OpinionJun 25 2014

Misled members pay for their own misfortune

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Building societies promote themselves as trustworthy, low-risk homes for their members’ money.

Banks may rip you off, but your building society is run to much higher ethical standards – at least that is what they claim.

Yorkshire, the second biggest building society, states on its website: “We go out of our way to offer good, honest products that give good, honest returns.”

So how did Yorkshire allow the misleading marketing of a Credit Suisse capital-protected bond that led to the building society being hit with a £1,429,000 fine by the FCA?

How did Yorkshire allow the misleading marketing of a Credit Suisse capital protected bond that led to it being hit with a £1,429,000 fine?

This highlighted the maximum return – typically up to 72 per cent over six years – even though there was practically zero chance of achieving it.

In fact, consumer organisation Which? said the returns needed had never been achieved in the FTSE 100 index’s history.

More than £545m was invested in these bonds by 56,236 Yorkshire customers between 1 November 2009 and 17 June 2012.

During the period under investigation 59 per cent of the products maturing achieved only the minimum return – typically 15 per cent over six years.

Overall, the average paid above the minimum was an annual 0.45 per cent. No one got the maximum.

Yorkshire knew there was a 50 per cent chance of its customers receiving only the minimum return yet it failed to highlight this.

Did the society’s executives really believe this was a “good, honest product”?

Improvements were only made to the marketing material at the instigation of Which? and the FCA.

The root of the problem is undoubtedly that these products are far too complicated, not just for customers but also for the building society staff who are marketing and selling them.

I am going to the very top here. Would any chief executive of a building society really allow a product such as this to be marketed in such a way if they understood the low likelihood of their members achieving the maximum return and the high likelihood of them getting very little?

As with the Norwich & Peterborough Lifemark scandal, Chelsea’s dabbling with Icelandic banks and Britannia’s high-risk lending, there appears to have been too little understanding, too little investigation and too little due diligence on behalf of members.

Now Yorkshire – or its members – must foot a fine of almost £1.5m. Yorkshire’s four executive directors have let their members down. Which? raised concerns about the marketing of these products in 2010.