max initial which funnly enough is higher than that payable on an ISA.
    Another client went to his B Soc to get a new deal on his mortgage, they had a ‘special’ deal but only if he did his and his wife’s ISAs with them.
    Then another couple who were convinced by the B Soc, until I showed them otherwise, that an Aviva Bond with Guaranteed Fund wasa deposit account.
    A friend who left a High Street Bank recently summed it up when he said, “I could no longer live with myself be targetted to sell overpriced products to people who did not need them, want them or afford them”.
    Then the FSA say that despite a decade of PPI with £10bn of misselling they could not find an individual culpable – maybe a mirror would have helped.
    We would have thought it bad if this was going on under the auspices of a regulator in Harare, let alone London.

  7. I think it is fair to say that IFAs – which are often SMEs – have borne the brunt of the financial services regulation while the banks have been able to keep on selling to average people coming in off the street. The difference between Independent Financial Advisers who must spend huge resources on regulator observances in order to stay in business and the ‘salespeople’ in bank branches is fundamental to the issues around advice in the UK.

    On this occasion I would agree with a criticism of the sale of some structured products. There have been some appalling products pushed on people by certain banks with terms that as Chartered Independent Financial Advisers we have been highly critical and from which we have advised our clients to stay well clear.

    The structured products that providers distribute through IFAs (eg. have to stand up to the scrutiny of the people who are advising on investments on a professional level and who have the facilities to research and compare the products in detail. That also is a fundamental difference.

  8. Oddly it looks like the banks are withdrawing from giving advice. They cannot sell products with fees of 3% or less and be profitable.
    Santander are selling just structured products after 2013, HSBC just deal with HNW via their IFAs and charge over 4%, the same with Barclays. CO-OP are out, Halifax will be selling protection (badly). Lloyds are just going down the Discretionary route to get more in ongoing fees and RBS have nearly thrown in the towel.
    What may well be left is the IFA community in five years time, however how many will look after clients with under £30k to invest? Only time will tell. One things for certain, there aren’t enough HNW clients for everyone.

  9. IFA’s and online brokers will be left – who are able to deal in volume.

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