12th December 2013 by The Harried House Hunter
Did customers of Lloyds Banking Group wake up one morning, decide to walk down to their High Street bank branch in search of a nice investment fund but instead found themselves walking home again insured against a range of illnesses?
Is that such a terrible outcome? Well, the City watchdog, the Financial Conduct Authority certainly thinks it is – to the tune of £28million.
What Lloyds would probably describe as a ‘customer segmentation process’ is probably a bit more sophisticated than relying on customer demand (which may be part of the problem) but whatever system it used for getting hundreds of thousands of customers in front of an adviser, it is clear the sales culture within Lloyds TSB (pre split), Halifax and Bank of Scotland was completely out of control.
Our hypothetical customer may have encountered a salesman or saleswomen at the top of their game, perhaps with a top of range of vehicle in the car park to boot.
Or they may have met someone with a slight air of desperation – think of Jack Lemmon in Glengarry Glen Ross – who had hit a rough sales patch and was at risk of seeing their bonus clawed back or their expected pay fall by more than a third.
Whichever salesperson our customer met, the outcome may well have been ‘less than optimal’.
But here are a few reasons why it is so unfortunate.
1) This all went wrong in a part state-owned bank. A fine even on this scale is not the issue – it is the huge compensation bill and that could run to hundreds of millions. One small silver lining is that stock markets have done pretty well, and actually the insurances concerned are not inherently harmful (actually they are pretty good when sold correctly) but the effort of simply investigating these sales brings a huge cost which falls, in part, on the British public. You could argue that other shareholders should expect better too.
2) It is astonishing that the Bank believed that the way back to full profitability was to take the cavalier sales practices from some of HBoS’s lending divisions pre-crisis and apply them to its sales advisers for insurance and funds.
3) It came as the Financial Services Authority – as the watchdog was then called – was bringing in a huge reform of the retail financial advice market taking the step of banning commission on pensions and investments because of fears of overselling and biased advice. Meanwhile at one of Britain’s largest banks…
4) The salary structures in place across the group were about rewarding more sales but there was also a marked failure to penalise poor advice. But the bank itself, as an institution, looked to be guilty of commission bias, because it was earning a huge amount more for sales of critical illness and income protection and much less from the sales of regular investment plans and it created a system that favoured those sales.
5) The whole idea of proper financial advice went out the window. The sales targets should not, of course, bias the product recommendations.
6) The really sad thing is that our hypothetical customer may well have benefitted from taking out income protection and critical illness depending on his or her circumstances. But they won’t think so now. It is quite likely that a huge segment of Lloyds’ customer base will regard these products as just another dodgy insurance product like PPI. And no doubt, the claim chasers are adjusting their messages to take advantage.
7) Another unfortunate issue is that some people who wanted to start investing may believe that it is simply not worth their while. If they had gone to an institution or even an IFA firm which cared about its customers, and believed in putting the customers’ and clients’ interests first, then they might have started investing for their future. Many people will assess what they have, work out if it’s the right thing for them, accept some compensation and then hopefully invest in the right place. But for anyone who believes that it is important for trust to be restored between the financial services industry and its customers, Lloyds’ behaviour has undermined the whole concept. One step forward and three steps back at least. What a shame.
Read more: Lloyds Banking Group fined record £28m