FOOL'S EYE VIEW
Customers Deserve Better

By Alan Oscroft
June 28, 2001

Liverpool -- One of the things that irritates us most at the Motley Fool is the obfuscation that is widely employed by financial services firms in order to sell the products that make them the most money in fees and commissions, rather than providing the best long-term products and services for their customers.

Have you ever been offered a bank loan and told "that's with payment protection, of course" without being told what that is or that you don't actually have to pay it if you don't want to?

Were you a victim of pensions mis-selling and did you end up swapping a perfectly good company pension for a poorly performing and overcharging personal pension?

Or how about endowment mortgages? How many people have been sold one without being told what they really are or how they work, or what size slice the endowment company is actually going to take out of their payments? And when endowments look like they're not going to cover that important final mortgage repayment, how many firms have took the trouble to keep their customers informed before they were compelled to do so?

Economical With The Truth

Recently, endowment providers have been sending out letters, and my mate Graham got one. After sizing it up, he said "Well, at least they were good enough to write and let me know." Not so, old friend, they didn't send it of their own volition.

In a news release yesterday, the Financial Services Authority (FSA) announced its determination to improve the standard of service offered by financial services firms, and here's what FSA Consumer Director Christine Farnish had to say:

"After sales services are often the poor cousin to a firm's sales strategy. Time and again we see consumers' expectations raised at the point of sale only to be dashed when the product fails to adapt to changes in their lifestyle or economic factors. For example, even when it became clear that many customers' endowment polices might fail to pay off their mortgages, it still required intervention by the FSA before firms agreed to tell customers about the risk."

That says a lot for the level of customer service in the industry, don't you think?

The whole press release is well worth a read (as is the discussion paper on which it is based, "Treating customers fairly after the point of sale"), especially if you're a bank manager or a financial salesperson (and don't worry, unlike the financial gobbledygook it is aimed at halting, it is clear and concise).

Front Loaded Investments -- Nasty!

One very legitimate complaint made by the FSA suggests that "firms could do more to minimise losses suffered customers due to early policy lapses of long term products by explaining the consequences of early lapse both when the customer buys the product and at the point of lapse".

Many products are sold with hefty early up front charges, and pensions and endowments immediately spring to mind. (Are endowments the worst modern financial products ever sold? Very possibly.) The lion's share of the early years of payments are often swallowed up in commission, only tailing off as the years progress, and because of that there are many endowment policies that are still worth less than the total of the contributions made a full seven years after they were started.

Although a long-term endowment may have made an average return of, say, 6% per year at maturity, if you have to end the policy early you will probably earn a lot less than that. In 1998, the Financial Times Quarterly Review of Personal Finance estimated that 70% of policies failed to reach maturity.

The FSA's criticism of such products appears, if anything, understated.

Action

One of the FSA's planned actions is to tighten the rules governing financial advertising to minimise the chances of people being misled, and I'd like to respectfully suggest that they consider making the following words mandatory in advertising for front-loaded investment products:

"If you have to cancel your policy early, there's a fair chance that we'll keep most of your money."

Other plans are to crack down on excessive industry jargon and promote plain English, and even if necessary to prohibit the sale of excessively complex and opaque products and services. Let's hope they keep those claws sharp.

More: The Financial Services Authority web site can be found here, and the "Customers Deserve Better" news release here, from where you can obtain the discussion paper.