The causes of bank mis-selling

What exactly is the culture that leads to banks selling customers products they do not need? James Ducker sheds some light on the forces at work.

by James Ducker
Last Updated: 19 Aug 2013

Bob Diamond recently broke ranks with Barclays after it dismissed the alleged mis-selling of interest rate swaps as ‘completely without merit.’ A week later, Diamond took a different approach when he said, 'I can guarantee you in some cases we have made mistakes. It's going to happen when we do thousands of transactions. When we make a mistake we're going to own up to it and we're going to fix it.'

I spent several years working on the sales floors of major banking institutions. Human error is doubtless a factor in the mis-selling of financial products; mistakes will be made when they are being sold in their thousands and banks need to address these mistakes providing proper compensation for them. 

However, I don’t believe human error to be the only factor in these mis-selling scandals. It’s easy for a bank to blame mistakes by their staff because that exonerates the institution from blame. 

The situation unfolding around interest rate swaps is an example of what can happen when things go wrong. One company, Norton Accord, which acts as an introducer to different litigation funding models for claimants, has dozens of SMEs ready to take on the banks, and is working with several different law firms. This mis-selling scandal could end up costing the banks billions.

I’ve seen incompetence from sales people, which in my opinion is caused by poor training and insufficient compliance systems in place at the banks. There is a big difference between odd mistakes from individuals, as was inferred at Barclays, and a culture in which the staff have insufficient knowledge to do their job properly. 

Another factor is pressure to make money. It is a fact that banks place a huge amount of pressure on salespeople to make profit.  Selling derivatives is highly incentivised in bonuses, kudos and promotions. 

Large targets are placed on these products and they must be met to avoid the wrath of the management. The system seems strangely skewed when sales people are under pressure and rewarded monetarily to sell a product that is supposed to be in the best interest of the customer. Looking after the customer in the right way and hitting sales targets seem to be diametrically opposed to one another. 

Although the majority of sales people correctly judge the balance between the two, there is a certain indoctrination amongst staff into the bonus culture within banks. The ostentatious, over-the-top consumerism of the Flaming Ferraris in the 1990s is in the past (we hope). However, the spectre of the doughnut bonus still haunts the dreams of sales people. In such circumstances, it’s not hard to see why some lose the plot.

Which brings me on to the final cause of bank mis-selling, and that’s the out and out cowboy! Unfortunately these characters still slip through the net, although these lone rangers who would sell their own Grandmother to make a profit are becoming rarer, they can cause a major headache to a bank – and the danger is that if they are making enough profit, the bank could be tempted to turn a blind eye. 

Bank mis-selling scandals can be eliminated, but to blame the situation on the odd mistake by staff is well wide of the mark. The FSA needs the power to take effective action that will affect the bank and the individuals themselves, and the banks need to take a close, objective look at themselves, and their compliance systems. 

James Ducker is a director of Benchmark Treasury Pricing, an FSA-regulated firm he founded to advise customers on risk management regarding FX and interest rate derivatives.

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