Jeff Salway: DIY investors can’t complain if lose out

IF YOU want to know exactly how financial services companies are failing their customers it’s well worth looking at the complaints being taken to the Financial Ombudsman Service (FOS).

The latest report shows that the number of cases taken up by the ombudsman almost doubled last year. It pointed to rising awareness among consumers of their rights and a growing willingness to complain. It needn’t add that banks in particular still treat customers unfairly and refuse to take responsibility for the consequences, including the inevitable complaints.

As you might expect, the biggest single issue was payment protection insurance (PPI) mis-selling, yet again. The banks attempted to blame claims management firms for the latest increase, all while insisting they themselves were changing their spots. But the ombudsman is being bombarded by PPI complaints because they aren’t being properly dealt with on the high street.

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Most are being upheld in favour of the complainant, proving that people with valid cases for compensation are being fobbed off.

The banks have taken an increasingly hardline approach to compensation decisions of late, even where they are clearly in the wrong. Their claims of improving banking culture are empty until there’s evidence that it amounts to more than spin and window-dressing.

More revealing are the other trends evident in complaints taken to the ombudsman. These will 
often tell us how banks are seeking to recoup the revenue lost when the PPI gravy train finally shuddered to a halt.

Investment complaints were up 42 per cent last year, mostly where people were sold products that didn’t match their appetite for risk. This points to a while-stocks-last surge in sales of structured products and investment bonds before high street banks restricted their investment “advice” operations.

Their withdrawal from advising ordinary customers on investments was a response to the Retail Distribution Review (RDR). These are the reforms that took effect on Hogmanay, including enhanced qualification requirements and a ban on providers paying commission to advisers selling their products.

This also means that we can expect investment complaints to fall later in the year. By forcing banks and a good number of independent financial advisers out of the market, and by deterring investors reluctant to pay a fee for advice, the RDR has sent many people down the execution-only route.

This is the DIY approach, where no advice is given and the investor merely asks a broker or adviser to carry out their instructions. Fine, if you know what you’re doing. There is a big pitfall that investors are often unaware of, however – if it goes wrong there’s nothing the FOS can do about it.

Even if the scheme is regulated, the adviser may not be, which means the investor isn’t protected by either the ombudsman or the Financial Services Compensation Scheme.

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Unfortunately, this is rarely made entirely clear by execution-only services.

That might not be a problem in the current market, but when losses materialise further down the line it’ll be a shock to many people when they realise the responsibility for investing decisions lies entirely with them.