Here are the seven ways banks are failing those seeking advice.

1. Poor risk profiling

Some of the questions in the risk-profiling tools the FSA saw were not clearly worded, used phrases that were open to interpretation or were too complex for some customers to answer. This risked customers giving answers that resulted in their risk profile being assessed incorrectly, the FSA said.

One firm’s risk-profiling tool contained a complex question that assumed customers had a particular level of financial knowledge and mathematical ability, requiring customers to use percentages to calculate potential investment losses.

Advisers failed to check customers understood questions in all mystery shops, even when they were clearly struggling to answer them.

This led to some customers’ risk profiles being assessed incorrectly and the adviser recommending an unsuitable product.

“Where firms rely on risk-profiling tools they need to ensure they manage any limitations through the suitability and ‘know your customer’ process. However, some advisers were over-reliant on the risk-profiling tools and failed to check whether customers’ risk profiles had been assessed correctly.

“Some advisers also failed to consider the customer’s ability to cope with any financial losses on their investment (i.e. their ‘capacity for loss’),” the FSA said.

2. Failing to consider customers’ needs and circumstances

The FSA found advisers failed to gather enough information about customers’ income, assets and financial commitments to ensure the recommendation was suitable for their financial circumstances.

Some advisers also failed to recommend that customers repay existing unsecured debts such as credit cards and loans, where this would have been in the customers’ best interests.

In the mystery shops with issues, the FSA found that advisers carried out their fact-finding in a rushed or unstructured way and failed to gather relevant information.

Some advisers collected the necessary information, but did not take it into account when making their recommendations.

3. Failing to consider the length of time customers want to hold the investment

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 FSA is particularly concerned about these failings as the majority of the mystery shops based upon the short, three to four year advice scenario resulted in unsuitable advice.

4. Inappropriate financial incentives sales targets and performance management

The FSA said its review clearly showed some advisers recommending investment products over non-investment products, even when they were not suitable for customers.

Given that in some of the mystery shops, advisers gathered the information necessary to be able to determine what would have been suitable for the customer but still recommended an unsuitable product the FSA believes that other factors – like incentives – may be causing poor advice.

5. Failing to give customers the correct information

The FSA assessed that advice disclosure was unacceptable in 42% of mystery shops as advisers failed to give customers the correct information.
The regulator found advisers failed to give customers the required initial disclosure on the firm, its services and remuneration in 13% of mystery shops.

Advisers made statements to customers that were unclear, unfair and/or misleading in 15% of cases and gave customers suitability reports that contained inaccurate information and/or failed to explain the disadvantages of the recommendation in 17% of mystery shops.

6. Inappropriate use of investment sales aids

The FSA was concerned that the interest rates some sales aids used to show the returns from cash deposits did not always reflect the actual returns available from the firm’s deposit products, so they undervalued cash deposits and made investments appear more attractive.

Some advisers’ descriptions of the results from the sales aids were often unbalanced and potentially misleading. For example, the FSA saw a number of cases where advisers emphasised the potential returns from the investment product without mentioning the potential for losses.

7. Weaknesses in firms’ controls

The FSA were concerned that the suitability reports some advisers produced contained inaccurate and potentially misleading statements on customers’ needs and financial situations that could result in harm if customers ever needed to complain, and that this form of system manipulation might not be identified by firms’ controls.