Jeff Salway: Retail banks’ advice is poor and misleading

Its mystery shopping exercise told us what we already knew – that so-called investment advice in the UK’s big retail banks is poor, misleading and, in many cases, downright dangerous, posing a serious threat to the financial wellbeing of customers.

It’s not the first time that Financial Services Authority (FSA) research has provided this kind of insight. It has conducted mystery exercises before, and with similar results, yet still it has done virtually nothing about it.

In 11 per cent of mystery shops – in which researchers posed as customers seeking to invest lump sums – the bank gave unsuitable advice. In one in six cases the adviser’s recommendation was unsuitable for the risk the customer was prepared to take, while they also failed to recommend that the customer first clear any unsecured debts, when this would have been the best option.

That’s just the basics – knowing what the customer wants, understanding their circumstances and making the recommendation accordingly.

It may only be a small minority of cases in which the advice was unsuitable, yet that amounts to hundreds of thousands of customers being put at risk.

The FSA declined to identify the culprits, but it soon became apparent that Santander’s advice was so bad that even the regulator has run out of patience. The Spanish-owned bank, which that very day said it would review the future of its face-to-face advice, faces a possible fine.

If that news hadn’t emerged, the issues would likely have been dealt with in private and consumers would continue being ripped off even after those very sales processes had been found to be badly flawed.

Only three months ago consumer group Which? interviewed several hundred bank staff about their views on the selling culture. Around half of those employed by the big five banks said they were under pressure to sell to customers, with targets taking precedence over the needs of customers.

Nothing new there, which is entirely the point. The FSA’s latest exercise not only tells us what we already know about the rotten sales culture on the high street, but that its timid approach to tackling such matters – declining to name the banks involved, for example – has utterly failed.

The quality of advice is usually the biggest risk to consumers, but it’s sometimes compounded by the danger that lies in the product itself.

A competition to identify Europe’s most dangerous product was launched last month, ahead of possible new powers allowing the European Securities and Markets Authority (Esma) to ban such products more easily.

The competition closed this week, but the proposals – which can be viewed at www.dangerous-finance.eu/category/proposals/ – make for interesting reading. Some you’ll be familiar with – overdraft facilities, endowments, credit cards and payday loans have all been nominated.

Most, however, are largely esoteric investment products that offer a handy insight into the lengths to which firms will go to confuse investors.

These products aren’t likely to be sold in a bank near you anytime soon. But if your bank or your IFA does start talking about weather derivatives, closed-end ship funds or partial hedged certificates, the alarm bells should start ringing.

Child trust funds (CTFs) could, it is evident in hindsight, also have been considered a dangerous product. Millions of parents are trapped in the accounts and unable to take advantage of the current government-backed child savings product, the junior individual savings account (Jisa).

The block on CTF holders transferring to a Jisa means the money they’ve put away in good faith for their children’s future is now left in uncompetitive and expensive savings and investments that providers have no incentive to promote.

An estimated six million families have money in CTFs, tax-friendly accounts offered to children born between 1 September 2002 and 2 January 2011. CTFs – which came with a government cash voucher – were replaced in 2011 by Jisas, which share the same tax advantages of normal Isas but don’t include the upfront incentive.

Existing CTFs were allowed to stay open but for some reason the bar on transferring the money to Jisas remains in place, punishing millions of families for their savings efforts.

More salt was added to the wound this week when F&C added a new £25 plus VAT charge to its investment-linked CTF, affecting some 60,000 people saving for their children or grandchildren.

Why the government doesn’t merge the schemes is a mystery, but calls to do so continue to fall on deaf ears – allowing profiteering at the expense of children.