Monday, 24 January 2011

Ill customs and bad advice are seldom forgotten (B. Franklin)

Guardian has an interesting article today by Heather Connon: "Bank customers need more protection against bad investment advice". It so happens I have researched how the warnings are given to consumers in banking sector when they take out bank loans for investments and I fully agree with the message of this article.


The author gives as an example the famous case of Barclay's Bank who was sued against and ordered not only to pay fines but also to compensate its customers who lost their money on risky investments, that they originally did not intend to make it. Many of the victims in these cases where older people, close to retirement age, who came to Barclay's to invest some of their savings in order to increase their chances for better life after their retirement. However, Barclay's employees did not take into account that the investments they were recommending to these clients had a highly risky profile and did not fulfill the clients expectations (of secure and cautious investment). It is often debated what the banks could/should do in such situations. Some say that the banks have to protect their own business and it is in their interest to sell such investments to the consumers that would bring the bank the most return. They suggest that the consumers should hire independent financial advisers to protect themselves from bank's abuse. Others, however, mention the specific, confidential character of the bank-client relationship which can lead to the increase of the bank's duties of care towards the client, including the bank's duty to advise/inform and warn the client that a certain investment does not fit that client's investment profile.


In the article you may find a description of a solution that UK is about to introduce in 2013: on retail distribution review (which would e.g. ban commission to financial advisers directly from investment products). However, the article criticizes this solution and mentions how unlikely it is that things will change. What we need for a real change to happen is not another regulatory instrument that leaves lots of gaps and ways for the banks to go around the duties of care, but a change of approach of the banks themselves. What we need is a basic understanding that a happy customer is a long-time customer and that a short-time gain may lead to long-time reputation/customer loss. After all, as Benjamin Franklin once said: "Ill customs and bad advice are seldom forgotten".

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