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FSA clamps down on mis-selling with new guidance

by Michelle Abrego on Jan 16, 2013 at 10:45

FSA clamps down on mis-selling with new guidance

The Financial Services Authority (FSA) has published final guidance to help firms avoid creating and operating incentives schemes that drive mis-selling.

In September 2012 the FSA published a review of sales incentives and asked for feedback on proposed guidance. At the same time Martin Wheatley (pictured), managing director of the FSA, told an audience of senior bankers and insurers to end schemes that encouraged bad sales.

Although it will leave its guidance largely unchanged, the regulator said it was planning to widen its review of sales incentives and will monitor how firms are acting on its guidance.

The FSA said it will widen its assessment of high street banks and other firms from the 22 firms that were originally looked at before the review in September 2012.

The guidance applies to all firms that deal with consumers and have sales staff or advisers who are part of an incentive scheme.

The regulator said it would consider additional work covering how firms manage performance and set targets as respondents to its consultation said these those practices were more likely to increase mis-selling than financial incentives.

Wheatley said: ‘Finalising this guidance is important because it gives financial firms a clear idea of what we expect from them and how they should manage their incentive schemes. It also marks a key step in changing the culture of viewing consumers as a sales target to somebody to serve.

'Firms need to look at this guidance now, work out how it applies to them and what they should do differently.’

The review published in September uncovered a range of serious failings of badly managed incentive schemes that encouraged staff to miss-sell, which suggested that firms had not properly thought about the risks or simply turned a blind eye to them, the FSA said.

The 22-firms investigated encompassed banks, building societies, insurers, and investment firms.

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34 comments so far. Why not have your say?

Chris Wicks CFP

Jan 16, 2013 at 11:01

Of course, this is completely shutting the gate after the horse has bolted. Going forward, mis-selling won't be the issue. Mis-buying will be, from the same folks as before - banks and insurance companies, due to the lack of advice that wiill now be available to people of limited means. The chances are the clients will have less recourse than before because provided that the product providers generate the right disclouse documents with masses of small print (that the clients will neither read nor understand) they will be in the clear. No one wiill be accountable. The losers will be the clients. Of course they won't be 'clients' anymore with all that entails. They will just be customers, like those who shop at Tescos and don't know what they are getting. End of rant!

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Man of Kent

Jan 16, 2013 at 11:08

"FSA clamps down on mis-selling with new guidance"

"... it will leave its guidance largely unchanged..."

These statements appear mutually incompatible. Discuss.

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Smudger 2

Jan 16, 2013 at 11:12

Black smoke pouring out of RDR engine 1.

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Jonathan Kirby

Jan 16, 2013 at 11:26

I have to say, the more I think about it, the more convinced I am that Hector joined the FSA with the sole intention of wiping out competition and more importantly, accountability for the banks.

As Chris Wicks says, they simply have moved people from advised sales (which they can be accountable for) to product buyers and caveat emptor.

To take the analogy of supermarkets further, they will also be buying horse meat in their burgers.

It makes you want to scream.

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Mark Cooper

Jan 16, 2013 at 11:28

The Banks, SJP and others still sit down with the sole intention of selling a product - the only way they can get paid.

I thought RDR was supposed to separate advice from product sales? It has done nothing of the sort, unless we are to believe these organisations will no longer have Sales Managers, targets or bonuses?

To achieve what they have, RDR could (and should) simply have been a cap of 3% + 0.5% remuneration from all Products/WRAPS/Platforms. Anything more and the client writes a cheque for the balance.

It really could have been that simple.

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David Banks

Jan 16, 2013 at 11:31

Re Chris Wickes CFP - Why is it assumed that people won't know what they are buying?

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John Smyth 3

Jan 16, 2013 at 11:43

You are perfectly correct Jonathan.

He was the banks placeman just like McCarthy and Turner. It has been obvious for years and Sants has been given his reward. Although he failed miserably at everything he should have done to protect the public he did everything that the banks wanted him to do. Poor Angela Knight did not achieve what they wanted her to do in the BBA so she was given a nudge into the world of Energy but no knighthood or whatever the female equivalent is.

It is noticeable how many non advised products have just sprung up from the banks and building societies in their offices and online.

Despite the insurance companies, banks and building societies still calling their sales people advisers their get out of liability catch phrase in the future will be " We did not advise you or sell to you. You bought it."

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Jonathan Kirby

Jan 16, 2013 at 11:44

@ David Banks

Very few people actually have a clue and go purely on trust.

If they did understand they would be very unlikely to buy the type of expensive rubbish peddled by the banks, etc.

Although less so given the recent scandals, people are still in awe of banks and live with the mistaken belief that 'their bank won't rob them'.

Oh boy, yes they will given a inkling of a chance. We have seen it time and time again.

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Jan 16, 2013 at 11:47

@David Banks

what do you think "miss- selling" demonstrated ?

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Ian Lees

Jan 16, 2013 at 11:48

I wonder of the FSA/FCA are going to " clamp" down on their own bonus structure ? or their othe awards for failure. . . such as Knighthoods ?

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Jan 16, 2013 at 11:49

@ Mark

You are so right. If there were to be a commission cap, then most of the high charging cowboys would be eliminated. Add the examination rules and hey presto, you have acheived your objective of a level playing field, not cost the industry huge sums to re-do computer systems and lead to better consumer outcomes.

Even better, if they had adopted this option, if the result was not as anticipated, they always had the option to change again. I rather suspect RDR as is was lobbied for by firms like Towry who had found a high charging advice fee model for HNW clients, and do not care about those with less to invest, as it was not in their business model.

So post event, adviser fees are unlikley to reduce, advisory firms with in-house funds can charge what they feel like, and charge £2,000 for a report, £500 per annum for up to three hours on review and still take over 2% annually as fees on their funds. But these charges are explicit, so thats all right then!

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Richard Hardy

Jan 16, 2013 at 11:56

No mention of the FSA/FCA actually looking at the products themselves.

Their view appears to be as long as the advice is OK then fine, you can still 'advise' clients to take out crap products.

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Ian Lees

Jan 16, 2013 at 12:00

What is clear is the FSA still does not beoieve that it is in the BEST INTERESTS of IFA's - to treat theri cusotmers fairly - eithout the additional intervention of the FSA . It has been demonstrated that Banks and Insurance companies - offer bonuses - made up of fickle figures of fantasy becasue of their poor record keeping. I received bonuses at scottish widows - when they were still authorised . . . rather than acting as introducers to Clerical Medical ( an extict company ). Where Tesco has been selling their "horse burgers", - the banks have been selling their " human flesh" , - the purchase and sale . . . and resale of client banks e.g LloydsTSB Group selling their bank of clients and branches to the Co Op ( who claim to be good with food ). For example check out the various insurance companies held within LLoydsTSB Group from St Andrews Life to Clerical Medical Hill Samuel and scottish Widows - and their various subsidiaries e.g SWIP . ..RBS who own Drummonds, Coutts, Nastywest Adams & Co ( the internal bank for RBS employees . . . at a certain level - so that directors do not need to engage with the Riff and Raff of Edinburgh or elsewhere ) with direct line, or NIG etc., etc., Such has been the contraction of insurance companeis and of banks - there is significant reduced levels of competition - and internal co operation form these monopolies. Clearly the sales and marketing and the bonus structure is designed for - and superb for the Churning of business ( often treferred to as " Shooting Fish In A Barrell " ) onto their platform or into their insurance company funds - geretaing up to 6% or 8% depending on which insurance company chosen. Such are the bonuses the backhanders and the incentives at financial institutions.

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Ian Lees

Jan 16, 2013 at 12:14

For the avoidance of doubt , " Misselling " is a serious form of fraud - which goes unrecognised by Sir Hector of the "Saints ", and his colleagues at the FSA. Given the reason for misleading consumers into doubting the full extent of the fraud committed by advisers - whether on behalf of their sponsor ( employer - whether bank or insurance company of national IFA practice or Natioanl Tied Agency firm ) - the individuals involved were fully aware of their actions - which were to obtian money ( in this case commisons ) by deception, or restricting the information provided - or failing to provide full or clear unequivical information upon which a client can make an " Informed Decision". MP's are now conducting themselves in this way - by refusing to provide answers to simple questions - which is a breach of Law as an MP. Directors at insurance companies and banks e.g Libor fiddling . . .are negligent and are in breach of their legal obligations, theri duties if due diligence and care - and should be hanged . . . to be on the safe side - or at least put in prison for 10 years minimum sentence. Perhaps if they applied the same deterrent . .on MP's . . . it may have the effect to discourage some . . . and we might see some improvement in their quality, or competence or integrity

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Julian Stevens

Jan 16, 2013 at 12:23

The headline refers to the FSA, the picture is of the head of the FCA. Is this a typo? If so, then (steady yourselves chaps) it may be unfair to lambast Martin Wheatley for grasping the nettle that the FSA for so long failed to.

That having said, for the FSA to have allowed commission merely to be replaced with more or less identical rates of AC and no obligation for firms to charge clients an advice fee prior to and entirely separate from any product implementation fee seems to me to be a massive compromise of one of the central pillars of the RDR.

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David Banks

Jan 16, 2013 at 12:27

Perhaps the new regulations will create an environment for products that are easily understandable by the layman. These products will then be distributed through the direct and non-advised channels and purchased 'off-the-shelf'. Too early to tell at the moment though - this is long-term thinking.

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Mr Man

Jan 16, 2013 at 12:41

The whole concept of misselling is baloney. If I recommended a 10 year endowment for a £1000 per year to a 20 year old and it matured with a payout of £25,000 I would be hugged, but I have missold Yes ? but the client would never complain.

If I sold a 45 year old their 1st Pension plan ,the same £1000 gross and in 10 years time it was worth £6500 the client might pursue me for misselling. Take a punt theory and they might win.

Most claims against advisers start through "poor performance" over expectation irrespective of how good the actual advice was, but win for a different reason. Giving advice is a fools game that can retrospectively be undone depending which way the wind is blowing. Why would anybody invest in a financial advice firm.

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Jonathan Kirby

Jan 16, 2013 at 12:46

@ David Banks

You are the eternal optimist.

By the time people realise they need to save or take out a pension or life cover it is usually way, way too late.

One particular case comes to mind of a highly paid intelligent professional person with whom I had discussed Life and Critical Illness cover but he didn't take any action.

Two years down the line I got a phone call to ask if it was too late to take up my proposals as his wife had been diagnosed with breast cancer.

Another lady in her late 50s on realising she hadn't any pension to speak of came into the office and asked me how much it would cost to build up a pension fund.

The calculation was horrendous and involved her having to do the impossible - 100% of salary still wouldn't do it.

Having put this in writing with some other suggestions for lesser amounts to help get her out of the hole, I was then treated to a tirade of abuse as she assumed I was being paid an obscene amount of money from the insurance company.

It was a stakeholder I recommended and it paid zero, but these just go to illustrate the depth of understanding of matters financial amongst 'Joe & Joanne Public'.

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Julian Stevens

Jan 16, 2013 at 12:59

In the continuing absence of any action on the part of the government to address the many things so badly wrong with the current pensions framework, I think many people would consider the sale of a pension plan without the benefit of a decent employer contribution and higher rate tax relief (for as long as that may last) to be a mis-sale by comparison with an ISA.

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Jan 16, 2013 at 13:35

Mis-selling is only mis-selling if you fail to demonstrate suitability. Performance is not a reason for a mis-sale. Pensions arn't always the most suitable option as Julian alludes to...

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Jonathan Kirby

Jan 16, 2013 at 13:53

@ Julian & Barman

Quite right, but sometimes they are.

In that particular case the lady in question would still have been within the age allowance threshold for all her income so receive it without tax deduction, but because her husband had pension income in his own right they wouldn't have qualified for pension credit.

Had she done an ISA she wouldn't have had the tax relief uplift and would have probably spent the lot inside a year or two given her financial ineptitude.

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Julian Stevens

Jan 16, 2013 at 14:08

Well yes, tax relief on contributions from untaxed earnings is undoubtedly attractive but, even so, which would most clients choose if presented with an A:B comparison between a PP and an ISA? I think that pensions has now become such a toxic issue that most people would disregard the tax relief on contributions and go for the ISA, bearing in mind that the basic rate of income tax is and for several years now has been much lower than it was only a couple of decades ago. 20% tax relief now set against being shackled by annuity rates at the end of the day? I know what I'd go for.

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Ian Lees

Jan 16, 2013 at 14:09

@Mr Man . . . I am waiting for one ( or maybe more ) adviser to make a claim against the FOS for their cack handed claims on pension transfers. Imaging someone who made a claim for pension misselling from aFianL Salary Scheme - were paid compensation by the FOS ( on behalf of the FSA/PIA/FCA - when heir schems are insolvent or nearly bankrupt ( e.g Scottish Widows Retirement Benefit Scheme ) - and the adviser recomended he or she take control of their investments - yet the flawed and somewhat dodgy regulator has intervened claiming " Misselling ", for and on behalf of the consumer. I wonder if the FOS will be considered as part of the conspiracy i.e conspiring with a consumer to defraud an adviser or insurance company ?

We need to review these pension transfers all again !

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Ian Lees

Jan 16, 2013 at 14:13

One wonders that given all the claims of " misselling ", has the failed regulator been guilty of " misselling "regulation ? Failure to regulate, refusal to regulate - and claims it is not in their " jursidiction", to regulate - FCA, like their predecessors the FSA the PIA and Fim . . . . BRA all . . . . misselling regulation

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Julian Stevens

Jan 16, 2013 at 14:30

Of course, they're guilty of all those things. But they happen to live in a very handsome, expensive and bomb-proof shelter created for them by the government. So basically, no matter how bad a hash they make of things, somebody else can always be made to pay and the top bod gets a knighthood. That's capitalism for you.

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John Bees

Jan 16, 2013 at 15:30

FSA a home for failed accountants alawyers, why is it they are always acting after the event. we told them about Northern Rock. Borrowing with out knowing what the clients income is and therefore the ability to repay, and lending more than a house is worth, is to say the least stupid. There is no right of retribution against the FSA they are fire proof, and therefore not effective or corrupt. in short thye make everyones life miserable, but what do we do?

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Philip Adams

Jan 16, 2013 at 15:37

@ Julian Stevens

"no obligation for firms to charge clients an advice fee prior to and entirely separate from any product implementation fee seems to me to be a massive compromise of one of the central pillars of the RDR."

This is still part of the RDR framework as far as i am aware?

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Mike Morley

Jan 16, 2013 at 15:50

As long as the FCA is a creature of the Treasury and subject to the dictat of the Government of the day there will be no effective regulation of the Banks. I was in the Building Society sector for many years and was horrified at the compliance of my employers who, when the Government of the day said jump merely asked "How High". 100% loans, self-certification all encouraged by successive Governments to create a housing lead boost to the economy. There was no way that the FSA was ever going to reveal that the Emperor was not wearing any clothes and the same will apply to the new alphabet soup regulators. The minute it suits the Treasury to give the economy a "fix" of the easy money drug to which it had become addicted they will all roll over to have their tummies tickled - and of course line up their future banking sinecures and knighthoods.

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Graham Newitt

Jan 16, 2013 at 16:25

With all the focus on Banks, I wonder if anyone has noticed that the guidance applies to any firm that employs an Adviser. Those that operate with self employed Advisers in particular need to think through how they manage mis-selling risk.

The paper says: 100% variable pay/commission only.

Where firms remunerate staff or advisers purely by variable pay (such as sales commission with no basic salary or a proportion of the revenue earned for the firm). This significantly increases the risk of mis-selling because staff need to make a minimum level of sales each month to be able to meet their financial commitments.

On a lighter note interesting they still mention commission in a 2013 publication!

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Bob Donaldson

Jan 16, 2013 at 16:30

You don't need to write a book on miselling you simply have to have a conscience as an advisor. The acid test to apply to anything is would I take the advice/buy the product if I was in the position of this individual.

If you apply that simple test to all the financial advice that you give it gives you a moral compass that you can use.

Would you buy an Investment Bond with 7% commission - No. Would you put all your money into a UCIS scheme guaranteeing 10% - No. Would you invest all your money into a structured deposit - N0.

If you end up answer yes generally you should be comfortable with the advice being given and be able to put your hand on your heart and say that you have done the job to the best of your ability.

Books, guidance, more words from civil servants justifying their jobs!

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Julian Stevens

Jan 16, 2013 at 17:21

To Graham Newitt ~ Quite some time ago I suggested that one of the main problems with this business is the separation between sales and admin/servicing roles.

The salespeople are generally regarded as the go-getting spitfire pilots whilst the admin wallahs back in the office are just the drones who shuffle paper and iron out the wrinkles. The sales bods (and I'm generalising here) want as little as possible to do with any admin matters whilst the admin wallahs don't have the interpersonal skills to deal face to face with clients.

What is needed are people who can do both, people who can service, review and develop an existing portfolio of clients, the recurring revenues from which would form the staple of their earnings, with the ability to bring on board additional business as well, both from existing clients and a few new clients.

The trouble, though, is that people like that tend to be running their own business and don't really want to work for anyone else. A tough one.

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Mark Cooper

Jan 16, 2013 at 17:58

Julian Stevens shrewdly wrote:

"What is needed are people who can do both, people who can service, review and develop an existing portfolio of clients, the recurring revenues from which would form the staple of their earnings, with the ability to bring on board additional business as well, both from existing clients and a few new clients."

That's me, that is.

"The trouble, though, is that people like that tend to be running their own business and don't really want to work for anyone else."

That's me again.

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John Bees

Jan 28, 2013 at 17:15

If the regulator takes a dislike to a sector, particularly if they are not getting a fee out of that sector, they will do everything they can to discredit the sector. therefore the warnings become a self fullfilling prophecy. and so the regulator is now giving the advice. there is no independence, only within the guidelines which are ever narrowing.

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John Bees

Jan 28, 2013 at 17:21

Anyone who beleives he or she is NOT paid in some way by commission is a fool. I any commercial organisation (one that has to make a profit) weather salaried or not, you will only be kept on if you make a profit, if you dont you will be sacked. therefore your pay no matter how you receive it is perfomance related in a business where profit is now fees charged or fund based its as broad as it is long.

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