Financial Downfall in Disguise

Mis-sold finance has become a huge issue within the UK for both the consumer and small to medium-sized business, with hidden fees, complex terms and conditions and simply bad advice provided. What are the FCA doing to combat this and how can the issues be further resolved?

‘Mis-selling’ has been defined by the former Financial Services Authority as ‘a failure to deliver fair outcomes for consumers’, including providing customers with misleading information or recommending that they purchase unsuitable products. Examples of financial mis-selling can include: mis-sold pensions, mis-sold mortgages, interest rate swaps, risky investments or timeshare sales. And, let’s not forget the big one for consumers: PPI. We have all had the calls, asking: ‘Have you been mis-sold PPI?’ Although nine times out of ten, these are nuisance calls – and this is an issue in itself – Payment Protection Insurance (PPI) is possibly the most prominent example of mis-selling for individuals, but commercial finance such as loan pricing for SMEs follows closely behind. This leads to all manner of problems within individual and commercial finance, but what can we do about it?

The Financial Conduct Authority (FCA) has the lead role in promoting good conduct in financial markets and regulates about 70,000 firms in the UK. It is their job to ensure financial services don’t mislead customers. However, although The FCA has made multiple interventions to affect firm and individual behaviour – including introducing restrictions on bonus structures through the remuneration code, and imposing mis-selling fines totaling £298 million from April 2013 to October 2015 – a recent report by the National Audit Office (NAO) has found that it has no way of knowing whether its activities are in fact reducing the overall scale of financial services mis-selling to customers, be it individual or commercial clients.

At present, commercial finance offered to limited companies falls outside the scope of the Financial Conduct Authority (FCA) and is unregulated. Providers are, in essence, free to employ opaque tariff charges, hide fees in complex terms and conditions, and make it difficult for firms to compare the cost of finance. As a result, individual customers as well as SMEs are often misled and end up paying far more than they should, sometimes with a detrimental impact on profitability, growth and local employment.

In 2014, mis-selling accounted for 59% (2.7 million) of customer complaints to financial services firms and the bugbear, PPI alone accounted for 2.3 million complaints in 2014 – 51% of all individual complaints. The FCA’s information on complaints to firms however does not identify when the alleged mis-selling that prompted complaints took place, leading them nowhere in the pursuit of combating the issue at the source.

Amyas Morse, Head of the National Audit Office said: “Mis-selling of financial products remains a major problem for Britain’s consumers. The regulatory and redress bodies have increased the prominence of mis-selling issues in financial service firms and £22 billion has been paid out in PPI compensation since 2011. Legislative restrictions limit my access to information that the FCA holds on firms making it impossible to draw definitive conclusions on its approach. The information my staff could see, such as customer complaints, does not show any clear reduction in the extent of mis-selling. The FCA cannot be confident that its actions are reducing the overall level of mis-selling, and it has further to go to show it is achieving value for money.”

Overall, banks’ handling of complaints has been poor also, requiring ongoing action from the FCA and the Financial Ombudsman Service (the Ombudsman), which aims to resolve individual complaints between consumers and businesses. Despite working on improvements, there has been no noticeable fall in the level of complaints about mis-selling upheld by the Ombudsman in the past 5 years. Many individuals fail to receive full compensation, mainly because of a lack of awareness or reliance on claims management companies. The Ombudsman has found that many don’t pursue a complaint because they believe that it wouldn’t achieve anything, or that it would be too stressful.

Commercial finance, such as loans, is integral to the growth and profitability of SMEs, both locally and nationally, so the gaps in FCA information combined with the scam-like complexity of some finance services’ terms and conditions makes for a rather large issue for companies simply looking for the best financial options available. Victoria Raffé, former Director of Authorisations at the FCA said: “The lack of protection and transparency for Limited companies seeking finance within the current regulatory regime is a real concern – government and others must consider the potential detrimental impact this has on SMEs.”

An investigation into SME banking by the Competition and Markets Authority (CMA) recently concluded that ‘the generally bespoke nature of SME loan pricing…has meant that it is difficult to carry out an equivalent analysis of prices on SME lending products.’

The #APR4SMEs Campaign, started by SME overdraft provider, Growth Street encourages providers of commercial finance to, by law, carry clear and accurate details of Annual Percentage Rate (APR) on their financial promotions, in all forms. The idea is that the availability of this standardised price metric (including all associated charges, fees and additional costs, expressed as a single percentage) would enable businesses to take all relevant costs into account when comparing finance options.

Ian Cass, Managing Director of the Forum of Private Business, which is supporting the campaign, says: “Business owners want to focus on developing their business not wading through terms and conditions to try to work out what financial product is right for their business. Although it is limited, APR is widely understood and will help businesses to make informed decisions.”

If you or your business has been affected by mis-sold financial services and you also think APR enforcement would help to combat it, you can sign a petition on the #APR4SMEs campaign website. The website also includes an APR calculator tool which exposes the true cost of commercial finance for small businesses. Being more aware of this issue could save your business a lot of time, money and trouble.