Paul Resnik analyses the factors that led to a £12.4 million ($22.2 million) fine levied on the UK arm of the Spanish bank Santander, to see what Australian financial planners can learn – and avoid replicating.
There seems to be an inevitability that the past behaviour of banks raises the ire of regulators. Over recent years, the UK regulator the Financial Conduct Authority (FCA) has in particular been at the global forefront of discoveries of bank misbehaviours and subsequent punishments.
In March, the FCA slapped the UK arm of Santander with a £12.4 million fine for failing to make sure investment advice it provided to retail customers was suitable. It was one of the biggest penalties ever handed down for poor investment advice.
Compulsory reading
The decision should be compulsory reading to all involved in advisory businesses. The huge fine sends a strong message to not only other UK banks, but to all banks and advisory businesses that regulators will pounce on organisations that provide inadequate or misleading investment advice.
In this case, as a result of several failures by Santander to fully inform customers about their investments, the FCA said that there was a significant risk of customers being recommended, making and remaining in investments that were unsuitable.
The FCA uncovered the serious flaws after it conducted a mystery shopping review of investment advice provided by Santander during 2012. The failures included advisers not fully informing customers about the products in which they were invested, not considering investors’ risk appetite and not taking into account enough information about customers to determine the suitability of investments.
“The thematic reviews conducted by the FCA, along with the reviews conducted by Santander, its external consultants and its internal auditors, all highlighted significant deficiencies in Santander’s investment sales process and its implementation during the period 1 January 2010 to 31 December 2012,” the FCA said in its March 24 decision.
“These deficiencies gave rise to a significant risk of customers being recommended, making and remaining in investments that were not suitable for them,” the FCA said.
Inadequate processes
As part of its failures, the FCA said Santander had inadequate processes to determine the risk appetites of customers, who had an average age of 60 years and who had, according to Santander’s own assessment, “very low” to “medium” risk appetites. They had an average investment per customer of around £24,000.
Those failures included Santander using a risk-profiling questionnaire with significant weaknesses, including the fact it had a very limited number of questions that made the test results overly sensitive to customers’ answers to individual questions. Questions were also open to interpretation and too complex for the firm’s customers to understand and answer.
Nor did Santander have adequate processes in place to ensure that its advisers collected the necessary information from customers to establish the suitability of investment recommendations.
Customers were also left in the dark about products in which they were invested. Santander did not take steps to ensure that its advisers provided customers with appropriate disclosure about products, services and costs or that customers received adequate explanations of why investment recommendations were suitable for them.
Customers misled
In some cases, customers were mislead. Some advisers made statements to investors that an investment “will likely double” and factual errors such as stating the FTSE 100 share index was 8,000-9,000 points in 2008, when it fell below 4000. Some customers were told they would not pay any commission on products, when in fact commission on one product was as high as 7.75%.
The FCA said Santander’s failings were serious because they were systemic and related to a large number of customers, including some who may have been “vulnerable due to age, their ability to replace capital, medical or other personal circumstances.”
After the FCA raised its concerns with the bank, Santander stopped giving investment advice from its branches from late 2012. Santander is one of the biggest banks in the Eurozone and operates a network of 1,200 branches. Its Bancassurance business provided retail investment advice to approximately 295,000 customers in relation to 349,000 investment products from 1 January 2010 to 31 December 2012. Its advice processes should have been much better than they were.
Appropriate due diligence
It’s not altogether surprising then that the FCA announced in its latest Business Plan that it will “look at whether investment advisers are carrying out appropriate due diligence to ensure that consumers are sold suitable products and services”.
My sense is that many smaller planning firms generally have suitability issues under control. It’s larger businesses that are more likely to be vulnerable to putting regulators offside. But that, of course, is a generalisation. It’s up to all businesses to make sure their advice processes are transparent and that investors are recommended products that suit their needs.
