May 2011 Commentary
The Financial Services Authority (FSA) has today fined Bank of Scotland (BOS) £3.5 million for the mishandling of complaints about
retail investment products - many from older customers with little or no experience of investment products. Whilst the fine was for
mishandling of complaints, the underlying issue that customers were complaining about was the suitability of the advice they had been given.
This is the first example of a final notice that highlights poor use of risk profiling tools since the FSA's
consultation and guidance
on assessing suitability was published earlier this year.
Between 30 July 2007 and 31 October 2009, BOS received 2,592 complaints about its sales of the Collective Investment Plan, Personal Investment Plan, Guaranteed Growth Bond, ISA Investor and Guaranteed Investment Plan. BOS wrongly rejected a significant number of these complaints. An internal review by BOS on a sample of rejected complaints revealed that as many as 45% of the complaints it had handled should have been upheld rather than rejected.
One of the issues identified in the FSA's Final Notice was that documentation and evidence around the discussion concerning the risk profiling tool used by the firm to assess customers' attitude to investment risk was inadequate. For example, some customers complained that the Investments, which were recommended to them, were too risky for them. Their general appetite for taking investment risk had been determined by BOS with the assistance of their psychometric risk profiling tool. The tool aided discussions between BOS's sales staff and customers, helping to provide a structured and consistent starting point for discussions around the customer's specific attitude to investment risk in relation to a particular need. However, the lack of adequate documentation and evidence of these discussions contributed to BOS's failure to properly uphold complaints in the appropriate circumstances. It could have improved its processes by requiring its sales staff to record a fuller explanation of their recommendations to customers to invest in the Investments where the risks associated with the Investments might appear to be inconsistent with the customer's responses to the questions in the risk profiling tool.
This is the first example of poor use of risk profiling tools since the final guidance on, 'Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection' was published in March. This guidance looks at the role played by risk-profiling tools and tool providers and includes guidance for firms providing investment advice or discretionary management services to retail customers.
Today National Savings and Investments (NS&I) have re-launched their index linked savings certificates. Many commentators are comparing the
returns that people might expect to get from these certificates with fixed rate deposit accounts to see whether people are likely to "win"
or "lose" by choosing to invest in these certificates. Rather than making a comparison with other accounts, it makes much more sense to
look at savings goals to see whether this is a good investment or not.
The 48th Issue of index linked savings certificates offers a return of inflation plus 0.5% over five years. The retail prices index is
used as the measure of inflation and the index from two months prior to the date of investment is used to calculate the index linking. At the
end of each year the value of the bond is increased by the index linked return since the last anniversary plus interest at the fixed rate (0.5%).
If the RPI has fallen then the index linked value is unchanged and the return is equal to the fixed rate. Returns are tax free and the maximum
investment is £15,000. A further benefit is a UK government guarantee as NS&I is backed by the Treasury.
The reason most people invest in cash is that they do not want to or cannot afford to lose their capital. Therefore their primary aim is
protection of capital and so the main risk is that inflation may erode their capital if the return does not keep pace with inflation. So it
really does not matter whether inflation is 0.5% or 5%, if the interest earned is always going to beat inflation then people will know that
their capital will always grow in real terms. Yes, they might have earned more interest in another type of account but they may also have run the risk of earning less and eroding their capital.
Therefore for cash investors, inflation linked savings are always going to make sense if they can afford to tie up their capital for five
years. The main problem for many investors is that the maximum investment is £15,000 per issue and so investors with larger amounts to invest
will need to seek additional solutions.
Providers other than NS&I have offered inflation linked savings products in the past. Returns under other products will be subject to tax
and so there is a possibility that any tax payable could erode the inflation protection. In addition, the financial strength of the product
provider needs to be considered as there is a possibility that the provider may not be able to meet their commitments under the product. There
are compensation schemes to reduce this risk but the amount protected will depend on which compensation sub scheme the product comes under.
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