Fine Times Are Here To Stay!

Firms which treat customers unfairly are being heavily fined by the financial regulator. We expose some of their nasty tricks.

I'm delighted to see that the Financial Service Authority (FSA) is taking its role as financial watchdog and defender of the public seriously.

For decades, laid-back regulation and feeble self-regulating codes of conduct allowed financial firms to ride roughshod over their customers' rights. Thanks to this lack of regulation, commission-hungry financial salespeople were allowed to run riot, leading to major mis-selling scandals involving, for example, mortgage endowments, personal pensions, free-standing additional voluntary contributions, split-capital investment trusts, high-income precipice bonds, home-income plans, maximum investment plans (ten-year savings plans) -- the list goes on and on!

However, since chairman Sir Callum McCarthy and chief executive John Tiner took the helm in September 2003, the new-look FSA certainly appears to be setting the financial world to rights -- and improving consumer protection as it does so.

In my opinion, consumer protection took two huge strides forwards when the FSA took over regulation of mortgages in October 2004 and general insurance in January 2005. These markets were in desperate need of an overhaul, as shady practices and various rip-offs were undermining public confidence in these financial products.

Indeed, unlike the Department of Trade and Industry, the Office of Fair Trading and the Competition Commission, the FSA appears to be keen to back its Treating Customers Fairly requirement with hefty fines. Here are three examples which have hit the headlines in the past week:

11 September 2006

The FSA fined Braemar Financial Planning Limited £182,000 for major failings in its sales process, which led to poor advice and inappropriate products being sold to some of its customers.

Braemar is a leading player in the market for pensions unlocking, which allows people aged fifty and over to take some or all of the benefits of their pension in a lump sum and/or income before their normal retirement age. This is a high-risk approach which is only suitable for a limited number of people.

Given the large pensions pots involved, the commissions paid to financial advisers can be huge, which is hardly a recipe for best advice! Indeed, in 2004, the FSA fined Sesame Limited £290,000, Berkeley Jacobs Financial Services £175,000 and Read Independent Financial Advisers £150,000 for pensions-unlocking failings.

7 September 2006

The FSA fined The Carphone Warehouse Limited £245,000 for not treating its general insurance customers fairly. During 2005, Carphone Warehouse sold mobile-phone insurance to 118,000 of its customers, yet failed to send adequate information about this cover to these policyholders.

Without a policy document and other information, these customers had no idea about the features and benefits of the policy they were sold. Many would have been sold unnecessary or incomplete cover, which is a serious failing indeed. In my view, each and every one of those policyholders should receive an automatic refund, because Carphone Warehouse singularly failed to keep its end of the bargain.

5 September 2006

The FSA fined Regency Mortgage Corporation Limited £56,000 for mis-selling mortgage payment protection insurance (MPPI) to financially unsophisticated 'Right to Buy' mortgage borrowers.

Regency flogged hugely expensive, inflexible, single-premium MPPI to its customers without first ensuring that these policies met their needs and demands. In several cases, customers were sold a policy for which they already had cover, or were sold a policy against which they were unable to make a claim.

In my view, the PPI industry is one of the nastiest financial sectors ever invented. How do I know this? Because although I see myself as Luke Skywalker today, I was one of the Darth Vaders of PPI for more than a decade! Hence, I expect this fine will be the first of many for PPI providers - and it's about time, too!

From my two decades in retail financial services, I know that headline-making fines of this kind create big ripples inside financial firms. Managers read this news and think, "Crikey, we're behaving in exactly the same way, so we'd better clean up our act fast!" Hence, these fines act as a deterrent to future bad behaviour, to the benefit of all consumers.

According to the FSA's Principles, a firm must, amongst other things,

• conduct its business with due skill, care and diligence;
  
  
• take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems; and
  
  
• pay due regard to the interests of its customers and treat them fairly.

To paraphrase two recent comments from the FSA:

"[firms] must take heed and ensure they have customers' interest in mind at all times during the sales process."

"We will not hesitate to consider enforcement action in circumstances where a firm's systems or actions leave open the potential for significant consumer detriment."

I'll second that!

Finally, if you believe that an FSA-regulated firm is failing in its duties, you can contact the FSA Consumer Helpline on 0845 606 1234. Who knows, your complaint could one day lead to improvements for millions of customers!

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