FSA concern at mis-selling of products, Published on Sunday 15 April 2012 20:22 INVESTORS targeted by bank-based wealth management services have been warned to tread carefully after new evidence emerged of poor practices and bad advice in the sector, writes Jeff Salway More people are being "upsold" into wealth management and private banking services as high street institutions seek to bolster revenues and tie down their more affluent clients. But some firms are exploiting demand from savers hit by inflation and low interest rates by mis-selling high growth, high risk products, it is claimed. The Financial Services Authority (FSA) has labelled private banking and wealth management as an "emerging risk" and warned of potentially "widespread detriment" resulting from a sales culture in the sector. The City regulator expressed concerns over the complex products being sold to savers and investors. It said some firms were failing to ensure suitability and check that their recommendations reflect the customer's risk appetite or circumstances. Low interest rates had created "strong incentives" for banks to sell products targeting higher levels of returns to retail investors "without adequately understanding or disclosing the risks," according to the FSA's latest retail conduct risk outlook. It said: "Banks inappropriately sell wealth management products to affluent and mass-affluent consumers, either by up-selling them into private banking or by offering them via their retail banking arms." The warning follows a damning FSA review of the wealth management sector last year, which found that of 16 firms investigated, 14 were investing in a way that posed a high or medium-high risk to the detriment to their clients. The FSA is carrying out a deeper review that could result in a crackdown on firms found guilty of unsuitable advice. But the waters are muddied by the fact that a wide range of firms operate under the wealth management banner, from highly qualified financial planners and advisers to so-called wealth services operated by high street banks and insurers. All of the big high street banks now promote wealth management and/or private banking services. "There's an Emperor's New Clothes element to the bank wealth management propositions," said Alan Dick, financial planner and founder of 42 Wealth Management in Glasgow. Wealth management should have a culture of looking after people and not just selling stuff. The FSA warned that bank customers shifted into private banking or wealth management services are being sold complex products unsuited to their needs. One study by the regulator last year concluded that of 11 banks examined for their risk profiling effectiveness, nine fell short of the expected standards. Iain Wishart, chartered financial planner and owner of Wishart Wealth Management, claimed the risk profiling approaches used by many wealth managers and private banks were "fundamentally flawed." "The investment risk process and questionnaires usually involve seeing what is the maximum level of risk clients will be prepared to accept," he said. Structured products manufactured by the banks themselves are especially prominent in some wealth propositions. Dick said: "The banks, including private banks, are selling so many of these as the margins on them mean it's a cheap way to raise revenues at a time when they are under pressure to boost their capital reserves." Structured products typically promise to protect the saver's capital while providing some exposure to stock market growth. Sales have soared over the last three years as high street banks in particular have targeted savers looking for more return than that offered by cash accounts. "Many wealth managers, including those working for private banks, actively target their advisers to sell the product and make high profit per client," said Wishart. "Often these profits can only be achieved through "churning" - moving one product to another and using short shelf life products that will mature - and then can be reinvested taking a further set of high charges and commissions a few years down the line." All of this is has to be viewed in the context of reforms coming into force next year - under the retail distribution review (RDR) - governing the way in which financial advice is accessed, delivered and paid for. The shake-up, which is expected to result in the IFA market shrinking significantly, will include a ban on providers paying commission to advisers for selling their products. The regulator, which fined RBS-owned Coutts private bank £6.3 million last November for investment mis-selling, hopes the changes will reduce the sale of unsuitable products by advisers targeting high commissions.