Reducing investments mis-selling at home

Posted: 29th November 2013

After the announcement that over 200,000 customers may be victims of investment mis-selling by HSBC, financial advice is back in negative media spotlight and therefore the eyes of customers. Whilst mis-selling is often seen to be a result of misappropriate sales-incentives, there is more that can be done internally to avoid your mis-selling becoming a headline.

The Financial Conduct Authority’s (FCA) recent announcement follows the Financial Services Authority’s (FSA) mystery shopping review, published in February this year. It looked at the quality of advice given in the sale of lump sum investments. The findings of the mystery shop underlined weaknesses in various aspects of the sales process and presented a wider landscape of adviser failings. Namely, problems with the fundamentals of investment advice: know your customer (KYC), risk profiling and imbalance or misleading disclosure:

Know your customer

KYC is the bedrock of financial advice. It is a form of due diligence to ascertain relevant client information before doing business with them. Advisers must be careful that they are not taken along for the ride; taking time to challenge appropriately is a must if the customer is to get value for money and your firm is to build a successful relationship with that customer. For too long there have been large blank spaces in fact finds or simple notes that state “does not wish to disclose” or “not applicable”. It is an adviser’s duty to get to know the customer in front of them.

Risk profiling

Risk profiling is not alive and well and hasn’t been for years. The FCA still uses the March 2011 paper, “Assessing Suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection” as an example of what it expects to see in firms. In reality, the risk profiling process remains a risk in itself. Stochastic modelling is in play, fancy questionnaires have been developed and ever more complicated approaches are being introduced.

Revisit your starting point

We know that testing a customer’s attitude to risk is a good starting point. When we then apply a process to understand the customer’s capacity for loss, what then? Revisit the customer’s attitude to risk; revisit that starting point. When we feed in the time horizon and objectives/goals, again, revisit the starting point. It is through a systematic approach that the skilled adviser will challenge advice and create robust documentation. Only then will risk profiling be effective for you and your customer.

Revisit customers post sale

Firms can carry out testing after the sale of a product. Why is this beneficial? You can ensure the file that has been submitted accurately reflects the discussions between customer and adviser, and that the customer has understood the financial product. Customer outcome testing is a tool that can be used to supplement business quality checking to involve the customer in the process through post sale calls.

Customer understanding

This aspect of post sale contact is extremely valuable. By validating the customer’s understanding of the product they purchased and the information they shared through the advice process, you move away from rules based compliance and start achieving the FCA’s broader aim: to measure and achieve good customer outcomes. This provides strong evidence for your commitment to good customer outcomes, relevant for your business and the regulator. Firms caught in the FSA’s mystery shop failures can use post sale contact to put things right.

The opportunity is there for firms to deal with problems effectively, internally. Failing to address problems at all is resulting in those problems aired in public instead: lit up on computer screens, lining newsstands and on customers’ TV sets.