There is a new danger lurking on the horizon for financial advisers, and this one has the potential to really damage consumer confidence in financial services if the consumer press takes hold of it.
Having pursued endowment mortgage mis-selling as far as they can, claims management firms are now turning their attention to sales of investment bonds, as they believe there are many cases where investors were advised to move out of deposit accounts and into “higher risk products”, which they say did not return the investments expected.
The immediate statement any intermediary will rightly make on reading this suggestion is a consumer may not necessarily have been mis-sold simply because the return on investments is not as good as originally anticipated, and the emphasis should of course be on whether the product was suitable to the investor’s needs in the first place.
But even if there are very few cases which might be upheld by the Financial Ombudsman Service, suggestions of a mis-selling problem might be enough to dissuade consumers from returning to the investment market in greater numbers, just as evidence emerges of more money going into Isas and investment bonds.
The problem we could have with this new claims pursuit is the line between what is considered to be an advised sale and what is a direct-offer is under scrutiny again, particularly when the Financial Ombudsman Service says firms have to make it clear when conducting execution-only business.
More importantly, the SUBJECTIVE analysis of product risk assessment and what is considered “suitable” could face a real challenge if talk of investment bond mis-selling takes hold, especially as there is no clear definition of mis-selling, and no clear definition of ‘caveat emptor’. The political spectrum of 15 years ago and the investment arena, as well as what was considered a suitable product or recommendation, is now with hindsight very different and in some cases being tested by retrospection.
The test of whether a bond was “suitable” could come down to whether the recommendation was made on the back of true adviser knowledge of the product, or whether it was based on the past performance of the product. The argument in recent years has been when it comes to with-profits products, it might actually be hard to show intermediaries knew they would be anything other than lower-risk, and the question then is how do you prove products were not mis-sold, rather than how do you prove they were.
While there is nothing directly to suggest claims management firms are looking at the sale of with-profits bonds, comments about “higher rates of commission” suggest this is the prime target.
There are some in the industry who genuinely believe with-profits bonds are not a good recommendation for consumers, as they feel it suggests IFAs do not understand their own market enough to make recommendations which are considered to be safer and offering better returns.
Accordingly, the argument Brunel Franklin - a claims management company - is making is one which industry bodies such as the ABI have also raised: recommendations to invest in with-profits bonds, for example, might have been driven by higher levels of commission in comparison to other types of investment bond. While there is no evidence of this, the association is dangerous enough as suggestions of commission bias could linger in the minds of consumers.
Given the pressure on returns, it may now be much harder to justify with-profits bond recommendations today, but whether it can be proven investment advisers are liable for mis-selling in relation to with-profits could be even harder to prove, as few intermediaries would have been aware of the risks with-profits funds posed, given the information they received from providers under the past regulatory regime.
If that is the case, where does the liability lie in relation to the advice process?
As it stands, it is potentially the life offices and banks, rather than the IFA market, which could see a new wave of claims if consumer interest takes hold, because investment bonds have been one of the mainstays of past investment recommendations by tied sales forces.
But as the industry has learned in recent years, any suggestion of mis-selling through financial advice hurts many more intermediaries than those who actually do the damage.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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