Investment: High street names under fire again as mis-selling woes go on

Thousands of people have fallen victim to investment mis-selling and the toll is reportedly rising as savers frustrated by low interest rates turn to banks for advice.

The extent to which some of Britain's biggest banks are selling customers inappropriate investment products was indicated by the latest complaints statistics from the Financial Ombudsman Service (FOS), revealed last week.

It upheld more than eight in ten investment complaints against Barclays, 76 per cent of those against Bank of Scotland, 73 per cent of investment complaints against Lloyds TSB, 59 per cent of HSBC cases and 58 per cent against Santander.

Many of the complaints upheld against Barclays related to the sale of two high-risk Aviva investment funds. It was fined 7.7 million in January following complaints from some of the 12,000 people - most of whom were retired or approaching retirement - who bought the funds. Barclays staff were found guilty of serious failings in the selling process.

The Financial Services Authority is investigating another major bank for similar issues. It estimates that about 250m of unsuitable investments are sold every year, a figure that almost doubles when fees and commission are added.

More people buy investment products from banks than from independent financial advisers, and that balance will only tip further in favour of banks as new rules coming into force at the start of 2013 seem certain to shrink the IFA market. Factor in a continued flight away from cash towards riskier products as inflation continues to eat away at savings accounts, and the investment sales opportunity for banks only gets bigger.

So, if you're likely to buy an investment productsfrom a bank, you need to know what you're getting, why and how much you're paying for it. Here are the key questions to ask yourself before signing on the dotted line:

• What are the charges?

A survey of 11,000 people by Alan Steel Asset Management found that half buying investment products through banks and building societies were unaware of the charges or commission, or thought there were none at all. Yet the research established that bank and building society customers are charged upfront commission of up to 7 per cent on lump sum investments.

Alan Steel, chairman of Alan Steel Asset Management, described the findings as "shocking", adding: "It is here that this blissful ignorance can be seen to contribute directly to a fall in an investor's standard of living in later life and sadly, in particular, during their retirement."

The impression that there are no charges is due partly to the way in which the commission is built into the investment.Tom Munro, director of IFA Tom Munro Financial Solutions, said: "The 'smoke and mirrors' marketing technique applied here is to spread this charge over the first six years of the plan at roughly 0.6 per cent a year, leaving the investor with the impression they are getting something for nothing."

• How much are you really paying?

The way in which the cost is built into the investment makes it difficult to work out how much you're paying, so ask for a clear illustration of the charges in monetary terms. Advisers are obliged to outline the costs.

Single payment products are the main sales focus because they provide a neat and sizeable commission payment for the adviser, whose priority is invariably their sales target.

Most mis-selling claims relate to investment bonds, on which advisers are offered the highest commissions - often around 6 per cent.

On many investments there is also a fund management charge of around 1 per cent to 1.5 per cent a year. So, far from paying nothing, you're actually seeing your investment dragged down significantly by the accumulated charges.

The average with-profits bond grew just 2.8 per cent in the five years to November 2010, according to Money Management magazine.

Munro said: "Reduce this by 0.6 per cent to cover the up-front charge taken and an annual fund management charge of around 1.25 per cent and you are left with less than 1 per cent investment return.

"In the current climate of 4 per cent inflation that is a substantial loss in real terms to capital, and that's before we include market value adjustments of up to 20 per cent, which can be introduced at any time by providers in adverse markets."

• Why does the bank believe this is the best investment for you?

A report last year by consumer group Which? underlined the extent to which investment bonds are over-sold. It sent researchers to branches of all the major high street banks to ask what they should do with a 55,000 sum that was about to mature elsewhere.

They emphasised that they were nearing retirement and did not want to take risks, yet almost two-thirds of advisers recommended structured products and six proposed investment bonds, even though they entail stock market risk.

While a good IFA will spend time asking about an investor's circumstances, what they want and their attitude to risk, such "fact-finding" is rare with bank advisers.

So ask for a clear explanation as to why the product is being recommended. Is it the most suitable option for your circumstances? Does the risk involved match your own risk profile? In what way does it fit in with your circumstances, such as your age, employment status, tax situation and savings and investments you have elsewhere?

Also, any adviser that fails to ask about your tax status - such as the rate at which you pay income tax, whether you have used your allowances - is not doing their job properly.For example, if you are paying money into an investment bond but haven't used your annual individual savings account (Isa) tax-free allowance of 10,200 (10,680 from 6 April), ask why you are being advised to put money into a product on which you would be taxed.

• What is the cost of getting out of the contract?

You should be given at least a 14 day cooling-off period during which you can cancel the contract without penalty. Clarify that you are being offered this, look over the policy again when you get home and ask yourself if you've got what you wanted. If you're not sure, exercise your right to cancel within the time limit.

The costs of bailing out once the cooling-off period has expired are often prohibitive.

If you decide in the first year that you want access to your funds, many providers will levy a hefty penalty charge of around 10 per cent.

This means that you have to be absolutely certain that the investment is suitable for you and that you're happy to leave the money untouched for the whole term.

• How much should you invest?

If you are told to invest more than 85,000, alarm bells should start ringing, because anything above that amount is not protected by the Financial Services Compensation Scheme in the event of the bank going bust.