Should You Trust Direct Consumer Deals with Banks Insurers Lenders?
Published / Last Updated on 01/02/2024
We shot a video over 10 years ago about trusting banks. We have revisited the subject given the Retail Distribution Review (RDR) that started on 1 January 2013 that has clearly influenced how banks, insurers, mortgage lenders, online pension/investment platforms and mortgage lenders offer services to consumers.
Impact of RDR
- Financial advisers must have minimum qualifications up to National Diploma level (equivalent of 1st year degree course) and be progressing to Chartered status e.g. Chartered Financial Planner or Certified Financial Planner (equivalent to 1st Class Honours Degree).
- Commissions were banned for financial advice on pensions and investment and must be carried out on a fee basis. Fees must be disclosed to consumers before agreement to proceed with any advice. The agreed fee can either be paid direct or by deduction from the pension or investment fund value.
- Full commissions can still be paid for non-pensions and investment works such as mortgages, equity release, life insurance, income protection insurance, private medical insurance, and general insurances such as home, motor, or commercial.
- Full commissions can also still be paid on pensions and investments where no advice has been given. Be careful of ‘direct to consumer’ deals where you chose/select your own pension and investment as no advice has been given, so you have no ‘comeback’ as you self-selected rather than an agreed fee where you seek advice for the same.
We suggest most property landlords should have a mix of both buy to let and holiday property to spread the risk of upward or downward turns in either sector.
Trusting a Bank with Cash Deposits?
- Banks and building societies are custodians of you cash deposits with strict regulations from the Prudential Regulatory Authority (Bank of England) and the Financial Conduct Authority on capital adequacy, toxic debt, risks of insolvency, money markets, charges, information disclosure and more.
- Bank deposits are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per banking licence or £170,000 for a couple with a joint account.
- Any more than this is not protected.
- Have you ever received a call or a letter from your bank telling you that about moving your cash from one account to another? Sometimes?
- We therefore do trust individual banks and building societies to a certain extent with our cash deposits.
Trusting a Bank with Pensions and Investments?
Given RDR above and the requirement for financial advice on pensions and investments to be delivered by qualified financial advisers and a fee (rather than commissions) to be agreed with the consumer before any works are undertaken, many banks, insurers closed their advisory arms and set up (if they had not done so already) direct to consumer arms to sit alongside other direct to consumer mortgage, insurance, pension and investments platforms.
Some kept their adviser arms, but most did not. By not offering advice, as you know this means that full commissions can still be taken, and no qualified adviser need be involved with Direct to Consumer (D2C) offerings:
- Finance companies ask you a series of questions or simply information and an application form online or by post.
- Dependent upon your answers to those questions, a list of products that meet your criteria will be offered.
- You then choose the product or service that best suits you.
- You have selected your preferred option for an ISA, general investment account, pension, equity release, mortgage, or life insurance.
- No regulated financial advice has been given.
- No qualified adviser has been involved.
- No liability for the selected product is accepted for the suitability of the product in these circumstances.
- Full commissions may be paid to the bank, insurer, or pensions/investment platform.
- How often has your bank or pension company or insurer contacted you to tell you that you can a lower charged or more flexible investment/pension with them? Unlikely.
The simple answer therefore is we do not trust banks, insurers or direct to consumer platforms for mortgages, pensions, and investments. Things are getting better now with Consumer Duties rules.
Good Consumer Outcomes – 4 Key Pillars of ‘Consumer Duties’
New Consumer Duties require all financial firms (whether advised or non-advised ‘direct to consumer’) to ensure that:
- Governance of products and services - is the financial business being run with the right approach for consumer ethics and employee welfare too?
- Price and value – is the charge a fair reflection of costs for works and time involved as well the liability taken on? Is it value for money?
- Consumer Understanding – what is the client’s knowledge and experience of finance, should they really have that expensive, complex product if they have little understanding?
- Consumer Support – what is both initial and ongoing support for the client? Is the financial adviser ensuring continued support and access to support for their client?
This has tightened up requirements for all financial firms to ensure that the product or service offered is supposed to be clear, fair, not misleading and is value for money, so banking and insurance groups as well as financial advisers must ensure compliance with the same but we still suggest you should be very careful of commissions and higher charges with no advice protection when you go direct to banks, insurers and investment/pension platforms direct.
