Paul Lewis –
Earlier this year the total fines levied on the financial services industry since 2002 by the FCA and its predecessor topped £4bn. From the start of 2019 to the middle of November, fines already stand at £392m.
Despite the eye-watering total, it seems lessons are not being learned. For fines, this year is already the fourth-highest annual total and the highest since we hit the peak in 2013-15, when banks were fined for cheating each other on Libor, Forex and any other index they could rig.
What do this year’s fines tell us about the state of the industry? My interest is consumers so I will ignore the £102m fine on Standard Chartered for failing to put in controls to stop money laundering; the £15.4m fine on Tullett Prebon for misconduct and failure to co-operate with the FCA; and the various non-reporting breaches (Goldman Sachs and UBS were fined £62m between them for that).
Instead I will concentrate on the £207m of fines for, to put it bluntly, cheating customers. Three of the worst were caused by commission-driven sales in the insurance sector.
In September, Prudential was fined £23.9m after it systematically missold more than 33,000 annuities in nine years up to September 2017. The victims were existing customers with Prudential pensions who were in poor health and had been sold standard annuities for healthy people instead of enhanced annuities to account for their shorter life expectancy. The sales were done over the phone without advice and the salespeople, earning commission on every sale, failed to inform customers of better deals if they shopped around and therefore cheated them out of thousands of pounds each. Managers failed to manage and £250m has been set aside for compensation with another £150m for interest and costs.
Six months earlier Standard Life had been fined £30.8m for the same trick – misselling unwell customers annuities priced for healthy people. It went on treating sick customers unfairly for eight years up to May 2016 as managers failed to manage the risk. Its commission-driven sales staff could double their pay or more through sales that put them under pressure. Standard Life has currently paid £33.7m to 19,100 customers and ultimately the bill is expected to total £60m.
For these insurers it was win/win. Staff could be poorly paid because most of their money came from commission. The firms would have saved money in future because these unhealthy people would draw their annuity for a shorter time than would the healthy people they were actuarially priced for.
Although customers will get the lost pension restored plus 8 per cent interest, they will have spent years on a lower income than they should have had. Some will have already died. Both Prudential and Standard Life say they no longer sell annuities to customers over the phone.
The third firm fined for misselling insurance is Carphone Warehouse. Its fine in March of £29.1m concerned £445m-worth of insurance (called Geek Squad) sold mainly with mobile phones. So far it has paid £1.5m in redress to around 18,500 customers.
Commission-driven staff were specifically told to mislead customers into a sale by telling them it was policy to include it but it could be cancelled within 30 days. A third of them did that but the FCA says the misselling bell among Carphone Warehouse managers didn’t even tinkle. It took whistleblowers to report the firm before the FCA got involved.
The firm says it has improved training and monitoring. The FCA notes that many of the Geek Squad sales were outside its remit and not investigated.
I must pass over the systematic cheating of businesses by the Reading branch of Bank of Scotland, for which the bank was fined £45.5m and two employees and four others were jailed. I will also pass over the major misselling of £475m of Lifemark structured products to 37,000 individuals by Keydata. Principal Stewart Ford was banned and personally fined £76m, with investors getting much of their losses refunded by the FSCS.
The most recent fine was £1.9m on Henderson Investment Funds for overcharging 4,500 customers a total of £1.8m over nearly five years. Customers were charged for active management of their funds when the money was in passive tracker funds for which the fees should have been a lot less. Henderson was operating a trick so common in the fund management industry there is even a name for it: ‘closet tracker’.
Henderson is the first fund manager fined for this offence in a continuing FCA review, which currently suspects 71 potential closet trackers and is working with 33 to change their ways. So far firms have paid a total of £34m in redress.
For these firms too it is win/win: they can charge more for doing less, and customers may not notice as the performance of their investment will be protected from the poor performance of managed funds and instead reflect the steady growth associated with trackers over much of the past decade.
The FCA has picked on two major areas of consumer detriment – commission-driven insurance sales and overcharging customers for managing their money. It’s time to ban both.
The fines are little more than an overhead and, although the firms are named, there is no evidence any are shamed.