Press Release 4 February 2010
The Financial Regulator today published the findings of a four part examination of selected credit institutions, life insurance firms and investment and stockbroking firms in relation to the suitability of investment products sold to older consumers. The examination commenced in December 2008 and was conducted throughout 2009. As part of this examination, a mystery shopping exercise was also carried out to assess how credit institutions interact with older customers regarding the sales process for investment products.
A number of issues of concern were identified during this examination and firms should ensure that their sales processes for older people are robust to ensure only suitable products are sold. The Financial Regulator has issued its industry feedback on the findings from this exercise and firms must consider the issues identified in the context of their operations and address them through appropriate amendments to procedures. The compliance issues identified during this inspection are already subject to separate engagement by the Financial Regulator with the individual firms concerned.
A range of issues were identified during the course of this exercise and include the following:
- Despite previous guidance from the Financial Regulator on the importance of a practical definition for older customers, a number of firms still do not have a definition of an older customer. The Financial Regulator has in the past advised that 60 is an appropriate benchmark.
- In the course of the inspections, the Financial Regulator noted instances where basic client information such as income and assets/liabilities were not recorded on the fact finding documentation of firms. The Consumer Protection Code requires that before providing a product or service to a consumer, a regulated entity must gather and record sufficient information from the consumer to enable it to provide a recommendation or a product or service appropriate to that consumer. The Financial Regulator also found that all the required information regarding the assessment of suitability for investments in accordance with the Markets in Financial Instruments Directive was not on file.
- A number of incidents were also found where firms selected a default risk rating, which was not the lowest risk rating of the firm, for clients that had failed to complete a section of the Know Your Client documentation. This means that a consumer may have been allocated an inaccurate risk profile.
- It was found that not all institutions offer older customers the option of having a third party present at a sales meeting. While some older people may prefer to deal directly with financial advisers, the Financial Regulator believes that the option to have a third party present may be useful where the customer has no prior investment experience.
- In certain cases firms did not give customers any advice on the level of emergency funds that should be maintained to provide for medical or other long term care expenses. The Financial Regulator recommends that firms refer to the need for an emergency fund, to ensure that customers have access to sufficient disposable funds in the event of a requirement for future health care needs or other potential unforeseen events.
- Some statements of suitability reviewed during the inspections were generic in nature. The Consumer Protection Code requires that the written statement of suitability provided to a consumer sets out the reason why a product or service offered to a consumer is considered to be suitable to that consumer.
The Mystery Shopping Exercise was conducted by an independent third party appointed by the Financial Regulator in selected banks and building societies. While a number of matters were identified as part of the mystery shopping, the results of this exercise were generally better than the inspections, primarily because thirteen of the fourteen mystery shoppers, who had a profile of between 72 and 79 years of age, were recommended a deposit where the term was no longer than three years. However, in four cases, discussions took place regarding products that could not be accessed for up to six years which is of concern given the age profile.
The Financial Regulator has already taken a number of steps in relation to the weaknesses identified as this examination continued, which include, requesting firms to conduct an independent assessment of certain files regarding products sold to older customers, engaging with all firms where there were findings as a result of inspections conducted and providing feedback on positive practices.
Any breach of a legislative provision or regulatory requirement, such as the Consumer Protection Code, may be considered under the Administrative Sanctions Procedure.