Dirty dozen: FSA reveals 12 examples of bad bank advice
Example of a customer misunderstanding a complex question
One firm’s risk-profiling tool contained a complex question that assumed customers had a particular level of financial knowledge and mathematical ability. The question required customers to use percentages to calculate potential investment losses based on different scenarios and then confirm the level of loss they would be willing to accept.
In one mystery shop, the customer only realised the potential loss implied by their original answer after the adviser explained it to him in more detail. However, advisers failed to check customers understood the question in all mystery shops, even when they were clearly struggling to answer it.
This led to some customers’ risk profiles being assessed incorrectly and the adviser recommending an unsuitable product.
Example of a poorly worded risk category description
In one firm, the ‘middle’ risk category highlighted the potential for the customer to lose money but did not indicate the extent of the potential losses. A number of advisers also failed to give customers any further information to help them understand the level of risk involved.
Because of this, we felt it would be difficult for customers to understand whether the risk category accurately reflected the level of risk they were willing and able to take.
Example of an adviser failing to confirm that a customer’s level of risk was correct
One adviser assessed the customer’s attitude to risk by asking him to read through the firm’s risk category descriptions and select the category he considered appropriate. The adviser accepted the category selected by the customer without any further explanation or discussion and recommended investment funds to match this risk profile.
We considered that the adviser had failed to take reasonable steps to ensure their recommendation was suitable as:
• the risk category descriptions failed to effectively explain or illustrate the level of risk involved.
Given these limitations, we felt the customer was unable to make an informed decision on whether
the category reflected his risk profile; and
• the adviser failed to check whether the customer’s ‘self-selected’ risk profile accurately reflected the actual level of risk he was willing and able to take with his investment. This was particularly relevant as the adviser had identified that the customer had no previous investment experience and limited financial knowledge.
Example of an adviser failing to take account of wider customer information
One firm’s risk-profiling tool assessed a customer as ‘medium’ risk. However, this was inconsistent with other statements she made to the adviser about the level of risk she wanted to take with her money.
While discussing her objectives, the customer stated her desire was for ‘safety’ and mentioned that she did ‘not want to risk’ her money. However, the adviser failed to investigate or discuss the discrepancy between these statements and the ‘medium’ risk category suggested by the firm’s risk-profiling tool.
The adviser also failed to discuss whether any loss of money would harm the customer’s standard of living. We considered that the adviser’s recommendation for a medium risk investment portfolio that would fluctuate in value on a daily basis and could result in potential losses was unsuitable for the risk the customer was willing and able to take.
Example of an adviser failing to gather necessary information
One adviser failed to gather enough information on the customer’s income, current and future tax status, existing assets and regular financial commitments.
Because of this, it was not possible to assess whether the recommended product was suitable for the customer’s financial circumstances and needs. We considered that the adviser had failed to take reasonable steps to ensure the recommendation was suitable for the customer.
Example of an adviser failing to recommend repaying unsecured debts
One adviser identified that the customer had around £9,000 of credit card debt. The customer was only making the minimum repayment amount each month and the outstanding balance was accruing a significant level of interest.
The adviser failed to recommend that the customer repay this credit card debt and instead recommended an investment within a collective investment scheme. The customer was likely to be worse off, as the interest on the credit card debt was likely to be higher than the investment returns (and paying off the credit card would not have involved any investment risk).
We considered that the adviser’s recommendation was not in the customer’s best interests and was unsuitable for his financial circumstances and needs.
Example of an adviser recommending a product that was unsuitable for the customer’s investment term
One customer wanted to invest for three years so she could help buy a house for her son. The customer confirmed that this term was to coincide with her son returning to the UK from a fixed-term employment contract abroad. However, the adviser attempted to influence her to extend the term. After some discussion the customer said that a term of between three to four years was possible and the adviser recommended a collective investment scheme.
The adviser stated that as the product was a medium-term investment they would ‘have to technically recommend that [the product remain invested] for five years’. However, when the customer made it clear that her three to four-year term was not negotiable the adviser contradicted their earlier statement and said that medium term meant ‘three to five years’. The adviser then stated the firm had ‘to recommend three to five years to be on the safe side’. These statements contradicted the product’s key features document. We considered that the recommended medium to long-term product was unsuitable for the customer’s short, three to four year investment term. If the investment had been made, the customer had an increased risk of getting back less than she had originally invested due to the short term and the impact of the initial charges.
Example of an adviser making a misleading statement on how the customer would pay for advice
The adviser told the customer ‘you don’t pay me a penny [and] you don’t pay the bank a penny for this advice’. We considered this misleading as the firm’s ‘Keyfacts about our services and costs’ document made it clear that although the customer might not have to pay anything upfront, the firm’s service was not free and the customer would pay by commission indirectly through product charges.
Example of an adviser making a misleading statement
One adviser made a number of misleading statements about the features and potential investment returns of the product they were recommending.
The adviser incorrectly stated that the customer would ‘always get a return’ and told him that the potential return from the product was three and a half times more than the maximum return that was actually achievable. The adviser reinforced this misleading statement by writing down the amount the customer ‘could’ get back based on his initial investment.
The adviser also made misleading statements about how the product was managed and gave no risk warnings. The adviser appeared to rely on the customer’s lack of experience to not question or challenge the product information.
This misleading disclosure meant the customer was not able to judge whether the product was suitable for his needs and circumstances.
Example of an adviser issuing a misleading suitability report
One customer made it clear to the adviser that she wanted to invest her money for three years and then use the money to go on an exotic holiday. The adviser recommended a medium to long-term investment product.
The suitability report setting out the recommendation was misleading as it stated that the customer wanted to invest for ‘at least five years’ and was keen to follow a ‘medium to long-term investment strategy’.
Example of an adviser using a sales aid in a misleading way
The adviser used an investment sales aid as part of the risk-profiling process to show the customer the potential returns from a ‘medium risk’ investment portfolio linked to his ‘medium’ risk profile.
The investment sales aid suggested the customer would receive a positive return on his investment at the end of the term. The adviser reinforced this by telling the customer this positive return was the ‘lowest potential return’ he could get back and represented the ‘worst case scenario’. We considered this misleading as the firm’s medium risk portfolio did not guarantee a positive return. The portfolio was invested in assets that would fluctuate in value on a daily basis and expose the customer to the risk of potential losses.
Example of an adviser manipulating the firm’s advice processes
The adviser told the customer ‘If I only put a five year timescale in, because you have no experience in the stock market, [the system] will probably drop you to cautious [risk]. If you want the better growth potential of a balanced [investment] we may need to put in a longer investment term, but after three years you can get it out’. The adviser then put a 20 year term into the firm’s systems and continued with the advice.
The suitability report given to the customer was inaccurate and misleading as it reflected the incorrect 20 year term rather than the customer’s actual objective.