Mis-selling scandal: Who can you trust?
This week it's pensioners who have been mis-sold. But we're all victims of bad advice.
The mis-selling scandal which led to a £10.5m fine for high street bank HSBC this week has put at question who we can trust when we need financial advice. The banks have for years ripped off customers by flogging expensive or simply wrong products, as Arthur Foster's heartbreaking story (see below) reveals.
But in the shocking story of the Nursing Homes Fees Agency (NHFA), the bank, for once, is not solely to blame for the fact that thousands of pensioners were sold dodgy investments that were inappropriate for their needs.
The scandal envelopes the Financial Services Authority (FSA), as well as Government-funded advice services and leading charities. All are guilty of letting us down when it comes to offering advice we can trust. Some have done it for financial gain, but others simply because they failed to ensure that the service they recommended was OK.
The story highlights the advice scandal that those close to the financial services industry are too ashamed to admit. The fact is there is no one that ordinary people can really trust to give them decent basic financial advice.
The list of shameful advice handed out by banks seems endless. From mis-selling useless endowment policies in the 1980s and 1990s, to pushing expensive and often unnecessary payment protection insurance on unwary customers in the past decade. Time and again the banks have proved they put profits before customer care.
But now we have to add charities to the list of advice shame. Leading older people's charity Age UK this week admitted it had made money by passing its customers on to the shamed financial advice firm NHFA.
The charity, in its earlier incarnation of Age Concern, had been mired in scandal after blowing £22m on the flawed membership organisation Heyday, which hoped to make big profits by taking cuts for various deals offered to its customers. The organisation's website is no longer live, but it seems likely that it would have had a financial arrangement with NHFA.
Age UK admitted on Monday its links with the care fees adviser. Michelle Mitchell, charity director of Age UK explained why the charity had directed people to the rogue firm, while attempting to defect criticism by laying the blame at the door of the regulator, the FSA. "These kinds of financial services are vital to older people and the Government's plans for long-term care funding," Mitchell said. "But what this shows is that there has to be a strong proactive regulator who will intervene to prevent this kind of massive failing in future."
The Government-funded Firststop Advice service – which also directed its customers towards NHFA, suggested that because the adviser had the backing of a major bank and was authorised by the FSA , it lent the company a high degree of authority.
The City Watchdog had investigated NHFA before it was taken over by HSBC, but failed to spot any wrongdoing at the firm until the bank pointed it out last year. That fact has led to accusations that the regulator has failed to ensure we're getting decent advice.
The City watchdog defended itself against accusations. Tracey McDermott, acting director of enforcement and financial crime at the FSA, put the blame for the mis-selling squarely at the door of HSBC. She said: "The responsibility for monitoring NHFA's sales was with HSBC.
"The FSA cannot look at every transaction and our rules therefore require firms to have suitable systems and controls in place to ensure they comply with our standards," Mitchell said. "In this case, HSBC's systems failed to identify the problem over a lengthy period and that is why they have been fined. We took prompt action as soon as we became aware of the problem."
But here, the statement that the watchdog cannot look at every transaction reveals the shocking truth – it's almost impossible for the FSA to monitor financial firms properly given the number of transactions that there are every day. In other words, advisers and bank staff know they can continue to flog the wrong products and make expensive commissions in the knowledge that the regulator is unlikely to spot their dodgy activities.
By the end of this week, HSBC had begun making efforts towards rebuilding its reputation. On Thursday it announced it would take responsibility for all disadvantaged customers of NHFA – including those from before the bank bought the company in 2005. HSBC has no responsibility for earlier customers but clearly hopes that its move will prove good PR.
Brian Robertson, chief executive of HSBC, said: "I am profoundly sorry about what happened at NHFA and it is only right and proper that we stand fully behind these customers." While the move is welcome, banks have a very long way to go to start to prove they could ever – if at all – become trusted advisers again.
Restoring trust has become a crucial challenge for the banks. NatWest, for instance, launched a customer charter which it hoped would help it "become Britain's most helpful bank". It may seem a cynical PR exercise, but if it encourages the bank to engage more with customers and improve things, then it has to be something that's a force for good.
There's also hope that the new challengers may offer a return to the concept of good, old-fashioned advice you can trust. The Co-operative, for instance,is waiting to hear the results of a Lloyds Banking Group meeting next week which should decide whether it will accept the Co-op's bid for more than 600 branches Lloyds is being forced to sell under EU competition law.
If the Co-op's bid is successful it will give the bank almost 1,000 high street branches. That could lead it to offer a credible alternative to the traditional high street banks. The fact that it's a mutual organisation means it has a stake in helping customers, as they are also its owners.
"The people our advisers provide financial guidance and support to own our business so we can't pay lip service when it comes to supporting customers," a spokesman from the Co-op said.
"If we were successful in acquiring the Lloyds branches, our existing model, which already serves millions of customers, would be extended to support millions more. We would provide a compelling co-operative alternative on the high street and help to rebalance the market again, following the demutual- isations, which led to member-owned businesses charting a different path."
Also tarnished by this week's scandal are the thousands of independent financial advisers. These are the body of people who are supposed to offer people decent advice – at a price – to help them understand complicated financial decisions. But the NHFA was an independent financial adviser and, as it transpires, its advice was far from decent. What went wrong? "The reason for this miss-selling has got to be commission," said Danny Cox, an independent financial adviser with Hargreaves Lamnsdown. "Investment bonds – such as those sold by NHFA – pay as much as 7 per cent commission where as an ISA pays 3 per cent commission and a cash account pays nothing."
One former adviser at NHFA , however, blamed HSBC for the firm's woes. Tom Scott, who joined NHFA in April 2004, told financial news website IFA Online that: "NHFA was an extremely ethical company before the bank bought it."
Cox said that banks have always been very worried about miss-selling and the way they try and stop it is by having very strict compliance procedures. "With elderly and vulnerable clients they usually adopt an extra layer of process to try and protect their clients and themselves.
"The over-riding principle is that an advice firm must take reasonable care to ensure the suitability of its advice given to clients. In the case of NHFA it looks as though some of the absolute basics were not covered: such as ensuring adequate cash reserves or recommending the most tax-efficient solution. They were also guilty of over-optimistic investment assumptions."
The NHFA is not the only independent financial advice firm to be accused of mis-selling. But that doesn't mean that all IFAs are dodgy. However it does demonstrate the difficulty of finding an adviser you can trust. Picking one through Yellow Pages or one of the websites that lists them is no guarantee of getting someone who will prove to have your best interests at heart.
The HSBC fine has cast a shadow over IFA advice," conceded Danny Cox. "However the industry has made great leaps forward in recent years and there are some very good advisers out there."
He said the best advisers are independent and fee-based so aren't influenced by commission. In truth, many advisers will only be interested if you have a big savings pot to invest – at least £100,000 in many cases – and will not want to know if you simply want some basic advice about which mortgage to take, for instance.
When it comes to it, the best place to get advice is probably through word of mouth. A personal recommendation is likely to be worth a lot more than a glossy brochure or flashy website. Danny Cox agreed. "A personal recommendation is by far the best quality test," he said.
If your friends and family have no experience with decent financial advisers, where can you turn? There are websites which lists advisers and their specialisiations, such as www.unbiased. co.uk or www.financialplanning.org.uk. If you are seeking advice on long-term care planning, for instance, you should go to an adviser who holds the qualification CF8, awarded by the Chartered Insurance Institute.
Decent firms will offer a free initial meeting and will make clear the service you will receive and how much it will cost you. Advice should not normally cost more than 2 per cent of the amount you invest and many firms will charge no more than 1 per cent.
Case study: 'The bank turned mum's dream into a nightmare'
Arthur Foster was ravaged by cancer in 1997. But he wanted to borrow about £20,000 for a little income and to replace some "white goods" in the Derbyshire home he shared with wife Joan. So the 76-year-old naturally turned to a bank for help. Its response set in train anguish for his family that would only come home to roost years later.
The couple had been together since the early 40s. Right are the pictures the young couple sent each other in 1943 when the Second World War separated them.
Arthur had relied on banks for years for help with money matters but the last advice he got proved disastrous. In September 1997, the Bank of Scotland flogged him what was known as a Shared Appreciation Mortgage. In return for lending him £21,250, the Bank demanded the return of the loan plus 75 per cent of the appreciation of the property instead of interest.
The cancer took Arthur just seven months after taking out the mortgage. Joan lived for a further nine years, before passing in December 2007. It was only when the couple's children began sorting out the estate that they discovered how wrong the bank's advice to take out the mortgage had been.
In its original documents the bank had claimed the mortgage came with a typical APR of 9 per cent. After 10 years that should mean that about £40,000 was owed. To the children's shock, they discovered they actually had to pay back almost £90,000.
"Horrendous as that type of usury might be, it wasn't the nightmare," says Tim Foster, son of the couple. "No, the nightmare was the casual indifference of the Bank of Scotland, their directors and staff, to even the basics of customer care," he says.
In echoes of this week's mis-selling scandal where thousands of elderly people were sold inappropriate investment bonds by HSBC, Tim feels the Bank of Scotland failed to check whether the speculative and ultimately expensive mortgage deal was right for his parents.
"I was shocked when I looked through the papers to discover that the whole transaction was conducted by post," Tim says. "There was no sense of diligence by the Bank of Scotland as to my parents' state of health or their mental capacity to enter into a complicated financial agreement.
"I cannot believe that the Bank could sell high-value mortgage services to elderly people by post. Irrespective of my dad's terminal cancer and corrosive treatment, had they not heard of the afflictions of dementia and Alzheimer's?"
Some 15,000 Shared Appreciation Mortgages were sold by the Bank of Scotland and Barclays to unsuspecting elderly folk in a few mad months between 1996 and 1998. It wasn't the first time the troubled equity release market had been hit by scandal.
In the late 1980s, about 10,000 pensioners were sold home income plans linked to shares, with the promise that stock market rises would give them a decent income. The logic was flawed and the deals left thousands of pensioners in severe financial difficulties. The plans were banned in 1991.
Since then banks and finance firms have looked for other ways to make money out of the elderly with pensioners seemingly bearing the brunt of the losses. Judging by this week's scandal, more pain will come for Britain's senior citizens.
"Just before she passed on, mum had been talking about selling up in Derbyshire and returning to her roots," says Tim Foster. "I am just grateful that she never found out that the bank would have made such a dream the nightmare we have borne on her behalf."
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