A “mystery shopping” exercise conducted for the UK Financial Services Authority (FSA) found a notable risk that retail investors receive unsuitable investment advice from banks.
The FSA Wednesday published the results of its latest mystery shopping review, which aims to gather first-hand evidence of what someone looking for investment advice might experience.
The FSA says the tactic represents part of the more intrusive approach to regulation that will be used by the Financial Conduct Authority (FCA), and that it forms work it is undertaking to examine the suitability of advice.
This latest review, which was carried out by an independent mystery shopping firm between March and September 2012, 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 reports that approximately three-quarters of customers received good advice, but that there were concerns with the quality of advice in about quarter of the cases.
In particular, it says that in 11% of the shops, the evidence suggests that the customer received unsuitable advice. And, in another 15%, the advisor 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 FSA says that the main reasons for poor advice were that advisors’ recommendations were not suitable for: the level of risk customers were willing and able to take (15% of mystery shops); their financial circumstances (13%); and, given the length of time they wanted to hold the investment (6%).
The firms involved were co-operative and agreed to take immediate action in response to the report’s findings, the FSA says. These actions include retraining advisors, making substantial changes to their advice processes and controls for new business, and undertaking past business reviews to identify historic poor advice and provide redress for customers. Firms have also been required to employ an independent third party to either carry out or oversee this work, it notes. And, one firm has been referred to enforcement.
“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 advisor in a bank,” said Clive Adamson, director of supervision at the FSA.
Adamson also noted that the FSA is disappointed by the results of this review, but encouraged by the action that the firms involved have taken to rectify the situation. “Since this review took place, we have introduced new rules on investment advice which have increased the professional standard of the advisers operating in the market and have removed the potential for advisors to recommend products that pay the largest commission but may not be right for the customer,” he added.