Is it time to cuff the banks?

It’s not surprising that the public holds the UK financial services industry in such low esteem. Over the past few decades, it’s given us mis-selling scandals in the pensions, endowment, payment protection insurance sectors – and more.

And the problem’s as alive today as it’s ever been. At the end of January, Barclays became the latest big brand to be exposed for mis-selling investments – resulting in a fine of some £7.7m.

How to stop mis-selling

Since its creation over 10 years ago, the Financial Services Authority (FSA) has talked about its aspiration to be more proactive in preventing these crises. Yet, while it’s become slightly better at handing out fines, it’s still no better at stopping mis-selling at the source.

FSA chairman Lord Adair Turner, wants to be the man to fix this. In January, he published a paper that raised the possibility of taking much more radical action to tackle mis-selling.

In place of the regulator’s current reactive approach, Lord Turner suggests that entire categories of investment products could be banned.

Can’t trust the banks

Although banning products may be a bit heavy-handed, drastic action is needed if we’re actually going to see results. But perhaps rather than outright bans, a more workable solution would be to ban the sale of particular products through certain channels. For example, stopping banks selling certain types of investment.

High-street banks have proven that they can’t be trusted to give appropriate investment advice. As our bank advice investigation showed again last year, the odds of customers being sold an unsuitable product or investment bond are unacceptably high.

If banks were restricted to selling basic investment and insurance products, it would be much more difficult for them to mis-sell. So, for instance, the default recommendation for customers looking for a home for their cash would simply be a savings account.

Go to independent financial advisers

Although some will argue that this would remove choice, it may have the opposite effect. Investors who were unhappy with the low returns they were achieving from their savings may be more likely to seek professional advice from an independent financial adviser (IFA) elsewhere.

Although IFAs may not have a perfect track record, the scrapping of commission on investment advice in 2013 should help them onto the straight and narrow.

For those who stay with their banks, the worst that could happen is that their money wouldn’t be working as hard for them as it might do elsewhere.

Banks have had the chance to prove they can be responsible in the investment market. Putting them in handcuffs may be the only way that we can ensure they’re treating customers fairly.