Millions facing threat of new mis-selling misery

The financial services industry will undergo sweeping reform after the general election, but could this do more harm than good?

Millions of people have been mis-sold financial products over the past decade, and millions more are likely to be victims. Ten years after the Financial Services Authority came into being, we seem further away than ever from preventing untrustworthy sales people scalping innocent clients.

Politicians and regulators have realised that the current system is not working and have proposed major reforms. The Conservatives' plan, if they win the forthcoming general election, is to create a new Consumer Protection Authority from the bones of the Financial Services Authority (FSA) and the Office of Fair Trading (OFT). Alternatively, if Labour remains in power, it will bring an end to the system which sees product providers earning commission as a reward for selling savings and investment products.

But even these proposals are seen as rather desperate moves which could create just as many problems as they resolve. Specialists in the area are not expecting a new dawn.

Mis-selling is "almost endemic", says Adam Samuel, a compliance expert. "The quality of financial advice isn't very good and, in particular, that given by banks is outrageously awful."

James Daley, money editor of Which?, says that the consumer rights group is getting "plenty of calls" about mis-selling, especially from the elderly. "Our investigations have found that standards are dangerously poor at the moment," he says.

The best way to protect yourself against mis-selling is the old-fashioned one: to rely on yourself and not to put your faith in an adviser or in a regulator. Advisers still have their role but you should be very wary about buying anything from them unless you understand it totally yourself. "We need to get back to caveat emptor," says Robin Ellison, pensions strategy partner at the solicitor Pinsent Masons. The idea "that someone selling you something has a professional duty to look after you is for lawyers and doctors", he says, and the thought that we can ever bring an end to mis-selling ranks along "with dreams of Utopia".

At the moment, the Financial Ombudsman Service receives 800,000 queries a year from disgruntled buyers of financial products, many of whom believe they have been sold a pup. But these people are only a fraction of the true numbers affected. To get your case taken on by the Ombudsman, you need to have exhausted the complaints process of the organisation which sold you the product. And, as James Daley says: "Many people might not even know they were put into a product that was not suitable for them."

Mis-selling tends to go in phases, as certain products are pushed by product providers and intermediaries. Up to five million homeowners may have been wrongly sold endowment mortgages; the personal pension mis-selling scandal accounted for another million adults; home income plans and free standing additional voluntary contributions robbed many others; loans were widely mis-sold to people who could not afford them in the credit boom. Payment protection insurance is the current problem area, and new areas are coming into view.

Traditionally, the victims were the poor (who were over-deferential to authority figures) but Samuel says this is changing. "Increasing sophistication means that richer people are now more vulnerable," he says, pointing to the sale of funds of hedge funds as an obvious danger area.

Now that traditional final salary pension schemes are being killed off, more of us have to carry greater investment risks in our pension arrangements and we may be tempted to go for complicated products that we do not quite understand in order to boost our returns. Obvious danger areas include hedge funds and so-called "cautious managed funds", which can consist of packaged debt and a variety of other exotic assets.

In order to earn their commission, sales people are often tempted to play on those human weaknesses of simple greed and keeping up with the Joneses. John Virgo, a barrister at Bristol's Guildhall Chambers, specialises in handling mis-selling cases and places the salesman's desire for commission at the heart of the problem. "It comes back to that conflict of interest and [the organisation's] weak internal systems," he says.

While intermediaries receive commission, bank and building society staff get incentives that lead to extra pay. And so focused are staff on hitting their targets that, on 37 mystery shopping visits undertaken recently by Which? to banks and building societies they gave poor recommendations on 33 occasions.

As a result, Daley gives the blunt advice to "avoid banks and building societies", warning: "The most honourable exception was Nationwide, which gave correct advice on two of the four visits it received.

Despite the millions of people who have been mis-sold to, senior managers have rarely been admonished for presiding over defective systems or for turning a blind eye. Regulators have, occasionally, thought of punishing individuals but they generally decide that the damage done to the financial services infrastructure of a loss of confidence would outweigh the benefits of achieving justice. Sometimes providers are also developing products which go beyond the realms of current regulation.

"It's a very innovative industry," says Robert Finney, the head of financial markets at the solicitor Denton Wilde Sapte. "It is constantly developing new products which are capable of being mis-sold and which existing rules might not cater for fully."

Regulators themselves have a very tainted record. In recent years, the OFT has kept a very low profile at the same time that loans – and the payment protection plans related to them – are being widely mis-sold. This is despite the fact that the Ombudsman is upholding more than 90 per cent of the consumer complaints it handles against certain parts of big-name brands including Barclays, Lloyds TSB, the Co-op Bank and MBNA. "The OFT is more interested in making points about competition policy than in regulating loans," says Samuel.

Even the Government is implicated in many of these scandals, whether for being too soft on the directors of these companies or for taking strange steps, akin to mis-selling, itself. Robin Ellison, a former chairman of the National Association of Pension Funds, is one of many lawyers who is concerned about the Pension Protection Fund, for instance. Dating back to 2004, it takes on troubled pension schemes whose employers have gone bust. But individuals whose money is there, especially young people, would not be so happy if they understood exactly how it works. "It is, technically, a Ponzi scheme," says Ellison. "Eventually they will run out of money. People should be told."

If you do not wish to be mis-sold, the advice is always the same. Understand the details of the products you buy, and do not be scared to ask questions that sound simple.

Consider paying a fee for financial advice, rather than letting advisers give you skewed recommendations so that they can take commission, do read the small print, brush up on your basic maths and your understanding of financial products – and do not always follow the crowd.

Stung into action: 'It's a victory for the little man'

Stewart Urwin, a retired policeman and his wife Melody were looking forward to a gentle retirement – "a few little holidays, a nice little car to run about in" – four years ago. She was just giving up the tea shop she had run in Thornton, near Blackpool, where he had sometimes helped her. They went to the Halifax and invested the proceeds of the sale of the business, a sum of about £70,000, which represented their lifetime savings.

"We had never invested before," says Mr Urwin. "They gave us lots of figures showing growth. My head was spinning. I felt: 'You are the Halifax, you just do it.'"

In fact, they were put into a unit-linked investment bond that was 85 per cent invested in equities. Unfortunately for them, this took place at the worst time possible, 2006 and 2007, shortly before the markets fell.

When Mr Urwin went back a year ago to check his investment, he was so shocked to discover it had lost nearly 30 per cent in value that he immediately withdrew what remained, less than £50,000. His wife became ill with worry. The couple were so shocked that they decided to challenge the advice given to them, but the internal Halifax complaints procedure turned them down.

Less than 80 miles away in Sheffield, Rachel Harrison and her plumber husband and small daughter were having their own difficulties with the Halifax. From a small monthly household budget of £1,650, they paid their £500 mortgage to the Halifax and an extra £80 a month to cover the loan if he ever got laid off. When this did happen, in January 2009, the lender insisted that he provide at least three job application letters and rejections a week to show he was applying for work. Ms Harrison says: "In this industry it's absolutely impossible to get that sort of document."

She and her husband admit they did not read the fine print but say they were given the insurance policy only as they were signing. They had already been with the mortgage adviser for two hours sorting out the mortgage loan ("with our two-year-old wrecking his office") and were desperate to get away. They trusted both the Halifax and the salesman and Ms Harrison never expected that they would "take money from us for eight years without our being able to get anything back".

She adds: "They are a big company and people trust them. My first bank account was with them. I thought they were more for their customers than they were for themselves." They could not see when they looked at the insurance policy any stipulation that they had to provide the three letters a week.

Both the Urwins and the Harrisons complained to the Financial Ombudsman Service. The Urwins got all their capital back with interest. "It's a victory for the little man," says Mr Urwin. The Harrisons, who could get nearly £8,000 back if they are successful, are still awaiting a decision. The husband (who prefers not to be named) is still looking for work and they have borrowed money off their family. Ms Harrison says: "We are down to our last pennies. We can pay two more mortgage payments and that's it. Hopefully, we're going to be OK but it's cutting it fine."

*The Halifax is now part of Lloyds TSB which, according to the latest Ombudsman data, is losing 33 per cent of investment complaint cases with customers before the Ombudsman and 89 per cent of general insurance cases.