I am going to ask you to put yourself in the shoes of a Bank of Scotland financial adviser for a moment.
In front of you is an elderly person – perhaps in their early or mid-eighties – and they want you to help them put their cash somewhere that can earn enough to keep up with inflation and cover some living expenses, but will, above all, keep their money safe for their remaining years and allow it to be passed on to loved ones.
It's one of the most common types of adviser/client scenario you can imagine. So what do you do? Recommend an array of cash savings on the premise that it's ultra safe and gives the client a little return? Or perhaps put most of it into savings with a little ventured into a genuinely safe bond? That's the sort of sensible, and, yes, ethical thing you'd probably do. But not the Bank of Scotland advisers: they pushed their so-called structured product on these unsuspecting savers.
If you don't know what a structured product is then you're lucky. In their simplest form, they work as follows. Some of the money is put into a savings plan while the rest is invested, usually in the stock market. An income is often paid but this can erode the capital, particularly if the stock-market element of the investment doesn't grow. Structured products are heavy on the marketing, light on warning, and, for most people, indecipherable.
Just look at the array of product names pushed on elderly – and, yes, let's say vulnerable – consumers by the Bank of Scotland: the Collective Investment Plan; Personal Investment Plan; Guaranteed Growth Bond; ISA Investor; and Guaranteed Investment Plan. Lovely touchstone words such as "guaranteed", "growth", and, of course, "bond" (the most misused word in finance.). But what this fine marketing spiel boiled down to was potentially thousands of consumers complaining that they were sold a product that was too risky and expensive – yes, charges on structured products are often sky-high as someone needs to pay the sales people – for their efforts. As a result, many people have been left out of pocket and in a riskier financial position than they wanted or needed to be.
But Bank of Scotland's advisers are not alone in this, the mis-sale of structured products. It is a recurring theme throughout the financial industry over the past few years. And as the ban on commission selling approaches, some insurers are incentivising advisers with massive pay offs to foist these often inappropriate and expensive products on the clients who have put their faith in them. And these aren't the only products being mis-sold as I write. Concerns are growing that investors are being pushed into exchange traded funds on the promise that they are low risk, but the reality is that they often track high-risk investments.
Where Bank of Scotland has excelled itself in the mealy mouthed unpleasantness stakes on this occasion is the way it has treated those customers who had the temerity to complain to it that they had been mis-sold. A Financial Services Authority investigation into the bank's complaint handling has found that the bank was both incompetent and unfair in assessing complaints. As a result, the FSA says "poor" decisions were made as to whether to offer compensation or not. Furthermore – and this lassos those further up the chain of command – the bank failed to pick up on the fact that it was rejecting a far higher percentage of complaints than was the norm, according to the Ombudsman's service.
Senior executives at the bank were alerted by the Ombudsman that they were rejecting far too high a proportion of complaints, yet they took no notice, blithely chucking out legitimate compensation claims.
Tracey McDermott, the FSA's acting director of enforcement and financial crime (and I think the second part of her job title is apt here), says: "This fine reflects BoS's serious failure to treat vulnerable customers fairly. The firm's failure to ensure it had a robust complaint-handling process in place led to a significant number of complaints being rejected when they should have been upheld.
"Had BoS undertaken effective root-cause analysis of the complaints it received and had adequate processes in place to feed back lessons learned from past complaints, it could have acted sooner to improve its processes."
Insult added to injury is the phrase that comes to mind, and the bank has now rightly been fined £3.5m and been ordered to pay the compensation due to those who have been mis-sold and had their compensation claims wrongly and brusquely turned down. The bank, of course, issued the usual mea culpa, and if I hadn't heard the same old tired words of apology many times before, and the commitment to put things right, then I could draw a line under it. But Peter Vicary-Smith, the head of the consumer group Which? points out this gross abuse of the complaint-handling system was carried out at a time when the bank was being bailed out by the taxpayer.
The conclusion has to be that despite the near cataclysm of 2009 and the fact that we as a nation in effect own a large chunk of the banking sector there is a dark heart at the centre of the industry beating as strongly as ever. A moral black hole persists that doesn't think twice about looking into the eyes of a pensioner and systematically ripping that trusting senior citizen off.
Publish and be praised
Insurers should publish their annuity rates to pension savers when it's time for them to convert their pot into an income for the rest of their lives, said insurance giant Aviva last week in its "Rethinking Retirement" report. This would mean those firms that deliberately foist uncompetitive annuity rates on savers would be exposed to greater scrutiny and, hopefully, competition. At present, most pension savers accept the rate offered by their providers, rather than shop around. In most cases, this rate can be beaten elsewhere. Not shopping around for an annuity is one of the worst financial mistakes you can make, as you can lose thousands if not tens of thousands over 10, 20, even 30 years. Aviva is right to highlight the failings of its own industry.
In his valedictory message to the Monetary Policy Committee last week, economist Andrew Sentance again urged a rise in interest rates in order to help dampen inflation. He has been the chief hawk on the MPC over the past year and his departure leaves the field clear for the doves who want to wait and see. But his message that inflation is again bedding down in our economy shouldn't be ignored. Inflation is the destroyer of wealth and once it's inveigled its way in it is a long, painful process to squeeze it back out. While the MPC's Spencer Dale and Martin Weale voted last month for a 0.25 per cent rise, with Sentance's exit they are isolated and I can't see a rate rise until autumn, earliest. Inflation has only been within the MPC's target for nine months in the past three years; the only conclusion is that they have given up – and we will pay the price.