MM leader: The uncertain future for bank advice

The results of the FSA’s recent mystery-shopping of bank advice, which found significant levels of unsuitable advice, should come as no surprise.

What is more noteworthy is that the FSA appears so keen on keeping the issue of bank advice quality high on its agenda. This is something the IFA community has been calling for the regulator to do for years.

In combination with FCA chief executive designate Martin Wheatley’s very public crackdown on sales incentives, the regulator appears intent on asking searching questions of banks looking to operate in the advice sector.

This is the correct approach. The long list of recent FSA fines levied against banks for advice misselling, usually linked to poor training and/or unhealthy incentive structures, highlights the need for firm action and a watchful eye.

The dramatic effect the RDR changes will have on banks that still have advice capabilities mean these structures are untested and in need of careful supervision.

The mystery shopping of six big firms, published last week, was conducted between March and September last year, before they had finalised their post-RDR propositions.

Out of 231 mystery shops, the FSA found 11 per cent of cases offered unsuitable advice. Advisers in a further 15 per cent of situations did not gather enough information to ensure the advice was suitable.

As a result one firm, understood to be Santander, has been referred to enforcement.

The FSA says other firms have agreed to retrain advisers, change their advice processes and undertake past business reviews.

The regulator intends follow up work later this year to ensure things have improved. You would expect big penalties for those who have failed to take on board the regulator’s guidance.

With banks experimenting with new advice processes that have yet to be tested commercially, 2013 could be a year of significant decisions.

Since the FSA action, Santander has announced in is considering whether to exit the advice space, or refocus on high net worth advisers. A number of competitors have already exited advice or heavily restricted their offerings.

The “poor me” commercial considerations of banks should not be a brake on regulators cracking down on misselling and consumer detriment.

However, if we are left with no banks offering advice in a year’s time, serious questions around the social purpose and success of reforms such as the RDR and regulation in general, in terms of engaging the mass market, will need to be answered.