Twisted truth about financial advice

Sam Dunn

Another week, another stonking fine for a financial services company.

The coffers of the Financial Services Authority must look pretty peachy after recent penalties.

Last week saw the Devon-based independent financial adviser Langtons hit with a £63,000 fine. The regulator found it was in danger of exposing customers to advice from untrained advisers and ill-judged product promotions.

On 11 September, Braemar Financial Planning picked up a £182,000 penalty. It had failed to provide suitable sales advice for customers seeking to “unlock” their pension - a high-risk action, since the wrong decision could lead to substantially lower benefits in retirement.

On 7 September, the retailer Carphone Warehouse got a £245,000 rap on the knuckles for not mailing important details of mobile phone insurance contracts to customers.

And one month ago, the FSA levied a £55,000 penalty on the Ancient Order of Foresters, a friendly society. Its mistake? To make what the FSA called “substandard TV advertisements” that didn’t explain the risks and drawbacks of a whole-of-life insurance plan and child trust fund. It was the first time a friendly society had been fined over its promotions.

Every FSA penalty announcement is peppered with explicit references to failures in “processes”, “systems” and “controls”. This may be the ugly language of the regulator, but it is music to consumers’ ears.
The regulator is ready to shine a torch into dark places. Fining the offending parties and enforcing change will bringsafer, fairer deals for customers.

The FSA’s endeavours to clean up the murkier parts of the industry show just how perilous buying a financial product can be. The regulator’s chairman, Sir Callum McCarthy, lambas-ted an audience of savings and pensions industry leaders last weekend on this very point. In particular, he said, the financial advice industry, independent or otherwise, suffered from “product bias, provider bias and [customer] churn”.

At the twisted heart of all this lies commission. If one insurer is allowed to offer more money than another to an adviser in order to sell its product, should we really be surprised when the adviser then recommends this product?

Sir Callum told his audience he was “not saying that commission as an incentive is necessarily bad”. But, he said, the present business model “frequently fails to mitigate” the high risks of bad sales advice.

There is hope for the future, albeit slim. Two studies - one from the FSA, the other from the industry itself - both aiming to prioritise the interests of consumers, are under way. At the very least, let’s hope their recommendations lead to better ways of doing business.

So far, it’s one-way traffic, and it isn’t the customer in the driving seat.