Mis-selling, in general, relates to the deliberate, reckless or negligent sale of a product or service. This usually occurs if the product or service is unsuitable for the customer's needs, or if the contract is deliberately misrepresented. Financial mis-selling refers to financial products specifically, which include pensions, mortgages and annuities. The reputation of the Financial Services Industry has been damaged over recent years by putting profits before customer needs.
There are many ways that financial mis-selling can arise, including:
- You may not have been given suitable advice about a financial product, service or investment
- The risks of a particular investment were not fully and clearly explained to you
- You were not treated fairly as an investor and, as a result, have ended up with an unsuitable investment
How is financial mis-selling regulated?
The Financial Conduct Authority (FCA) is responsible for regulating the financial services industry, which involves monitoring their activities and treatment of customers to ensure they're not mis-selling any of their products. Under the Financial Services and Markets Act 2000 (FSMA), the FCA has many enforcement powers, which include imposing fines, removing authorisation and, where necessary, prosecuting businesses if they're found guilty of mis-selling.
As part of their regulatory responsibilities, the FCA promote 'Principles for Businesses', which were informed by substantial consumer research to determine how customers perceive fair treatment. The Principles state the fundamental obligations that apply to all FCA regulated companies and individuals. Through the Principles for Businesses, the FCA aims to help companies put the interests of their customers, and the integrity of their services, at the core of what they do. Despite these regulations, however, many consumers are still victims of mis-selling. A well-known example of this is the recent PPI scandal, which has already cost UK banks billions of pounds in refunds. Clearly, mis-selling has a detrimental effect on both consumers and the economy, which is why it's so important for businesses to ensure customers are treated fairly.
Examples of financial mis-selling
There are many ways in which you might have been mis-sold financial products, including interest rate hedging products (IRHP), mortgages and PPI.
Interest rate hedging products
Interest rate hedging products (IRHP) were introduced to help customers manage fluctuations in interest rates. There are several types of IRHPs, including 'swaps', which enable customers to 'fix' their interest rates, 'caps', which place a limit on any interest rate rises, and 'collars', which enable customers to limit interest rate fluctuations. As the threat of interest rate rises increased, IRHPs became a popular option for businesses to protect themselves. However, after the recession, businesses who purchased IRHPs have begun to complain that the products were mis-sold.
Recently, there's been a significant rise in the number of consumers complaining that they've been mis-sold mortgages. The most common complaints include:
- The mortgage end date is after their retirement date.
- Consumers were advised to borrow money without proving their income, which is called self-certification or overstate their income to borrow more.
- Consumers were advised to switch lenders and weren't told about the fees and penalties.
- Consumers were given a fixed-rate mortgage and told to re-mortgage to a better deal later on, then incurred penalties for leaving the fixed rate early.
The mis-selling of investments is another key example of how consumers are mis-sold financial products. This usually occurs where the financial service provider fails to inform you about the risks involved, or about how your money would be invested. Our sales-based culture also means that many businesses are encouraged to sell as much as possible, without properly considering the customer's needs or suitability for the product. This means that investments are often mis-sold because the advisor didn't consider the consumer's specific needs or attitude to the risks. It's worth noting that financial mis-selling is still a crime even if the victim didn't lose money. However, if the advisor did take appropriate measures to explain the risks and the customer still went ahead with the investment, they cannot complain even the investment performed badly.
Payment Protection Insurance (PPI)
The mis-selling of PPI is one of the biggest mis-selling scandals in UK financial services history. In the 2000s, PPI was often sold without consideration of a customer's circumstances or included with credit card products without the customer's knowledge. Millions of policyholders have complained and thousands of new complaints are still being received by the Financial Ombudsman Service. As a result, billions of pounds have been paid in compensation.
There are many ways that the mis-selling of PPI occurred, including:
- A financial service provider inappropriately pressured customers to buy PPI, for example by telling them it was compulsory.
- Consumers weren't told about exclusions to the policy or that they could buy PPI from another company.
- Financial service providers still advised unemployed or retired customers to buy PPI.
- Nobody fully explained the terms and conditions.
What to do if you've been mis-sold financial products
As soon as you notice a problem, you should complain to your provider. You won't need concrete proof, but you will need to be clear and concise in your explanation of the issue. You should take all the relevant information and any written proof to your provider or adviser. If you aren't sure who to contact, you can ask for a copy of the firm's internal complaints process. If the firm does not make contact within eight weeks, or if you're unhappy with their final response, you can go to the Financial Ombudsman Service. The Pensions Ombudsman Service is also available for pension-related issues.
How can businesses avoid financial mis-selling?
Mis-selling frequently occurs when businesses offer sales consultants commission on reaching targets and bonuses for meeting milestones. This is because consultants are encouraged to complete as many sales as possible. Therefore, to save time, the employees might not ask enough questions to be sure the product suits the customer. Advisers may also sell a product they're more familiar with, as they feel more confident marketing it, which means the customer won't receive a product tailored to their needs.
Treating customers fairly will help to minimise the risk of financial mis-selling, avoid reputational damage, reduce complaints and improve customer retention. This is why businesses must establish and implement appropriate measures that adhere to the Principles for Businesses promoted by the FCA. By putting these Principles at the heart of their business, there are constructive changes that businesses can make to the way they operate. For example:
- Performance targets: To encourage a more balanced approach to performance, the business could include risk and service performance targets in its rewards programme and monitor the sales of individual products by each advisor.
- Sales consultants: The business could also require their consultants to record the range of suitable products discussed with each customer, as well as the reason for the customer's final choice. Consultants should only qualify for a commission if they provide this information.