RegulationFeb 13 2013

FSA finds 25% of bank investment advice inadequate

Search sponsored by

One-quarter of investment advice given by banks and building societies is of questionable quality, with customer suitability not being properly assessed and evidence unsuitable advice being routinely given, according to a Financial Services Authority mystery shopping review.

As a result of a mystery shopping exercise involving six major retail banking firms, the regulator has launched an enforcement investigation into one of them.

The FSA has published the results of the review, carried out between March and September 2012, looking into the quality of investment advice given by banks and building societies.

This is the first time that the FSA has published the results of a mystery shopping exercise since the payment protection insurance mystery shopping exercise in September 2008.

This 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.

In total 231 mystery shops took place. The FSA said the results show that, while approximately three-quarters of customers received good advice, there were concerns with the quality of advice in the other quarter:

• In 11% of mystery shops, the evidence suggests that the adviser gave the customer unsuitable advice; and

• In 15% of mystery shops, the evidence suggests that the adviser did not gather enough information to make sure their advice was suitable.

The main reasons for poor advice were that advisers’ recommendations were not suitable for customer risk appetite, financial circumstances or investment goals.

According to the FSA, the use of mystery shopping as a supervisory tool is an example of the more intrusive approach that will be used by the incoming Financial Conduct Authority.

In response to this report, the firms involved were cooperative and agreed to take immediate action, the regulator added, including retraining advisers, making substantial changes to their advice processes and controls for new business, and undertaking past business reviews to identify historic poor advice and compensate customers.

Firms have also been required to employ an independent third party to either carry out or oversee this work, the FSA said. One firm has been referred to enforcement.

Clive Adamson, director of supervision at the FSA, said: “Mystery shopping allows us to understand what customers experience when they purchase financial products. This review shows that customers are not consistently getting the quality of advice on their investments that they should expect when visiting an adviser in a bank or building society.

“Whilst we are disappointed by the results of this review, we are encouraged by the action that the firms involved have taken to rectify the situation for their customers.