Lessons to be learnt from mystery shopping

Mystery shopping was used to gather first-hand evidence of what someone looking for investment advice from a bank or building society might experience. The FSA stated that the use of mystery shopping as a supervisory tool was an example of the more intrusive approach that will be used by the Financial Conduct Authority.

Although the mystery shopping review assessed six major firms in the retail banking sector, focusing on the quality of advice given to customers looking to invest a lump-sum, financial advice firms should still find the results of relevance to their business models. It gives an indication of what issues were of interest to the outgoing regulator and, presumably, to be replicated by its successor. However the results are not exactly a revelation, especially bearing in mind the stream of recent enforcement cases involving banks.

The FSA carried 231 mystery shopping visits and the results showed that, while approximately three-quarters of customers received good advice, there were concerns on the quality of the other quarter:

• In 11 per cent the evidence suggested that the adviser gave the customer unsuitable advice.

• In 15 per cent the evidence suggested that the adviser did not gather enough information to make sure their advice was suitable, so it was not possible to assess whether the customer received good or poor advice.

The main reasons for poor advice were that advisers’ recommendations were not suitable for:

• The level of risk customers were willing and able to take. In 15 per cent the FSA had concerns on the suitability of advisers’ recommendations for the level of risk customers were willing and able to take. The FSA identified risk-profiling tools with complex and limited questions, firms operating unclear customer-risk category descriptions and firms failing to check that the results from risk-profiling tools were correct.

• Customers’ financial circumstances and needs. For example, advisers failing to recommend the repayment of unsecured debts such as loans, where this would have been the right option for the customer (13 per cent of mystery shops).

• The length of time customers wanted to hold the investment (6 per cent of mystery shops). The FSA found that some advisers recommended medium to long-term investments even though customers made it clear they would need their money after three to four years. The regulator stated it was particularly concerned about these failings as the majority of the mystery shops based on the three to four-year advice scenario resulted in unsuitable advice.

The paper covered a lot of the ground already covered by the FSA’s Guidance on Assessing Suitability and provided some useful examples of poor practice as well as some similar findings.

Similarly, the paper links up with the FSA’s recent paper on Risk to Customers from Financial Incentives, published in January. The regulator is clearly linking its work on inappropriate financial incentives, sales targets and performance management to the mystery shop findings on poor advice. The FSA has stated that it will carry out a review later this year to see whether firms have acted on its guidance. Further enforcement may be a possibility.

Another area of significant failure identified in the mystery shopping exercise was the failure to give customers the correct information. The FSA assessed that advice disclosure was unacceptable in 42 per cent of cases and the main problems were:

• Failure to give customers the required initial disclosure on the firm, its services and remuneration (13 per cent of cases).

• Advisers made statements to customers that were unclear, unfair or misleading (15 per cent of cases).

• Advisers gave customers suitability reports that contained inaccurate information or failed to explain the disadvantages of the recommendation (17 per cent of cases).

Financial adviser firms can learn several lessons from the failures of the banks.

Philip Ryley is a partner and head of financial services and markets for Michelmores LLP