How HBOS ‘sales culture’ biased investment product sales
I had not immediately spotted that HBOS ‘whistleblower’ Paul Moore, sacked head of Group Risk, in his written evidence to the Treasury select committee had specifically accused his employers of encouraging the promotion of corporate bond funds as alternatives to deposits without due regard to suitability. I am currently dealing pro bono with a complaint to the Financial Services Ombudsman involving the replacement of riskless investments by a managed fund in an investment bond wrapper by a Lloyds TSB branch, which I have no doubt was similarly motivated by profit to the bank rather than suitability for the customer. Product sales are vastly more profitable than plain deposits, both at point of sale and as a discounted value of a ‘captured’ fee stream for perhaps 20 years. Mr Moore’s insider account of the conflict between risk managers and sales managers is enough to make you never to want to deal with a bank again. Which is why I put it here.
‘As the yields went down on standard deposit accounts, many customers were switched into corporate bond funds. Group Regulatory Risk and I were not confident that customers who switched out of deposit accounts into corporate bond funds would really understand the additional capital risks they were taking on and we wanted to ensure they did.
‘What was clear was the advisers were strongly targeted to sell corporate bond funds to deposit account customers whose deposits matured and the margin HBOS made on corporate bond funds was very much higher than on deposit accounts. This obviously increased the incentive to sell them.’
I do not know whether Mr Moore’s allegations are accurate or tainted by his personal sense of injustice at being fired by the bank but they coincide strikingly with what I was told three years ago by a young man who worked in investment product sales and (knowing my book) approached me for advice about how to handle the pressure he was placed under to compromise his own integrity.
It is tempting to write off the banks ever being a safe source of mass market investment products. But the fact is other countries with higher levels of personal savings than the UK typically rely on their banks as the main conduit. So the FSA cannot afford to despair: solving the problem of acutely inadequate personal liquidity and investment savings in the UK may need the engagement of high street banks, as the people with the best customer footfall. But don’t hold your breath. Assume banks are for deposits and loans, not investment advice. It’s that simple.
Is there another systematic mis-selling scandal brewing in corporate bond funds or only isolated incidents? I am not sure. The FSO is saying they do not yet know the scale of the problem. That is consistent with the time it typically takes for complaints to filter through to the FSO from the point losses have been incurred and complaint processes with the selling firms have been exhausted. I will return to this topic, though.
My investment bond case, by the way, was submitted in January 2008, before significant losses had arisen, and is still in a queue waiting to be dealt with!