What is mis-selling?

Most of us have forgotten – or never learned – Latin. And the phrase caveat emptor – buyer beware – is now as much a part of retail history as amo, amas, amat is to the National Curriculum. When we buy a car it has to seat us in a protective shell with airbags and safety belts. Food must be sold without a side order of E. coli. And we can choose white paint safe in the knowledge that it is free of arsenic. There are laws.

But one industry resists the march to safety. I refer to the serial mis-sellers in financial services. ‘What about caveat emptor?’ is the cry whenever a new set of rules governing financial products is announced. ‘What about individual responsibility/freedom/profit?’ they shout when colleagues are fined for selling products that clearly could never do what they promised. And when I point it out they tweet me haughtily “I think actually if you read para 94(b)(ii) blobby point 5 of the T&Cs you will see it was definitely NOT a promise. Buyer shld’ve realised!”

Mis-selling and the financial services industry as we now know it were born together on 1 July 1988 when personal pensions were no sooner marketed than mis-selling began to two million people at an eventual compensation cost to the industry of £13.5 billion. Not that we knew what ‘mis-selling’ was. First coined in 1985 about gun sales in the US, the OED records its first application to financial products in The Daily Telegraph 25 April 1990. I tracked back the now familiar phrase ‘pensions mis-selling scandal’ to the Glasgow Herald 16 July 1994. Most recently High Street banks and other providers of lending systematically mis-sold £7 billion of largely useless ‘payment protection’ insurance on those loans.

Last year the Financial Services Authority fined five banking groups and a building society a total of £38 million for not treating their customers fairly. It was the first time such fines had been levied in such quantity. The biggest was the £10.5 million fine on HSBC for mis-selling thousands of customers products to pay for their long-term care through its subsidiary NHFA. Earlier in the year Barclays was fined £7.7 million for mis-selling investments to more than 12,000 elderly customers. And Coutts – the posh bit of RBS/NatWest – had to cough up £6.3 million for mis-selling high net worth customers nearly £1.5 billion of risky investments. Even the little building society Norwich & Peterborough was fined £1.4 million for mis-selling risky investments by a now bust firm called KeyData. In addition to these fines they all had to pay compensation costing many times more.

One common mis-selling mantra is ‘risk means reward’ or as it is sometimes put ‘you have to take a risk to get a bigger reward’. It is used to sell profitable investments where money can easily be lost. But if risk really did mean reward then it wouldn’t be a risk would it?

Another is that investments are better than cash savings ‘in the long-term’. If that is defined as a hundred years the evidence is on their side. But most of us don’t have that long and how long-term it has to be to make profit a racing certainty is unknown. Many sales people will say it is ‘two to five years’. They are wrong. Barclays Capital, which produces the definitive study into investment performance and which normally supports stock market investment refers to the first ten years of this century as ‘the lost decade’ for shares.

At the heart of mis-selling is commission. Without commission not a single one of these scandals would have happened on such a scale. From January 2013 commission should go for investments and pensions. But insurance and loans will still be sold on commission and many advisers will switch much of their business to those products. So buyers of financial products will still have to beware, be very aware, and just say ‘no’ – dictum factum.