Analysis of the Financial Misselling - Assignment Example

 Analysis of the Financial Mis Selling 1. Introduction Financial mis-selling is a term which is dedicated towards describing of the sale of investment or other financial products to the customers on the ground of false information and that of misleading advice. The most predominant scenario of financial mis-selling is that where the elderly people having a significant fund amount is made to invest in a totally uncertain and inappropriate risk project. Financial mis selling may be applied to various products like “life insurance policies, mortgage loan policies, car and other consumer loans, credit card terms and conditions, mortgage loans and that of unfair bank charges and so on” (Financial mis selling claims, n.d.). The paper will deal with the financial mis selling through a case study and analyze the factors with the provision of solution. 2. Different types of financial misspelling and factors In the recent case in Barclays Company Bob Diamond broke the ranks with Barclays after dismissal of alleged interest rate swaps. Human error is one of the important factors leading to the mis selling practices. The mistakes will be done when the financial products are sold in thousands and need emerges for addressing the mistakes and also provide proper compensation for them. Another example of financial mis selling moves centers around the interest rate swaps as well as their alleged mis selling to the small business. A company named Norton Accord has been also accused of financial mis selling with the instance of interest rate swaps. The mis selling scandal can lead the banks in costing billions. Incompetence is seen from the sales people who are caused through the poor training as well as insufficient compliance systems. There lies a big difference between the odd mistakes from the individuals inferred from Barclays where there was insufficient knowledge for the individuals. Another major factor in the mis selling is that of making money. This is one of the factors which lead the banks to set up certain standards. The banks place generally place a great pressure on the sales persons to make huge profits. Selling of the derivatives is highly incentivized in bonuses and promotions. The large targets are placed on the products and they must meet the criteria for the wrath of management. The systems leads to the circumstances that the sales people are under pressure and they are paid for selling a product which is supposed to be in the best interest of the customer. Looking at right ways, the customers are in the right track as well as hitting the sales targets can be visualized as diametrically opposite to another (The causes of the mis-selling scandal, 2012). Other types of financial mis selling include the Payment Protection Insurance (PPI Policies), Mis-Selling of Accident, Sickness and Unemployment Policies (ASU Policies), Mis-selling of Personal Loan Protection (PLP Policies) and so on. Insurance products in the financial markets are complex and the information asymmetry between the insured and insurer leads to mis selling (Financial Mis-Selling, n.d.). Now, some of the factors leading to financial mis selling will be discussed. The difficulty of the insurance produce and irregularity of information between the insured person and insurer leads to mis selling. The policy documents related to insurance leads are in many of the cases are full of jargons as well as fine prints which make the insured persons for interpreting the actual meaning of the written policies. One of the major issues leading to the financial mis selling is that of the lack of financial literacy. The persons who are getting engaged in certain negotiations associated with financial products have been seen to suffer from immediate attention in the financial literacy. The people are in many of the cases are not particularly aware of the financial motives which associate them with greater probability that the sale will not be based upon the needs. When the customers agrees in buying policies, they overlook the literature and they often shows hurry for compiling things up and they do not even the study in a careful manner. They indirectly land up in a situation making themselves worse off and the agents in a better off situation and leads to a sub optimal result. Incompetence from the sales persons and high rewards as discussed is another important factor leading to financial mis selling (Jain, n.d.). Now we will be discussing an example of financial mis selling with respect to Payment Protection Insurance (PPI Policies). But before that, a prior discussion about the same can be mentioned. 3. Payment Protection Insurance (PPI Policies) and mis selling The payment protection insurance (PPI) which is sometimes also called loan protection or the PPI is generally utilized for covering person’s loan or debt repayment in the event of certain problems like situation where a person cannot work because of his or her illness etc. These policies vary from companies to companies related to different norms and regulation and these policies are generally sold as a part of the deal at a time when the consumers take out loan, mortgage or credit card (Financial Ombudsman Services, p.1). Common scenarios in which PPI mis selling mat occur are mainly the time in which the people did not have an employment at the time of taking the insurance. At the time of taking the insurance the person having a medical problem which could have kept him from working then the person should have been warned that the insurance was not suitable for him and it was also not mentioned properly to him then the claim of mis selling can be made. Mis selling may also take place in situation where the entire cost of the PPI was not explained to the customer or that the company only quoted the loan cost with PPI attached. If the customer was sold a single premium policy and in place where the total loan cost is paid up front with money that can be also borrowed simultaneously at the same interest rates as the loan then the customers may be at least be able to extract a refund by the cancellation of the PPI. If the customers have canceled or have repaid the loan at an earlier stage, the customer can also claim for a refund. In situations where various other important features related to the loan were not explained as for example the terms of canceling the cover or major exclusions like stress and back problems, then the customers can claim the money back. If the customer already had alternative cover which are able to insure the payments of the customers like that of income protection or of an employer illness and were not asked at the time of entering the deal of PPI, then in that case, mis selling can occur. If PPI is brought for covering a long term loan then there may arise a chance where the insurance may rub out before the repayment of loan. Majority of the PPI policies will run for five years and so if the loan term is greater than this, then there should be explanation of the limitation. If the sellers have not made this, then the person can also claim the mis selling (Monk, 2012). 4. Alliance & Leicester-The case In Britain, one of the famous bank Alliance & Leicester has been fined an amount of £ 7 million by the city regulator for the case of mis-selling payment protection insurance (Alliance & Leicester to pay £7 million fine for PPI failings, 2008). The company was alleged of breached PPI sale through telephone and sale of credit card PPI. The customers who bought single premium policies on loans, mortgages or that of the Hire purchase agreements have been claiming refunds in the previous years. A vast majority of PPI policies before mid 2008 were not only unsuitable from the customer’s angle but they were highly ineffective. In a span of three years from January 2005 to December 2007, the company approximately sold around 210,000 PPI insurance policies for helping clients in searching for affordable mortgage. Alliance &Leicester sold roughly 210, 000 PPI insurance policies to help clients searching for an affordable mortgage or loan with an average premium of £1, 265, yet there was clearly a common malfunction by advisers to provide buyers particulars on the expense and details of PPI. In addition to mis sold Alliance and Leicester PPI, Alliance & Leicester wanted to offer PPI without having effectively thinking about what exactly clients needed. In the selling of PPI, the company did not ensure that the PPI was optional and it also taught its workforce in forcing difficulty upon the clients when the later questioned about the incorporation of PPI within their agreement and also there was inhibition of the suggestion of the advisers (Alliance and Leicester PPI Claims, 2012). The director of FSA’s director stated that, “It is particularly unacceptable for a firm to train its advisers to put pressure on customers when recommending insurance cover which they have not asked for and may not need" (Evans, 2008). She also added that the firms should not emphasize only on the paperwork sent out after a telephone call acting as an excuse for unclear and false statements (Record fine for PPI mis-selling,2008). 5. Apology from the company The company being alleged apologized and guaranteed in paying back the customers who lost out through the process of mis selling. The chief director of the bank stated that, “Customers can be assured that we are taking this matter very seriously and that we have reviewed and tightened up our processes from December 2007 to ensure that all customers get the right information and advice” (Alliance & Leicester fined for mis-selling PPI, 2008). However apology has been taken by the company, on ethical ground this is not at all correct and this needs to curb down very strictly. 6. Continuous occurrence of mis selling 6.1 Demand side factors The financial mis sellings continues due to certain fundamental problems. Initially it can be stated that the first type of problem is in a situation where the payment protection policies are turned down. Suppose, if a customer purchased a policy and claimed on it but the company from which it has bought generally refuses in reimbursing the same. This occurs often due to exclusion clause in a very small print of the company policy. In most of the cases the customers are in a situation where they are not able to realize what they have been taking out which they actually did not want i.e. there remains a gap between the demand and supply and this leads to a situation of disequilibrium. The people who took PPI were not properly disclosed about the understanding. Another type of problem which arises from the demand side is that about of the disputes related to the refund of premiums. This take place when the consumer has already paid for a payment protection policy with an up-front single premium. After the customers pay off the loan in an early basis the then there may generate complaints (Financial Ombudsman Services, n.d., p.1). 6.2 Supply side factors The role of the banking industry has broken the trust of people with obnoxious events generating like that of mis selling of PPI policies, derivatives of SME’s, alleged manipulation of LIBOR and so on. These milieu of mistrust generation occurred due to tremendous obsession by the financial success and over emphasis on the short run performance by these institutions. The outcomes related to the customers and maintaining a sound business operation led the Boards and Executive management in a large number of banks to the domain of failure. Thus over emphasis on revenue generation led to the sacrifice of the ethical grounds of these institutions and led to this crisis situation (Treanor, 2012). 7. Challenges and remedies The principal challenges at this critical juncture lies in the restoration of trust of the customers, shareholders and that of the policymakers and that of the regulators. The nucleus of the banking success lies in the development of trust. The customers must be in a position such that they can trust their banks and their savings are properly handled. The customer must trust their banks for the purpose of managing the financial transaction in a smooth manner. In the commercial banking the process of sound business operations should be such that the banks will be by the side of the customers at difficult as well as in good times and it will not suddenly change its terms in a rapid manner or in the withdrawing of the support. Proper standards are required to be established for establishing culture and values within which the individuals work (Banking Standards, 2012). The regulation of FSA has introduced an approved person’s regime for the particular for certain roles of the top hierarchies like CEOs, Money Laundering Reporting officers and so on. There are seven statements of principles as directed by the FSA. This has been legally developed by FSA. There has been legal regulation developed by FSA. The principles of FSA have set tight requirements for conducting the business in an integral way with due skills and proper care and intelligence. FSA has increased the area of intervention through the Retail Distribution Review (RDR) as well as Mortgage Market Review (MMR). The FSA has stated that incentive schemes which drew the people to mis sell should be minimized and properly managed. The firms should identify the process of the incentive schemes so that the agents might not mis sell. The firms shall also need to understand the incentive scheme and simplify them. The sales managers should be properly follow guidelines which shall not develop conflicts in the interests and they also need to control the risk of mis selling in case of face to face situations (FSA launches initiative to outlaw flawed sales bonuses that encourage mis-selling, 2012). The central bank officials have led the officials for reviewing their files on the payment protection and refund of the people who shall never have taken out these policies. The Central bank has declared that the banks and the other firms which sell protection insurance will have to write to the customers (Weston, 2012). 8. Conclusion The brief study of the paper gives us an idea that the financial institutions have increased their activities related to mis selling and making the customers worse off. This comes out of the institution’s tremendous spree of generating a gigantic revenues and short term profit maximizing motives. In business, it is a fact that the people engaged should always maximize profit subject to cost minimization, but the practice which hinders the customer’s perspectives is not at all good and rational from the point of view of the business. This is because customers are the fundamental pillars of a business and customer satisfaction and maintaining their trust is an inevitable spare part of business mechanics. The customers on the other hand must be also aware perfectly about the policies. The negligence and reluctance of the customers will lead them to land up in such a bad position. The rules must be strictly followed and it compliance should be clearly monitored by the apex financial institutions like central bank. References 1. Alliance & Leicester to pay £7 million fine for PPI failings, (2008). Available at, http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/115.shtml(accessed on 28 November, 2012) 2. Alliance and Leicester PPI Claims, (2012). Available at, http://missoldppi.com/mis-sold-ppi/alliance-and-leicester-ppi-claims/(accessed on 28 November, 2012) 3. Alliance & Leicester fined for mis-selling PPI, (2008). Available at, http://www.which.co.uk/news/2008/10/alliance-and-leicester-fined-for-mis-selling-ppi-158453/(accessed on 28 November, 2012) 4. Financial mis selling claims, (n.d.). Available at, http://www.mccarthy.ie/practice-areas/litigation/financial-mis-selling-claims/ (accessed on 28 November, 2012) 5. Evans, R, (2008), Alliance & Leicester fined £7m for mis-selling PPI. Available at, http://www.telegraph.co.uk/finance/personalfinance/insurance/3152039/Alliance-and-Leicester-fined-7m-for-mis-selling-PPI.html(accessed on 28 November, 2012) 6. Financial Ombudsman Services, (n.d.). Available at, http://www.financial-ombudsman.org.uk/publications/factsheets/payment-protection-insurance.pdf(accessed on 28 November, 2012) 7. Financial Mis-Selling, (n.d.). Available at, http://www.swiftlawyers.co.uk/our-services/financial-mis-selling/(accessed on 28 November, 2012) 8. Jain, R, (n.d.). Mis-selling in Insurance and how to prevent it. Available at, http://www.policyholder.gov.in/uploads/CEDocuments/Third%20Prize%20Essay.pdf(accessed on 28 November, 2012) 9. Record fine for PPI mis-selling, (2008). Available at, http://news.bbc.co.uk/2/hi/business/7657446.stm(accessed on 28 November, 2012) 10. The causes of the mis-selling scandal, (2012). Available at, http://economia.icaew.com/News/Bank-misselling(accessed on 28 November, 2012) 11. Treanor, J. (2012) Banking standards board to be considered by industry taskforce, Available at: http://www.guardian.co.uk/business/2012/oct/14/banking-standards-board-anthony-browne (accessed on November 29, 2012) 12. Weston, C (2012), Thousands to get refunds for mis-sold insurance policies. Available at, http://www.independent.ie/business/personal-finance/latest-news/thousands-to-get-refunds-for-missold-insurance-policies-3252450.html(accessed on 28 November, 2012) Read More