This week, the Central Bank issued their Consumer Protection Outlook Report for 2016. It is always interesting to read what concerns the Central Bank regarding the advice given to people and what areas they are going to target for their inspections during the year.
The Central Bank see the absence of a consumer focussed culture as the biggest threat to achieving their objectives of “achieving long-term, sustainable and positive outcomes for consumers”. They want to see the changes from the top down.
I have to agree with them. It is a big problem, especially with the banks. Anyone who has ever lodged a large sum into their bank account will be familiar with getting a phone call from their bank, asking them if they want to speak to an advisor who will then try to sell you an investment bond.
I have interviewed with banks in the past and was amazed to be told that they have weekly sales targets. You cannot give good advice in a week! It takes weeks to advise someone on their money. These sales people are under huge pressure from top management to meet their weekly sales targets or they will not get their bonus (the basic salary isn’t great).
The Central Bank aren’t happy that the products being sold to customers are difficult to understand and the documentation is too long and confusing.
I agree with them on both points. If the product is confusing, don’t offer it as a solution to a client. Investing should not be difficult to understand, prices go up, prices go down. There shouldn’t be caveats.
I do agree that there is too much documentation but it’s the Central Bank who lay down the law on what has to be provided to clients. A lot of the information that they tell us to provide is nothing but blurb and means nothing to a client. As an advisor, I have to provide the documentation the Central Bank want me to issue and the information that is important to the client.
With deposit interest rates so low, a lot of people are looking for a higher return by investing their money. The Central Bank are concerned about clients not understanding risk and the higher costs of investing.
They are correct, clients should have more awareness of risk. There are a lot of risk profiling tools used in the market that are nothing but rubbish and do not take into account other factors outside the score they get on a test. The UK Regulator wrote a very good paper on assessing risk for clients in 2011 and the process they recommend is something that I have followed since the paper was published.
A few times in their paper, the Central Bank touch on how staff are paid and what incentives they have i.e sales bonuses. They also state that the commission paid to intermediaries creates a conflict of interest which can lead to advisors not working in the client’s best interests.
I am not against commission, it has a place. Lots of people can’t afford to pay for good advice up front and would prefer to pay by a commission structure. Clients should be given the choice of how they want to pay.
If they Central Bank feel that client’s are being given incorrect advice so someone can earn a commission, then ban them! But according to the director of consumer protection, Bernard Sheridan, it doesn’t look like that will be happening soon “We will be cautious about what steps we will take, as it can be difficult to unravel. We’re not looking at whether we’d ban commission or not”.
The Central Bank submitted themselves to a peer review of their consumer protection function by their Dutch counterparts. Their findings? “The Central Bank has exhibited a strong commitment to consumer protection and commended a number of our regulatory and engagement initiatives as areas of good practice.” Tell that to the victims of Custom House Capital …
When getting financial advice, make sure your advisor is working in your best interest. Good advisors will let you take your time to consider all the information provided, will have no problem in answer questions on fees and will help you understand any risks you are exposed to regarding any money you invest.
If you have any questions, contact me directly at steven@bluewaterfp.ie