Coutts’ unprecedented sales review
Fowler Drew tells Citywire Coutts’ sales review likely to reveal commission bias.
Citywire broke the story, prompted by a letter to clients, that was then picked up by the Sunday Times and others, that Coutts were reviewing all investment recommendations from 1957 to 2012 when they enacted the changes in charges required by the Retail Distribution Review. This is an extraordinary story which begs lots of questions.
In a statement to Citywire, Coutts’ chief executive Michael Morley said: ‘There have been some instances where the advice given during our previous advice process could have been better, and we are working hard to address that. We want our clients to be absolutely certain that every investment made by them is indeed suitable, and continues to be suitable. If not, we will ensure that portfolios are appropriately adjusted, and if clients have suffered any financial detriment, they will be compensated in full.’
Asked by Citywire for an opinion, Fowler Drew said that we would not be surprised if the review revealed that a key problem area has been poorly-advised sales of investment bonds, as that is what we have detected from clients we have taken from Coutts. Everyone in the industry knows that these were the products most vulnerable to commission bias, because large commissions were paid by the insurance companies providing the bond wrappers and these external incentives might then be replicated or reinforced by internal incentives to individual advisers. Asked by Citywire, at our prompting, whether bond sales would be included in the review, Coutts said they would be.
Whilst commission bias is itself a scandal, and so are excessive charges, the key to redress is neither of these but rather actual fault with the suitability process. In our experience of taking on past Coutts clients, the common cause of unsuitability has been that the clients’ tax position was worsened by a bond.
Citywire was very keen that we should go public with our comments. There is no shortage of advisers willing to talk in general terms about the risks of bias within commission-fuelled firms like Coutts but not many people willing, for any number of reasons, to go public. Since in this case we are confident about the tax argument, it does not really matter if we do not know what role, if any, external commissions or perverse internal incentives played: we think Coutts got it wrong in the cases we have seen and we are willing to say so. We agreed to be quoted as long as we could check the copy. That we way we are doing a favour for any existing or past clients of Coutts sold a bond by them partly or largely on tax grounds, particularly as a response to the capping of pension contributions: they would be wise to put Coutts on notice they expect the review to examine whether both the general and the specific arguments, including tax, were accurate in their own case.