So when did mis-selling of financial products become ‘normal’ in the UK? The truth is it always went on but not until a few massive scandals in the 70s and 80s did the Government of the day decide to introduce regulation in the form of the Financial Services Act 1986. From 1988 all financial firms dealing with consumers had to be authorised by self governing bodies or directly by the Securities and Investment Board (SIB). Later this morphed into the Financial Services Authority bringing together the Personal Investment Authority (PIA), Investment Management Regulatory Organisation (IMRO), Life Assurance & Unit Trust Regulatory Organisation (LAUTRO) and the Financial Intermediaries, Managers, Brokers Regulatory Association (FIMBRA). Certain professional bodies could regulate their own members such as the actuarial, legal and accountancy professions.
In the 1986 pensions legislation the Conservative Government allowed anyone from 1988 to opt out of an occupational pension scheme. Previously it was often compulsory to remain in an occupational pension scheme and this could be part of your contract of employment. Individuals could also contract-out of the State Second Pension (known as SERPS at the time) and use a personal pension as a vehicle for this.
The first wave of massive personal pension mis-selling then occurred with the now notorious ‘telephone number’ illustrations making no mention of inflation and assuming compound growth of as much as 13% per annum (later reducing to 12%, then 9%, and eventually 7% with various caveats). Lower growth rates were also used as comparators, but one wonders how much prudence was used in selling the transfers and opt outs at the time. This was the era of the yuppy and commission hungry salesmen with very little training and a mission to sell, sell, sell!
Eyebrows were raised and eventually the regulators made some enquiries into anecdotal evidence of mis-selling, but by the time the problems were unearthed much of the damage had been done. Multi-billion compensation claims followed and large teams worked on the review for several years. Legal & General, Allied Dunbar and Prudential were the some of the worst hit.
Whilst selling pension transfers and opt outs became a ‘no no’ it was then noticed that a concerted effort was being made to sell Free Standing Additional Voluntary Contribution Schemes. Again these were often front end loaded with huge fees and commissions deducted from the first 2 years premiums. Again the mis-selling was raised with the regulators who at first just suggested it was anecdotal. Evidence was provided and eventually with consumer pressure groups all helping it was proven that systematic mis-selling had taken place to the detriment of consumers.
What next? Endowments were systematically mis-sold because of the huge commissions possible. Then income protection policies as well as the now infamous Payment Protection Policies linked to loans and credit cards.
The common link has been commission incentives that have driven mis-selling behaviour. And now we see large pay day loan companies, often backed by mysterious overseas financial firms exploiting technology and ruthless terms and conditions to fleece the poorest in society. When will the Government stop pontificating and actually do something? People need protecting from these vultures – a free market has to have controls.