Financial Product Mis-selling
Financial products such as investments, insurance, and savings accounts, as well as more complex products like interest rate hedging products, can help individuals and businesses grow and protect their assets. The institutions that sell these financial products, however, have a legal responsibility to truthfully represent them to customers, and to only sell products that are suitable for customers.
UK banks and financial institutions have a poor track record in recent years of treating their customers fairly and in accordance with the applicable regulatory standards. Most Britons have heard of the massive payment protection insurance (PPI) scandal and the billions of pounds paid to settle PPI mis-selling claims, but this is just the tip of the iceberg when it comes to improperly sold financial products.
The Milberg London team has a huge amount of experience and expertise helping investors and businesses that have been mis-sold financial products and suffered losses as a result. Our solicitors, combined with the resources and international footprint of the broader Milberg group, are well placed to do even more to address this growing problem.
Financial Product Regulation in the UK
The Financial Conduct Authority (FCA) is an independent public body that oversees the UK’s financial markets. It regulates more than 59,000 businesses and is responsible for ensuring fair and honest markets. The FCA has three main operational objectives: protect consumers, protect financial markets, and promote competition in the interest of consumers. To enforce these objectives, the FCA uses a variety of powers, including rule-making, supervision, investigations, and punishing misconduct with penalties and sanctions.
The FCA is funded by charging fees to the firms it regulates, including insurers, banks, investment fund managers, and advisories. For 2019/2020, the FCA set a budget of £537.7m. For 2020/2021, funding will increase to £587.6m.
But as well-resourced as the FCA is, it is still dwarfed by the size and complexity of the UK financial services market. According to the House of Commons, in 2018, the financial services sector contributed more than £132 billion to the UK economy—nearly 7% of gross domestic product.
PPI products were mis-sold by banks and brokers for over a decade right under the nose of the regulators, resulting in compensation to consumers in the billions. A few years later, the interest rate hedging products (IRHP) mis-selling scandal was brought to light, revealing that high street banks had again caused damage to countless individuals and SMEs across the UK with inappropriate financial products.
What is Mis-Selling?
The FCA defines the mis-selling of financial products as “a failure to deliver fair outcomes for consumers.” There are two general types of mis-selling:
- Providing customers with misleading information about a financial product. This can involve omitting key information about a product, or providing information that makes the product appear to be something it is not (i.e. misrepresentation).
- Recommending that customers purchase a financial product that is unsuitable. Unsuitability takes into account an individual investor’s financial situation and investment profile, such as risk tolerance. What is suitable for one investor may not be suitable for another.
In the case of PPI mis-selling, customers complained that they were sold coverage they didn’t need, want, or understand. While not all mis-selling is deliberate, the PPI scandal revealed a concerted effort to push the product on consumers in order to make more money for banks. You can see examples of what counts as PPI and other financial product mis-selling here.
Customer Compensation for Financial Product Mis-Selling
PPI mis-selling has cost UK banks an estimated £48bn, including £38bn paid in compensation to customers who were mis-sold PPI. The FCA calls PPI claims, “the largest consumer redress exercise in the UK’s history.”
A silver lining of the PPI scandal is that it brought renewed attention to consumer rights and financial institution misconduct. After PPI mis-selling was exposed, it was revealed that several banks—many of them the same banks implicated in PPI—had problems with the way sold IHRPs. Banks have paid more than £2 billion to customers that purchased IHRPs and suffered financial losses.
The prevalence of the financial markets in the UK economy could be fertile ground for consumer mis-selling scandals, which since 2000 have cost UK banks an estimated £67bn. The Financial Times has identified payday loans, bank-sold investments, business banking, pensions, and data as emerging areas of mis-selling concern.
With the FCA struggling to rein in the misconduct of the UK’s biggest financial institutions, well-funded law firms specialising in financial product mis-selling should have a bigger role to play in holding these bad actors to account.