Trading low risk for higher income: banks in the forefront of ‘the next mis-selling scandal’
In today’s Sunday Times, Money editor Kathryn Cooper devotes her ‘Cooper on Cash’ column to the high street banks’ sales strategy of moving low-risk investors, including the elderly, out of low-yielding savings products into higher-yielding investment products that expose them to risk of loss of capital. Several of my recent items refer to this. She wants the FSA to ask itself whether it is enough to look at documentary evidence of the sales process ‘rather than casting its eye over the banks’ entire business strategies: is it right that pensioners should be moved en masse into corporate bonds and equities in their search for income?’.
My experience, analysing one of the banks’ sales process documentation in response to a complaint now with the Ombudsman, is that the process is fundamentally flawed in a number of key respects, including reliance on the customer’s self diagnosis of ‘need’ (as any IFA will tell you, this is often wrong or incomplete); inaccurate internal risk scoring and suitability mapping; and partiality in failing to describe the alternative solutions with equal weight. This is the ‘box-ticking’ approach Kathryn refers to. I think of it as a carefully-crafted ‘biased decision tree’. I will return to this in detail, analysing the bank’s particular process, when I know the outcome of the FOS complaint.