According to figures released by the Financial Conduct Authority (FCA), more than £33bn has already been paid out to those who mis-sold PPI.
An estimated 64 million PPI policies were mis-sold in the UK from 1990 to 2010, and poor client conduct has cost banks a staggering £264bn over four years between 2012 and 2016.
How to avoid financial mis-selling
- Provide information and training
- Better product governance
- Appoint Treating Customers Fairly (TCF) champions
- Revisit all disclosures
- Work with HR to check targets
- Check the impact of client categorisation rules
Successive scandals such as LIBOR and PPI have damaged client trust and confidence in the financial services sector. Following the financial crisis, regulators have sought to restore investor confidence with a tougher regime, a renewed focus on Treating Customers Fairly and regulations, including MiFID II.
Under these rules, firms must ensure that any financial instruments recommended to clients are suitable and appropriate for their needs. To do this, you must conduct suitability assessments for all recommendations, including buying and selling or holding investments.
Is this enough? What more can you do to show a genuine commitment to clients if it isn't?
1. Provide information and training
An important question is whether advisers (product distributors) currently have the right information, knowledge and training about your products, services and financial instruments?
They should be clear about who the target market is and who your end clients are. This is vital and one of the best ways of preventing mis-selling. Ensure that there are clear processes and rules if advisers want to recommend products or services to those they are not designed for. Advisers should know what to do in this case.
2. Better product governance
Is there a product approval process already in place? Think about how you can improve communication between product manufacturers and distributors to prevent mis-selling.
How can you encourage dialogue between them post-sale to improve governance? Ensure there are measures in place when distributing other firms' products. It is important to consider how you can ensure that you only recommend products, services and financial instruments endorsed by management.
3. Appoint Treating Customers Fairly (TCF) champions
They will be dedicated to championing customer needs, assessing the impact of any change or new products on clients, looking at the latest developments from the client's perspective, etc. This will be pivotal in maintaining a customer focus.
4. Revisit all disclosures
Are your disclosures compliant with the rules? Do you always disclose conflicts of interests, costs, charges, commissions, connections and relationships upfront? Ensure you make appropriate disclosures on independence or any restrictions on the type and nature of products, services or instruments.
Do you inform customers about the range of financial instruments you recommend and make any links to issuers and providers clear? It's important to explain the nature, purpose and frequency of suitability assessments.
Let customers know that these tests aim to ensure you act in their best interests. Disclosures are crucial and help customers make comparisons and informed decisions. Don't underestimate them.
5. Work with HR to check targets
Check that there are no incentives, performance targets or other conflicts that may cause you to recommend certain products when others are more suitable. It is important to ensure that there are no remuneration or performance targets that encourage you to act in ways that are not in the customers' best interest.
6. Check the impact of client categorisation
It's important to ask the question about client categorisation's impact. Are your systems and processes fit for purpose? Ensure there is a clear process for obtaining and recording consent where clients opt to be categorised differently (e.g. retail instead of professional).
Your client onboarding software should be capable of recording suitability assessments and reports, issuing annual reminders, and even categorising clients.
Want to learn more about FCA Compliance?
To help you plan and execute compliance in your organisation, we have created a comprehensive SMCR roadmap.
We also have 80+ free compliance training aids, including assessments, best practice guides, checklists, desk aids, eBooks, games, posters, training presentations and even e-learning modules!
If you'd like to stay up to date with FCA best practices, industry insights and key trends across regulatory compliance, digital learning, EdTech and RegTech news, subscribe to the Skillcast FCA Compliance Bulletin.
Last but not least, you can interact in person with thought leaders and your peers at one of our popular live webinars and face-to-face events.
If you've any questions or concerns about compliance or e-learning, please get in touch.
We're happy to help!