Continued bank mis-selling is likely without a change in approach


Financier Worldwide Magazine

April 2014 Issue

April 2014 Issue

Financial services firms are fighting to regain global trust and regulators are resolute in the view that businesses need to work harder to regain consumer confidence. The industry still has issues with suitability and although many banks have withdrawn their advice offering, there is still significant potential for detriment to consumers and further reputational harm to the industry. Unless a different method of oversight is adopted, the industry is likely to be plagued by continuing challenges.


Following a succession of mis-selling scandals, suitability continues to sit high on the agenda of the Financial Conduct Authority (FCA). This links directly to its operational objective of securing an appropriate degree of protection for consumers and is core to the Treating Customers Fairly initiative, which aims to ensure firms put consumers at the heart of their businesses.

The main issues with advice suitability tend to stem from inadequate fact finding, limitations in the use of risk profiling tools, unclear customer risk categories, and insufficient information gathered around clients’ existing arrangements. There also continues to be issues around the inability of firms to identify where risks may occur and there is often an overreliance on systems and controls that may not be adequate enough to uncover those risks. 

However, the facts are simple and have been made quite clear by the FCA: identify target markets, research their needs, develop products to meet those needs and ensure that those products are only distributed, directly or otherwise, to those retail clients for whom the product is suitable. 

So why is unsuitability still so prolific? 

The evidence gap

In recent thematic work conducted by the UK regulators, it has been noted that whilst the rules around recordkeeping are stringent, there is often a mismatch between what is said during a customer meeting and what is recorded on the file. 

A mystery shopping exercise, conducted in 2012, where customer-adviser communications were recorded and considered alongside written records, uncovered a widespread problem that suitability reports alone are often not enough to evidence suitability. The FCA identified that: (i) many suitability reports failed to reflect what was discussed during meetings; (ii) suitability reports sometimes contained inaccurate information; and (iii) suitability reports often failed to explain disadvantages of the recommendation. 

Increasingly, the FCA has been relying on recorded ‘phone meetings’ and customer contact programs to validate the core constituents of a robust sales process. 

The missing link

Even against the backdrop of explicit regulatory guidance, the FCA continues to uncover evidence of business monitoring teams being unable to identify unsuitable advice when carrying out file reviews. Firms have all the Know Your Customer (KYC) information, the suitability report, the risk questionnaire and report, yet the suitability report does not correlate with customer’s risk profiles or personal circumstances.

The missing link here is that we have only the adviser and clients’ word that the advice process was fit for purpose and that the client outcome was suitable. That is why the regulator’s Mystery Shopping exercise recorded meetings, so that everything that was said between the adviser and the client was captured. 

Current monitoring 

Firms commonly adopt pre and post sale file monitoring to root out unsuitable sales and identify areas vulnerable to risk. This may take the form of a first and second line of defence whereby files are reviewed by an independent team or external resource, followed by quality assurance of the first line of defence by another department or outsourced checking team. Files may also be reviewed post sale as part of a past business review (PBR), often as a result of regulatory intervention, an increase in complaints or identification of a problem within sales practices.

The frequency and number of files checked varies between firms but it is clear that firms do not have the time, personnel or financial resource to check every client file, despite the fact that this is the only way to ensure that all business written is suitable. Often a variety of problems pass through the system unidentified and only emerge once a PBR has discovered them, or from management information (MI) resulting from line one and two monitoring. Either way, in order for a problem to be highlighted it needs to be large enough to be noticed, by which time the scale of the problem has usually escalated and the cost to remediate is sizable. 

In addition, the line one review process of only assessing files is fundamentally flawed: assessing a file does not always reveal ‘unsuitability’ and unless compliance teams actively engage in a program of customer contact, the outcome of the advice suitability review will often be unclear. 

It is apparent that this oversight, which identifies issues after they have embedded and leaves a wealth of files ‘unclear’, does not allow firms to be proactive in identifying and mitigating risks, despite being a key requirement of the UK watchdog and a business’s best defence against mis-selling. 

A different approach 

The FCA has recently asserted that “routine business quality monitoring is unlikely to be sufficient on its own to effectively monitor for the risk of inappropriate behaviours” (FCA Thematic Review TR14/4 – ‘Risks to customers from financial incentives – an update’), illustratingthat firms’ current monitoring is not adequate enough in their eyes to diminish the risk of mis-selling. They continue by commenting that they “want firms to consider what was actually said during a conversation” as this could contain evidence of pressure selling or not explaining the risks and product information sufficiently.

This clearly demonstrates that a new approach is needed whereby advisers and sales agents can have their interactions monitored quickly and independently. Some firms are beginning to conduct their own mystery shopping initiatives and post-sale customer contact regimes to spot inappropriate conduct in a more timely manner than regular monitoring. However, these methods still have limitations in the number of transactions that can be reviewed. 

Whichever method firms decide to adopt to increase the quality of their monitoring, firms can take steps to maximise the insight that can be gleaned from the information and statistics discovered. Ensure you are capturing every interaction with an authentic record of what is said, and the next steps or outcomes agreed. Refine your systems and controls to maximise the number of records that are reviewed against a detailed and consistent compliance rule set. Review suitability and disclosures at a discrete level, as well as for consistency across records that comprise an entire transaction. Ensure you have processes and controls in place to escalate, investigate and potentially redress individual advice or sales of concern. Define and generate relevant metrics and key performance indicators around the compliance reviews in order to identify systemic risk. Define your continual improvement processes, so that the learning from every review improves the quality and efficiency of the next.

There are increasing burdens on firms to comply with a more intrusive supervisory approach and firms are still struggling with the day-to-day balance of increasing profitability, delivering good consumer outcomes, and ensuring compliance with regulation.

However, unless a different method of oversight is adopted, financial institutions providing retail advice are likely to be plagued by the continuing challenges of inaccurate recordkeeping and contradictory information given verbally. It is vital that firms are able to prevent such widespread mis-selling in the future; otherwise they can expect a further intrusive and intensive approach from the regulator.


Joanne Smith is Chief Executive Officer of the The Consulting Consortium Limited and recordsure Limited. She can be contacted on +44 (0)203 008 6020 or by email:

© Financier Worldwide


Joanne Smith

The Consulting Consortium

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