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Beware banks selling protected investments

Investment | Protected

By Justin Modray, published 16 May 2011.
Helpful? 17

Banks have a history of pocketing high commissions to sell mediocre investment products. Little seems to have changed.

Actually, I should probably change the title to beware banks selling investments, period.

But my focus here is protected investment plans for two reasons. Firstly, they're quite an easy sell to inexperienced, unsuspecting customers. And secondly, the banks seem to receiving rather high sales commissions for flogging them.

To recap, protected plans run for a fixed term, typically 5 years, and link returns to an investment index (e.g. FTSE 100) while protecting some or all of your initial investment.

They're not necessarily bad products, it all depends on the terms offered by the plan (e.g. what proportion of FTSE 100 growth you'll receive). But because sales commissions are paid out of money that would otherwise buy investment returns, it generally follows that the higher the commission the less attractive/competitive the product.

And there's also the risk that banks or building societies will try to sell these plans (to hits sales commission targets) regardless of whether they're actually appropriate for customers - Norwich & Peterborough Building Society was fined £1.4 million in April this year by the FSA for mis-selling these types of product.

Let's take a look at the banks and building societies selling these products (at the time of writing):

Nationwide Protected Equity Bond Legal & General 7%
Santander Growth Plan Santander 6.8%
Yorkshire BS Protected Capital Account Credit Suisse 4%
Chelsea BS Protected Capital Account Credit Suisse 4%
Barclays Growthbuilder Woolwich min 3%

It makes for depressing reading - especially in the case of Nationwide pocketing an extortionate 7% commission, equal to £700 per £10,000 invested. But at least the above disclose sales commission in their key features document, HSBC simply says the amount will be confirmed by their adviser when you buy - not very transparent.

Of course, this is nothing new. Banks have long found ways to screw money out of their customers, regardless of whether it's in the customer's interests. Buy despite efforts by the FSA over the years, little has changed.

At the very least financial providers and banks should be forced to display any sales commissions on the first page of product literature - I got the figures in the table above from small print that most customers will never read...

Or maybe banks and building societies should be banned from selling investments unless they start acting more responsibly. What do you think?

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Readers' Comments (2) - To post a comment please register or login .

Comment by MIchel at 8:58am on 23 May 2011:

Very helpful article. Why does the regulator not do anything about this? It supports banks in favour of the IFA. Is that because the regulator can conduct a compliance type relationship with the bank whereas a relationship with an entrepreneurial IFA would be more difficult to manage? Surely it is the consumer that needs to be considered.

Comment by justin at 3:47pm on 24 May 2011:

My impression is that the FSA is relatively laid back about banks flogging inappropriate/expensive product to retail customers because they know the banks will usually have deep enough pockets to stump up fines and compensation should the need subsequently arise. This is less likely to be the case with IFAs - where the offending IFA typically goes bust and leaves the rest of the industry to pick up the tab via their FSCS levies.

If I were made regulator my stance would probably put over half the retail financial services industry out of business - because they clearly don't act in their customer's interests and/or they couldn't afford to run on sensible profit margins due to the directors/employees/shareholders being accustomed to excessive remuneration. Tough, but in my view probably necessary if customers are ever to be sure of getting a fair deal when buying financial products/advice.