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15 financial risks for investors and savers
The Financial Services Authority has warned about 15 risks that consumers face from financial services; ranging from buy-to-let fraud and mis-selling to greedy advisers and bad banks.
Complex and risky products, mis-selling and unfair mortgage terms are among the 15 biggest risks consumers could face this year when dealing with financial companies, according to the City regulatorIn its Retail Conduct Risk Outlook paper, the Financial Services Authority (FSA) said investors and savers were struggling with the effects of a slower economy, low interest rates and poor investment returns.
It noted that as consumers tried to save more and pay off their debts they were at increased risk of being sold unsuitable products that are too risky, they do not need or that they do not understand.
The areas the regulator is most concerned about are:
1. Cost cutting leads to mis-selling
The FSA is concerned that cost cutting within banks and building societies will lead to product mis-selling and an increase in staff being incentivised to cross-sell. It warned that staff remuneration and reward schemes could be a driver to consumer detriment.
2. More complex products
Low interest rates and volatile markets could increase the number of complex and risky products being made available to consumers. It made particular mention of structured products, trade life policies, unregulated collective investment schemes and exchange traded products.
3. Advisers' commission grab
The requirement for financial advisers to ditch commission and operate a more transparent business through new legislation known as the retail distribution review (RDR) could see advisers rush to grab as much commission as possible before the new rules are implemented on 31 December 2012. The FSA also warned that consumers must ensure they receive on-going financial advice from their adviser if they are paying for it.
4. Insurance standards
The regulator has noticed that ‘benefits and cover in some general insurance policies are being eroded relative to the standard that consumers have come to expect, while additional administration and cancellation charges are also being introduced’.
The payment protection insurance (PPI) scandal has also left its mark, with the FSA concerned new protection products will be created that do not serve consumers well.
5. Governance of funds in life insurance companies
The FSA is worried that life assurance funds are failing to maintain the stated risk profile, putting consumers' money at risk. It said that inadequate disclosure may mean the consumer may not understand the risk they are taking.
6. Distributor funds
This risk is posed by independent financial advisers that run their own funds, known as ‘distributor funds’. The regulator is concerned that the distributor funds do not have sufficient systems and controls to guard against risks because of their size.
7. Inadequate complaints handling
Consumers are exposed to detrimental treatment if their complaints are not dealt with speedily or if the complaints are unfairly rejected. The FSA highlighted the banks' poor record of complaints handling, particularly in relation to PPI, that had led to widespread consumer detriment.
8. Investment propositions
The use of platforms and wraps by financial advisers is of concern to the FSA. Platforms and wraps are a type of technology used by advisers to aggregate all of a client's investment, savings and pension information and enable the adviser to invest and move your money and invest it easily. The FSA is worried that consumers’ assets will be placed on a platform as a default even though it is not suitable.
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