Article by Laura Jenkins and Paul de Villiers
26 March 2012
Despite the high street propaganda, gone are the days of being on first name terms with your bank manager and popping in for a quick chat about your personal finances. Like much of the high street, the banks have commoditised their products and have adopted (at least as far as their retail customers are concerned) what may be viewed as a pile them high, sell them cheap approach. Such an approach is evidenced by their sales techniques and the numerous 'introductory discounts' on financial products now on offer.
Of course, ultimately, a bank is a business. The question is whether the retail customer should expect a higher standard of care when buying a financial product from a bank than when buying their weekly groceries. The Financial Services Authority (FSA) believes they should.
So, what guides how a bank treats its customers? The relationship between a bank and its customer is regulated by the Financial Services and Markets Act 2000 (FSMA), the FSA handbook rules (ICOBS/COBS), the FSA principles and other regulatory rules and codes as well as decided case law.
One of the four objectives of the FSA under the FSMA 2000 is securing the appropriate degree of protection for consumers. The principle of 'treating customers fairly' should be embedded within the business models of all firms regulated by the FSA. The FSA seeks to impose on banks a much higher level of such care than that expected at the supermarket checkout.
One way in which this relationship is regulated is by ensuring that the banks differentiate between the financial sophistication of their customers and tailor their services accordingly. In relation to investment products, the specific obligations on a bank hinge upon the type of customer with which it is dealing. The Markets in Financial Instruments Directive (MiFiD), incorporated into the FSA Conduct of Business Sourcebook (COBS) in 2007, requires banks to categorise their clients as: retail clients; professional clients; and eligible counterparties (ECP).
Those falling within the retail category - the less experienced, knowledgeable or sophisticated investors - will be afforded a higher level of protection than that afforded to investors in the professional or ECP categories. Ultimately the categorisation rules are based on the premise that the less knowledgeable you are, the more you need to trust your bank and therefore the higher the standard of care expected of them. The recent decision in Bank Leumi (UK) PLC v Linda Joy Wachner  EWHC 656, however, illustrates that it is the bank itself that decides how knowledgeable you are. Their categorisation of a professional client is not required to be objectively correct; instead a client must satisfy a qualitative and quantitative test undertaken by the bank.
That said, in the majority of cases, the consumer will generally be classified properly as a retail client and accordingly should be afforded increased protection.
The banks are commercial businesses whose ultimate aim is to maximise profit for their shareholders. In their drive for greater profits, the banks have focused increasingly on how to sell more products to retail customers.
However, in recent times some banks have been found to be selling products to retail customers in ways that are unfair, unclear or misleading and in breach of the FSA principles (see box below).
These methods of unfair selling, which put the bank's bottom line before the customer's best interests, are evident in and formed the basis of R (on the application of the British Bankers' Authority) v The Financial Services Authority and another  EWHC 999 (Admin).
As mentioned above, PPI is often sold alongside loans and new credit card accounts. Essentially, the borrower buys insurance to protect their repayments in the event that they become unable to pay them. A premium is paid for the insurance. There is nothing wrong with PPI in itself. It is the manner in which it was sold to retail customers that has caused the furore.
On 10 August 2010, the FSA published policy statement 10/12: The assessment and redress of Payment Protection Insurance Complaints. It comprised what the FSA described as a "package of measures" stemming from its serious concerns about the widespread weakness in previous PPI selling practices to the detriment of many retail customers several of which were referred to the Financial Ombudsman Service (FOS). At the year ending 31 March 2009, the FOS had upheld 89 per cent of PPI complaints referred to it.
The BBA brought proceedings in the Administrative Court seeking a judicial review of that statement. One of the BBA's grounds was that the FSA and FOS could not lawfully interpret the FSA principles to "contradict or augment" specific regulatory rules (in this instance, ICOBS). The BBA argued that the banks had been applying the ICOBS rules and that the principles were only to be applied where specific rules do not exist.
In April 2011, the court decided otherwise. The fact that a specific rule exists does not prevent the banks from having to consider the principles; the principles are "the ever present substrata to which the specific rules are added". If liability (not only to the FSA but to an individual customer) can flow from a breach of the principles then this means that a bank must not only comply with the letter of the rules but (like an MP or government minister) it will be in trouble if it does not also comply with the spirit. This imposes a higher obligation on the banks to treat customers fairly and put their customers' needs before their own financial interests.
As a direct result of the decision in the BBA case, the banks are now experiencing a deluge of mis-selling claims. The banks have had to make substantial provision in their reserves for compensation. Although the number and size of mis-selling claims are unknown, it is estimated by the Telegraph that claims against the banks involved in the mis-selling of PPI alone could exceed £10bn. Such mis-selling has spawned a number of 'claims management companies' who are seeking to cash in.
To prevent future claims, the banks need to review how they sell their products to customers and whether their selling techniques comply with not only the specific rules, but also the more general principles applied by the regulators. The banks are now seeing regulators 'bare their teeth' more frequently than in the days of plenty. The slick sales patter of the banks' call centres is approaching its shelf life and there may be a need to bring back the bank manager to restore trust in UK retail banking.
Unfair, unclear or misleading
Some banks have been found to be selling products to retail customers in ways that are unfair, unclear or misleading and in breach of the FSA principles, including:
1. Assumptive selling
A term used when sales advisers are encouraged to include an additional product to that requested in the initial quote given to the customer. Often where assumptive selling practices are used, the customer is not informed that the additional product is optional; for example, payment protection insurance (PPI) being attached to new credit cards or bank loans.
2. Pressure selling
This involves the deliberate 'pushing' of a product whether it is appropriate or not and therefore a failure to take into account whether or not the product is suitable to a particular customer's needs. Banks have also been found to train their advisers to handle objections raised by customers who do not consider a product to be appropriate for them.
In many cases, bank staff were incentivised to sell products irrespective of whether they were appropriate for the consumer. In the case of PPI sales, many banks disproportionately rewarded sales by ensuring that sales advisers could achieve bonuses that were often several times greater if PPI was 'bolted on' to the primary loan or credit card.
3. Misleading advice
Banks have been found to have actively misled their customers as to the true cost of a product being purchased. They have also advised customers to purchase products for which they are not eligible and failed to disclose significant exclusions and limitations in policies and products purchased.
This is particularly evident in the mis-selling of 'packaged' current accounts. These accounts, for a monthly fee, include various insurance products alongside the current account services, often irrespective of whether or not that particular customer needs or is eligible for that insurance cover. On 27 October 2011, as a result of numerous complaints, the FSA finally issued new rules enforcing stricter requirements on banks that sell 'packaged' current accounts. Banks must now check whether customers will be able to claim on a policy and explain the details of the policy to them at the time of purchase.
This article was first published by Solicitors Journal on 27 March 2012 and is reproduced by kind permission.