The news that Lloyds TSB has been forced to pay £100m in fines and compensation to hapless customers to whom it (and a number of IFAs) sold toxic "precipice bonds" is another unhappy reminder of the shortcomings in our financial services industry. It also raises awkward longer-term questions not addressed as often as they should be.
The first point one, grudgingly or not, is to give credit where credit is due. Lloyds TSB can rightly boast that it is the most effective protagonist in the UK of so-called bancassurance, the strategy of using its bank network and in-house team of financial consultants to sell its customers all manner of other financial products.
The whole idea behind Lloyds TSB buying Scottish Widows was to take the name and product range of the venerable life company and use them to push millions of pounds of business through the bank's High Street network. That the sales force succeeded in selling so many patently unsuitable precipice bonds to their customers shows how formidable this marketing machine still is. (Lloyds TSB is something like twice as successful at cross-selling products to its customers as its nearest competitors.)
More remarkable still is that, if past experience is anything to go by, even such a hefty and public fine as the FSA has handed out this week seems to do little in practice to impair the power of the bank's franchise. At some point, you would think, the customers must surely start to wonder quite why they continue to trust the bank's advice so much. But somehow it never seems to happen. (In the interests of disclosure, I have to admit I bank with Lloyds TSB and own some shares in them, in part precisely because of their proven ability to screw so much profit out of their customer base.)
The second point that is unavoidable, and has been made here many times, is that many IFAs and other intermediaries are still, in practice, so driven by the lure of commissions that they too will happily sell ridiculously inappropriate products to their clients, given enough push from a powerful provider. Anyone who bought one of these bonds through an IFA, in my view, has double or even triple cause for complaint, though full marks also to those intermediaries who refused to have anything to do with them.
The third point is that the obvious lessons for bank customers and IFA clients still clearly need to be learnt all over again. Above-average yields on investment products almost invariably come with a real (though often hidden) risk to capital. Never buy anything from anyone who is being paid directly to sell it to you. If you don't understand it, don't buy it. And so on.
In the case of precipice bonds, what is still remarkable, to my mind, is how any self-respecting adviser could have even thought about recommending them to a client, given the clear and quite evident nature of the potential risk-reward payoffs in the event of a market downturn. The FSA says the bank itself managed to sell them to 6,000 customers for whom the amount invested was more than 35 per cent of their total financial assets, a truly gruesome statistic.
The fourth point that occurs to me is more troubling, and that concerns how to prevent such sorry episodes occurring again. The fine, the compulsory compensation and the adverse headlines will all damage Lloyds in the short run. If the FSA succeeds in getting after some of the advisers who knowingly sold these bonds to their clients, that too will deliver some belated justice in a necessary cause.
But will any of this medicine actually help to reduce the risk of such episodes recurring? There are reasons to doubt whether they will have that much effect. It would be interesting to see, for example, what the internal management accounts of Lloyds TSB calculate as being the true ex-post cost to the bank of this unsavoury episode.
The £1.9m fine itself is trivial, and even with the compensation payments, one has to wonder whether the drive to make a profit out of the bank's customer base by selling them products is going to be lessened as a result of what has happened. In many cases, the bank will now start selling their customers something else instead to do with the money they receive as compensation, which may or may not be of more value to them.
It is true that the episode casts fresh doubt on the wisdom of buying Scottish Widows in the first place: Lloyds TSB paid a full price for a business at just the wrong point in the cycle, and one has to wonder how far the need to meet sales targets in the immediate aftermath of the takeover lay behind the reckless determination to proceed with the sales drive for the precipice bonds and other products at the time. But is the culture and incentive system that created a climate for mis-selling within the bank going to change? We shall have to wait and see.
As far as the compensation payments are concerned, they surely introduce an unhelpful element of moral hazard into the equation. In practice, will bank customers now feel the need to more cautious about buying products from their banks? The more widespread the feeling becomes that the FSA (or somebody) is always going to bale you out if any financial decision goes wrong, the less of an incentive it creates for you to try to avoid the salesmen's blandishments.
I have no easy answers to these conundrums. What I do suspect is that it is going to take something much more dramatic - perhaps even someone going to jail - before providers, advisers and customers alike are sufficiently shocked into making the radical changes in behaviour and attitudes that are needed.
In a healthy capitalist system, there will always be some mis-selling, but we really don't want or need to live in a world where it is quite so tiresomely repetitive.Reuse content