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Phil Young: The trust paradox in financial services

What is driving more people into the arms of individuals and businesses they purportedly do not trust?

Phil-Young-700x450.jpgThe 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



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Great piece, Phil, one of the best things I’ve read on the thorny subject of trust. Whenever I read about the importance of restoring trust in financial services (and I read about it often) I always think what a dangerous thing it would be to do, a bit like restoring trust in ice on frozen ponds. A lot of the time it’ll take your weight perfectly safely – but it would be very unwise to assume it always will.

  2. Christopher Pitt 8th February 2018 at 1:05 pm

    Great article. Trust is an interesting one. Many people would trust Ryanair to fly them safely to their chosen destination but, would they trust them not to find more ways to charge a little bit extra here and there? People trust banks, or rather the banking system, because there really isn’t any alternative, e.g. it’s almost impossible to operate effectively in today’s world without a bank account. And actually, the downside risk of transactional banking isn’t that great. But when it comes to financial advice the risks are considerably greater. Pick the wrong one and it could cost you a fortune. Pick the right one and it could save you a packet! Unfortunately, as an industry there have been far too many instances where financial advisers (in the very broadest sense of the term) have delivered the former rather than the latter and it will only be when such scandals are eliminated that the public in general will trust financial advisers.

  3. A good read Phil, with the key observation at the end being spot on. The person doing the trusting (the client)should have nothing to fear if they are placing their trust in someone who is trustworthy. When someone chooses to place their trust in someone they are allowing themselves to be vulnerable to the ethics and motives of the other person. The decision to trust someone or not can only really be judged with the benefit of hindsight once the other party’s behaviour has been experienced.

  4. Wishful thinking I think Phil !

    Why do people have bank accounts ? not because they trust them, 99.9% (me included) hate and distrust banks, they have too, why do people go to a dealer to buy a car, I doubt its because they trust a dealer more than a private sale (ease and protection?

    The bigger question, and the elephant in the room is why is there scandals on an industrial scale forever present in our industry ? I really don’t think its because of the widespread trust ?

    People have to seek financial advice and they have to “trust” some-one…and all the time the good ethical advisers are stuck at the back dealing with a mountain of paperwork, compliance and procedure, the corner cutters pass straight past us to the consumer filling their boots as quickly as they can inflicting maximum damage often for millions.

    How often do we read the latest scandal has been done by 2 or 3 firms and miss-sold with impunity ….

    By making something simple like going from A to B so burdensome and difficult is counter productive; its not about being transparent, open and honest, or consumer protection, its about slowing things down grinding things to a near halt, so people take time in their advice, people have time to think about the advise they have been given….

    So what do the corner cutters do about this ?

    Yep, cut corners and head straight for the prize ….

  5. It is said that people are motivated by greed and fear. As such a lot of the mis-selling has resulted from both of these emotions.

    People investing their pension fund in an Unregulated collective investment scheme (UCIS) are driven by greed because they have been convinced that they can get a higher rate of return than investing in regulated funds. The advisers promoting these investments are again driven by greed as they can generate higher levels of income by promoting these schemes.

    The Defined Benefit (DB) pension transfer boom has again been motivated by greed. Consumers seeing the high cash equivalent transfer values (CETV) would like to get their hands on what for many of them, could be life changing amounts of money. As such they are eager to take advantage of the new pension freedoms. The advisers encourage them to transfer as they can earn large initial and ongoing fees as a result of a transfer.

    The fear will come in if there is a long term downturn in the performance of world stock markets. The same clients who were happy to transfer their DB pension funds to get their hands on the Pension Commencement Lump Sum (PCLS) will be worrying when the remaining fund starts to fall in value due to poor investment returns and that is when the complaints will start. Some of them will claim that the adviser took advantage of their trust to encourage them to do something which was not in their best interests.

    If the adviser has not kept good compliance records they will be found to have given bad advice. If that happens in a lot of cases, we will have another mis-selling scandal on our hands.

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