This talk was given on 25 July 2006
The text here may not be identical to the spoken text
FSA SUMMER SCHOOL St John's College
After Dinner 25 July 2006
Hello. Now where was I?
For those of you who weren’t here last year, a lot of people in the financial services industry have tried to shut me up over the years but here a year ago one delegate, Lyn Foreman, managed it. Just as I got to my best lines she fainted.
I have to say it’s a long time since I had that effect on a woman. They sometimes go to sleep but…
So if anything I say tonight makes anyone feel a little light-headed just hang on to the table OK?
So where was I?
Well for those of you who weren’t here and you’re thinking who is he and why did they ask him once never mind invite him back, I am a freelance financial journalist, write for various magazines and newspapers and I present Money Box on Radio 4. I have as they say a good face for radio – crap voice but there we are.
St John’s College. Isn’t it marvellous? Some student rooms are in a tower built in 1602. Elizabeth the First was on the throne and Shakespeare had just written Hamlet. Including that immortal line ‘neither a borrower nor a lender be’. He hated the financial services industry did Shakespeare.
Financial services really began a hundred and fifty years later in the coffee shops of Georgian London. Someone came up with a new money-making wheeze. Life insurance.
"You give me five pounds every quarter. And I’ll give you £1000."
"Splendid plan. When?"
"After you die."
OK, they needed to work on the marketing. So it was sold as a generous product. Life insurance isn’t about you, it’s not a selfish product like saving – it’s an altruistic product. You pay money, someone else benefits – that’s why the first two years’ premiums go straight to the person who sold it you.
The industry started as it meant to carry on. The very first life insurance claim was disallowed. On 29 January 1765 Edward Cartwright insured the life of William Jenkin for seven years in the sum of £200. Jenkin was already 65 but Cartwright declared that Jenkin was in good health, didn’t drink, and, crucially then, had had smallpox. So without seeing Jenkin the society accepted the risk fixing the premium at £17 4s 6d annually. Now that wasn’t too generous, it was only to last for seven years so the premiums would have totalled just over £120 for a payout of £200 if he died within seven years. Just after Cartwright paid the second premium, Jenkin did die. Cartwright claimed his £200. The society refused, saying it now had evidence that Jenkin had in fact been ill when the policy had been taken out.
So the very first life insurance deal that was done in London was reneged on. Cartwright went to court. The judges heard conflicting evidence on the health of Jenkin – not now of course he was dead; about how he was before – and the court upheld Cartwright’s claim. He got his £200 and another £35 for legal expenses. Thus forming that unique bond between insurance companies and lawyers which still exists.
You might think a life company like that – which took the premiums, refused to pay, and was then forced to do so by the courts – wouldn’t have much future. But it did. The Equitable Life Assurance Society has never looked back. It’s glanced nervously over its shoulder a few times…
Its Chairman Vannie Treves now carrying on that long tradition of lawyers and insurers working together. Last year the Board decided to sell its historic assets, including a Gainsborough portrait of one of the early board members, raising one and a half million pounds. Just enough to pay for two months of the society’s abortive legal case against former directors.
Equitable Life of course has been blamed for much of the loss of trust in the financial services industry since those bleak events in the court case – not 1766, but 2000 when three judges upheld the principle the Board didn’t understand – that it was bound by the agreement it had signed. But it’s wrong to blame Equitable. No lawful industry has been rocked by such a succession of scandals as financial services.
Mortgage endowments sold from up to the late 1990s will leave three million people up to £40 billion short of the money they need to repay their mortgage. Only £1 billion of compensation has been paid.
Personal pensions mis-sold to nearly two million people up to 1994 cost the industry £11.5 billion in compensation and another £2 billion in running the compensation scheme.
Additional Voluntary Contributions – at least 100,000 customers were sold the wrong sort of AVCs to top up their company pension. More than £250 million in compensation has been paid.
Split capital investment trusts sold as safe investments. Up to 50,000 individuals lost at least £600 million. The industry finally coughed up £142 million and about 20,000 people got less than half what they had lost.
Precipice bonds were sold up to 2004 to 450,000 mainly older customers who wanted safety and a good return. They put in £7.4 billion and may have lost more than £2 billion.
And the FSA will report in the autumn about the way opt-outs from SERPS into personal pensions were sold after a report showed that the average customer lost around £4000 by doing so. Which? says 4.5 million could have lost £7 billion – £3 billion was paid to the insurance industry in charges.
On top of these major scandals, the Financial Services Authority has fined 85 companies and individuals almost £70 million and forced them to pay over £300 million in compensation for a variety of activities ranging from the misleading to the illegal. [In fact I checked the attendance list and out of those 85, at least five are here – having paid out between them more than £20 million in fines. Is part of the fine commuted if you do retraining?]
And as the FSA gets better at finding and fining the rogues within the industry, we are seeing a growth in unregulated investments – wine, land banking – there’s a good idea! – even Stanley Gibbons has set up an investment department for stamps, coins and autographs.
The mystery is not that the industry has lost the trust of its customers; the mystery is why anyone buys anything from it, at all, ever.
I mentioned commission on life insurance policies where the first two year’s premiums can go straight to the salesperson. And then 2.5% of the annual premium for the rest of your life.
Actually I shouldn’t have said life insurance, should I? Insurance is not the word. It has been rebranded ‘protection’. Marvellous products that protect us from all sorts of horrible things. Except they don’t. Home contents protection? Does it prevent me getting burgled? No. Motor vehicle accident protection. Does it stop my car being run into? No. Building protection. Does it stop a lightning strike? No. It’s not protection. It’s insurance. Protection stops something happening. Insurance pays you if it does happen. We all understand what insurance is. After 200 years why call it something else? If not to mislead customers? If not to treat them unfairly?
Critical illness cover. There’s a good product. Seven dread diseases including cancer, heart attack, stroke, liver failure. I’d like protection against those please.
"Well I can’t actually stop you getting them. But I might give you £100,000 if you do."
Errr to do what with?
It was heavily sold by salespeople on commission – they can get up to half the premiums for four years - £2000 for one sale. So no wonder that more than a million policies were sold in 2002 – five million altogether. But then insurers realised that they had been oversold. So the price doubled up and claiming was made more difficult – some now pay out only after your second heart bypass!
In May the FSA found that customers weren’t told the importance of medical disclosure –which could of course stop the sale – that sales staff failed to explain this product clearly and that sales literature was still unclear. One leaflet I’ve seen says ‘cancer’ is covered. But the definition of cancer is in a second document which explains it does not include many kinds of tumour and excludes most prostate and skin cancers. Similarly ‘heart attack’ excludes many ‘acute coronary syndromes’. ‘Loss of limbs’ means two or more. ‘Blindness’ has to be total and in both eyes. And so on.
As critical illness sales decline, identity theft cover grows. That’s a big worry isn’t it. Someone pretending to be me. "Why not add our ID theft cover to your protection package?" Great. Hang on a minute. Someone steals my ID. Takes money out of my account. Who bears the loss? The bank. Who is paying the premium? Me. Mmmm
In this summer school you’re studying treating customers fairly. The best way to treat customers fairly is not selling them stuff which won’t fulfil its implied promises and which they don’t need. Get your sales people to ask this simple question. If I wasn’t paid commission for selling it, would I recommend this product. And if the answer is ‘no’ don’t sell it.
Treating customers fairly means minimising commission, not maximising it. Those of you who have heard me before will know that my view is that the reliance on commission is at the heart of the problems of the financial services industry.
I once visited a woman, in her 70s, who had been conned out of a lot of money by an IFA who visited her at home. I asked her about him. What was he like, did she have any suspicions about him? "No" she replied "he seemed such a nice man. He had a Rolls Royce and everything." That particular gentleman now lives abroad. The person I visited was lucky not to lose her home.
Equity Release is better now. But last year the FSA said consumers were still not being advised properly. And a week ago the FSA reported on another mystery shopping exercise which found that all firms failed to explore the impact of equity release on limiting future options; on a third of occasions intermediaries failed to examine the impact on means-tested benefits; a third failed to issue an initial disclosure document; and some recommended clients to release too much equity with no clear purpose – except to boost commission.
Without commission, would these errors have been made? Without commission, would pensions have been mis-sold? Would mortgage endowments have been sold at all. Without commission, would split capital investment trusts or precipice bonds have been sold? Or SERPS opt outs which have cost people £4000 each? No.
What worries me is that there are teams of people in financial services companies devising these products not to provide a service to customers, not to treat them fairly, but just to generate sales.
And even with good products commission drives poor quality sales. In March the FSA published the latest persistency figures – how many people keep their long-term financial product long-term.
Endowments – more than one in four sold by IFAs given up after four years.
Whole of Life policies – about one in four sold by IFAs given up after four years.
Personal pensions –more than half sold by IFAs now given up in less than four years.
And it’s getting worse. In 1993 about three out of ten personal pensions sold by IFAs were given up within four years. Now it is more than half – 52% of personal pensions sold by IFAs in 2000 were given up before four years had passed.
And where is the commission paid? Up front. In some cases almost all the premiums actually paid will have gone to pay the commission.
I know the argument for commission – how do you motivate people without commission? Well it may come as a surprise but most people who work don’t get paid commission. What motivates doctors, journalists, politicians, the people who work at the FSA – OK that is a mystery – but the excellent staff who have cooked your dinner and served your drinks so wonderfully tonight who run this ancient college. I’ll tell you. If they do their job well, they are valued, promoted, and yes maybe given a bonus at the end of the year. A fair wage for a worthwhile job. That’s what motivates most of us. And if people don’t do their job well, then they are offered advice, perhaps some training, and if that doesn’t work they are disciplined, warned. And ultimately sacked. That’s what controls most of us at work.
It’s called management.
I don’t believe the people who work in financial services are so different from all the rest of us that they can only be motivated to get out of bed by the thought of earning £2000 for selling a product that isn’t wanted, isn’t needed and may not even achieve the limited objectives set for it. Treat them like people, not like greedy bastards and they might behave like the former, rather than the latter.
25 July 2006