MONEY COMMENT
Another Financial Mis-Selling Fiasco

By Cliff D'Arcy
April 17, 2003

The Financial Services Authority (FSA), the regulator of financial services in the UK, has hit Lincoln Financial Group with a whopping £485,000 fine for mis-selling investment products.

Salespeople working at City Financial Partners (CFP), one of Lincoln's sales arms, were found guilty of selling inappropriate products to clients in order to boost their personal commission incomes. The offences under consideration took place between November 1993 and October 2000, but the problems at Lincoln go way back.

Lincoln is reviewing the policies of 28,000 clients and has already set aside £8.8 million to compensate 5,000 clients that have already complained. Lincoln terminated its contract with CFP in 2000 and subsequently got rid of its own direct sales force too.

This comes as no surprise at all to me, because I worked at Lincoln's West End office for a short stint in the early 1990s. Lincoln expected members of its sales force to sell to friends, family and acquaintances, as these people tended to place more trust in the advice of someone they knew well. Another technique was to "cold call" complete strangers and talk them into coming in for "free" financial advice (which ended up costing them a fortune in commissions).

A huge chart on one wall of the office showed how much commission income each salesperson had earned and the company's entire ethos revolved around winning as much business as it could from every client.

I couldn't stomach working in this environment, so I quit. However, the financial training and qualifications I received increased my interest in personal finance (and my suspicion of financial firms), which indirectly led me to working for the Fool today!

The FSA punished Lincoln for mis-selling "tax-free" ten-year endowment savings plans. These products were highly inflexible, carried heavy upfront charges and included life cover that was almost always unnecessary for most clients (especially young investors, a key target market for Lincoln). The first two years' premiums disappeared in charges (before miraculously reappearing in the salesman's pocket).

Even when policies matured after ten years, investors would be lucky to see any growth above the sum of their contributions – some savings plan! Also, if contributions stopped at any point, returns would be a fraction of what had already been paid in. Furthermore, the performance of Lincoln's fund managers was also equally frightful, further depressing investors' returns.

Ironically, these products were called "Maximum Investment Plans" (MIPs) – you couldn't make it up!!!

So, why would clients buy MIPs as opposed to cheaper, more flexible, tax-efficient PEPs (which were replaced by ISAs in 1999)? Single people with no children don't need life cover, so why buy inflexible life assurance savings plans that are just shortened versions of mortgage endowments? Of course, clients wouldn't buy MIPs without the hard sell - PEPs were never mentioned because they paid a fraction of the commission earned from selling MIPs.

The moral of this story is: if you're starting out in investing, take any and all advice you receive with a pinch of salt. There's no question that financial advisers have cleaned up their act in recent years, but there are still too many bad products and ruthless salesmen out there.

Read A Plain English Guide To Investment and How To Spot Dubious Advice to learn the questions you always need to ask.