Jeff Salway: New rules mean more opportunities for 'rip-off banks'

The £7.7 million fine dished out to Barclays on Tuesday for mis-selling investments was notable more for the parallel with chief executive Bob Diamond's imminent bonus award than for any element of surprise.

Diamond is reportedly set for bonuses in the region of 8m, sufficient to cover the fine handed down by the Financial Services Authority (FSA), but trifling in comparison with the 60m in compensation payments the bank now faces. Yet while this is the biggest FSA penalty yet levied for retail market failings, it could prove merely the tip of the iceberg.

To recap, Barclays was found guilty of mis-selling Aviva's global balanced income and global cautious income funds to more than 12,000 investors between July 2006 and November 2008. Most of those who suffered losses were retired or approaching retirement, yet the bank's staff failed to establish their circumstances, objectives and appetite for risk before selling them the product. That high street banks are raking in millions from flogging inappropriate investments to elderly clients is no secret. Worryingly, however, the period covered in the Barclays investigation ended before interest rates plunged and wiped out the savings income on which many people, especially pensioners, depend.

That erosion of savings income has given high street banks a gilt-edged opportunity to sell investment products to the retirees searching for a new source of income - and it's safe to say that most banks have taken full advantage.

They are selling structured products (which protect capital and promise some exposure to stock market growth) and investment bonds by the truckload by pitching them as an alternative to cash accounts. And, as the FSA investigation into Barclays confirmed, income funds are also being heavily touted to older investors for whom they are clearly too risky.

The findings support research carried out by consumer group Which? last year. Its researchers asked 37 bank branches what they should do with a lump sum of 55,000, emphasising that they were risk-averse and approaching retirement. Almost two-thirds of banks suggested structured products, and six recommended investment bonds, both of which entail stock market risk.

Unsurprisingly, the Financial Ombudsman Service (FOS) has seen a sharp rise in the last two years in complaints from over 55s advised by their bank to move their money out of savings or deposit accounts and into riskier products, with most grievances upheld in favour of the consumer.

This all takes us back to the Future of Banking Commission report published last summer. Its recommendations included a call for banks to stop paying commissions to frontline staff, who are currently rewarded for sales more than customer service, and to link executive pay to customer-based measures, including complaint handling.Those measures alone would go some way towards incentivising banks to work in the interests of customers, rather than focusing on how they can sell more products.

But instead it's only going to get worse. This isn't just because the mis-selling of the past two years has yet to reach investigation stage, but because of the retail distribution review (RDR) reforms coming into effect in 2012. One unhappy consequence of the RDR is that it will present banks with even more chances to rip people off.

The changes, addressing the way in which financial advice is accessed and paid for, are widely expected to result in the IFA market shrinking. Many people who currently go to an IFA for investment help will be priced out in the post-2012 regime of fee-based advice, and will instead turn to banks and other product providers.

IFAs have been demonised in some quarters, but complaints to the FOS about IFAs are significantly less likely to be upheld in favour of the consumer than those against banks.

One inevitable outcome of more people buying their savings and investment products from their bank is even more mis-selling, unless the FSA concentrates more on preventing it and less on handing out fines years after the damage has been done. From the consumer perspective, there's a simple moral to the story - NEVER buy an investment product from a bank unless you know exactly what you're doing, what you're getting and what you're paying for it.