IT is not cynical to suggest that packaged current accounts are often mis-sold – it’s logical. More than 10 million people hold a packaged account and fork out an average of £15 a month for the privilege, yet research shows that only a minority use any of the add-ons they are paying for.
Many have no idea what services their accounts offer – and often they contain insurance that cannot be claimed on.
The Financial Services Authority (FSA) last week announced new rules for packaged accounts that will force banks and building societies to send customers an annual eligibility statement and remind them to check that the benefits in their account are suitable for them.
The changes come into force in March and while they don’t really go far enough, they’ve clearly given the banks something to think about. Both Lloyds TSB and Royal Bank of Scotland are to suspend branch and phone sales of packaged accounts next year. They claim the move is unrelated to mis-selling worries, but the timing suggests otherwise. The annual statements will be sufficient to make many people realise they’ve been sold a dud. The claims management vultures already know that and they’ll be targeting the market next year, having torn much of the meat off the bountiful payment protection insurance (PPI) carcass.
Lloyds said it would be back with another packaged account next year. Others will no doubt review their products too. If it means the banks realise they have to provide accounts that offer real value to customers, the FSA’s new rules will have had a positive impact already.
It’s now less than two weeks until reforms kick in that have been in the making for six years yet continue to be the subject of bitter complaints.
As if by magic, the body behind the changes this week issued two reports that neatly underline the issue’s complexity.
Almost half of people who have sought the assistance of a financial adviser didn’t realise they were paying for it, according to new research from the FSA. It is the regulator that has pushed through the pragmatic- sounding retail distribution review (RDR), a set of new rules that many advisers argue are anything but sensible. Come 1 January, the RDR will outlaw commission payments from investment providers to advisers for selling their products, with advisers and clients instead having to agree a fee in advance.
The aim is to eliminate the bias that the FSA believes is to blame for unsuitable advice and a series of mis-selling scandals over the past two decades.
It’s research found a third of people who don’t receive advice assume it will be free.
Why it would be free I have no idea. Do accountants or solicitors work for free? No, so why would financial advisers? The bizarre perception that they do is one of the consequences of the commission system, where consumers have not forked out a fee, but instead have paid what is often a very expensive long-term price as the commission has eaten into their investment.
This week, the City watchdog also published details of compensation payments for thousands of cautious investors who lost money in high-risk investment funds. People with money in two Arch Cru investment funds lost around £140 million when the vehicles were suspended in 2009.
The FSA has ruled that those investors must decide whether they want their case looked at, rather than tell firms to review their sales. However advisers have to ask those clients if they want their sales reviewed.
The regulator has blamed IFAs for failing to explain the risks of the funds to investors, putting the episode firmly under the ‘mis-selling’ category (quite conveniently in the context of the RDR).
It wants those firms to compensate clients, which is likely to drive some out of business.
But it is not that simple. The funds were classified as cautious by the Investment Management Association, a label that clearly failed to reflect the risks they posed to investors.
The FSA claims IFAs shouldn’t have relied on that categorisation and that they should have carried out more due diligence. That’s fair, but if the regulator had done its own job properly the mis-selling would never have gone so far.
In reality, the blame can be spread widely – across the producers, managers, regulators and advisers. It’s pure coincidence that the RDR research followed within days, but paranoid IFAs – of which there are plenty – will suspect otherwise.
Quality financial advice is of a great value that, as the FSA’s research underlines, too few people appreciate. The RDR will have the unfortunate outcome of reducing the number of independent advisers.
But it will also improve the quality and therefore the public perception of the industry, with the hope that eventually, more people will be prepared to pay for advice because they know what they’re going to get from it.