The fine line between a scam and mis-selling

Tony Levene takes a closer look at the issue of mis-selling...

Every week, I write about scams ranging from car hire firms with no cars to so-called “automatic money machines”.

And one frequent response is “Why write about that? Surely no one falls for that.” But people – nearly always intelligent and often with substantial savings - do succumb.

My critics have a point, however. Many scams carry warning signs – they're from companies you have never heard of based in places you can't find on most maps.

I am attacked almost daily by scamsters who want me to pay for something without thinking. But equally, I am often under assault in banks and building societies.

Staff with little financial knowledge try to persuade me into the product bosses have ordered them to sell that week. There is no attempt to discuss suitability or risk.

All the employees know is that if I buy the plan, they get a bonus while if I don't, they might be sacked. It's not just a square peg in a round hole – they'll sell any peg for any hole.

Norwich & Peterborough Building Society, which has served East Anglia's savings and mortgage needs well for generations, was out of its depth in pushing plans from the now bust Keydata to customers. Keydata sold complex derivatives based on American life insurance policyholders dying sooner than expected. It's a fair question to ask if N&P staff really understood the plan – which I had criticised in The Guardian in October 2005.

For years, the banks have sold payment protection insurance (PPI) to customers who don't want it, don't get the chance to think about it, and who often couldn't claim on it.

And there are still people suffering from endowment mortgages which promised to pay off home loans but won't.

But because these rip-offs came from big, respectable organisations, I am not allowed to use the word “scam” even though the effect is much the same. Consumers lose hard-earned money while sellers grow richer.

Instead, I have to say “mis-selling”. Earlier this year, Barclays Bank was fined £7.7m by the FSA for mis-selling £692m worth of so-called “cautious” and “balanced” funds to 12,331 customers, mainly pensioners. The FSA calls this rip-off “retail failings”.

The list of Barclays “retail failings” included:

• not explaining risks
• not checking on suitability
• not training staff on the products
• failing to monitor staff
• doing nothing when the problem became apparent.

You can read a lot more here.

The fine is about the same as an investment banker bonus so Barclays won't miss it. And even the £60m compensation the bank will pay on top of the fine is only a little more than the commissions it received on the products.

But I want to help Barclays with its public relations. So I can say, in its defence, that it is not unique. Many competitor banks are at it. It's how retail banks are often run.

Some banks have been fined. Others either don't get caught or not enough victims complain or – this is crucial – they are found not guilty by a system which is heavily stacked against consumers. They say we have to trust the banks – after all, we have spent hundreds of billions bailing them out.

The general rule is that you can't complain of something that is covered in the small print (however incomprehensible) or in the product particulars (however complex). The magic words are “light touch regulation” - that means if they hit your pockets with a light touch and not an AK-47, you can't ask for compensation.

Now, the Financial Services Authority (FSA) boss Lord Turner says all those mis-selling scandals and light touch rules are in the past. The FSA, which is set to disappear, has published a 75 page paper on how it claims it can better protect consumers.

It recognises “light touch” means the consumer is an easy touch. And it promises it could ban some products.

Don't hold your breath for this. Whatever happens, if anything, will be years away. In the meantime, the banks will be at every money making scheme right up to the wire of any change.

The best protection is self protection. So here's my two top rules:

1. Never buy anything from a bank without checking the market – lovemoney.com is a great place to start – and taking independent advice if necessary.

2. If you don't understand the product and the seller can't explain its pros and cons to your satisfaction on the back of an envelope, walk away just as you would an overseas scamster.

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