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Financial products and the elderly
The latest report of the Financial Services Ombudsman shows that older consumers continue
to be mis-sold financial products. Consumer Choice asks why this is so and suggests ways in
which consumers can be protected.
AT A GLANCE
Why are financial
products different?
Questions to ask.
Choice Comment.
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Since the Financial Ombudsman was
established in 2005, there is one group
of consumers that continually features in
his case studies. That group is the elderly.
In fact as many as 10% of the cases he
deals with relate to financial products
being mis-sold to older consumers.
Unfortunately, there seems to be no
sign of that figure falling. Back in his
2007 Report, the Ombudsman noted that
the problem of inappropriate investment
products being mis-sold to the elderly
“continues to be a matter of concern”.
Fast forward to today and a recent review
of cases again shows that the elderly
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FEBRUARY 2010 FINANCE
continue to feature disproportionately.
This led the Ombudsman to say he was
saddened and disappointed by the
attitude of banks in their dealings with
older consumers.
Why are financial
products different?
For the Ombudsman to express concerns
about the attitudes of banks, it seems
likely that there is an issue surrounding
the way in which financial firms market
and sell their products to older
consumers. This view is supported by
evidence uncovered by the RTÉ
programme ‘Primetime’ which uncovered
clear mis-selling of financial products to
vulnerable consumers. However, what is
it about financial products as opposed to
built products that make them more
likely to be mis-sold?
The most obvious difference is the
intangible nature of financial products
and many of the services that surround
them. In addition, the product and the
service surrounding the product are
inextricably linked. Also, information
and advice are a much more critical
component of financial products than of
many built goods.
FINANCIAL SERVICES OMBUDSMAN CASE
On 14 July 2009 the Financial Services Ombudsman, Joe Meade,
published an update of cases handled by his office between
January and June of the same year. Many of the cases related to
instances where financial products had been mis-sold to the
elderly. Below is one such case.
A couple in their 70s had their life savings on deposit but were
approached by their bank in late 2005 and advised that they would
get a much better return if they took their money off deposit and
invested in a Managed Fund instead. After a short discussion they
agreed to do this and in early 2006 they invested €345,000 in
these Funds. In July 2008, the complainants were again contacted
by the bank and advised to switch the investment into cash as the
Fund was losing heavily in value. The Complainants were very
concerned about this and met with the manager of the local
branch. They stated that it was only at this meeting that the
investment was explained to them in detail and it was the first time
that they fully understood how the investment functioned. It was
only at this stage that the complainants claimed they were
informed that 70% of the investment, €245, 000, was based on
the performance of the stock market. The complainants claimed
that they had never been told this before and that they would not
have entered into an investment that was based on stock market
performance. By then, in 2008, the €345,000 investment was
worth only €265,000, invested funds of €240,000 (then valued
€170,000) could not be withdrawn for at least six months and an
early encashment penalty of €9,000 would also arise. The money
had been mainly invested in an Irish Property Fund for a period of 5
For example, take a consumer who
decides to spend €20,000 on a new car.
He or she chooses from a range of
models and can take into account the
experience of other consumers who have
the same car. The consumer can also testdrive the car and purchase it under
warranty. Provided the vehicle is well
cared for, it is also possible to calculate
its re-sale value.
On the other hand, a consumer
wishing to make an investment of
€20,000 must account for a myriad of
variables, all of which relate to
complicated and intangible concepts.
These include gauging the risk which is
inherent in most financial products.
Not only does the consumer have to
understand the risk attached to the
product, they must also assess this risk in
relation to their own circumstances.
Different consumers have different risk
profiles, with older consumers unable to
undertake the same level of risk as their
younger counterparts. In other words, a
financial product for a 25 year old
consumer may not be suitable for a
consumer in his or her 70s.
Investment age profiles (on the next
years and 9 months. They complained to the Ombudsman that the
investment was unsuitable for them.
The Ombudsman had to consider whether the recommended
investments were appropriate or not. He noted that the investors
were in their 70s; the husband was retired and had no pension; he
suffered from heart disease (from which condition all five of his
brothers had died) and was a diabetic. This personal and individual
history had been pointed out to the bank’s representatives
according to the complainants, and though the bank denied it was
aware of the specifics of the complainant’s illness it accepted that
its sales representative had been given basic information about the
health issues.
With regard to these circumstances, and to the fact that the
introduction to these products was at the instigation and initiative
of the Bank and that the sales pitch and financial review had been
carried out at the home of the complainants, the Ombudsman
found that the Bank had not exercised appropriate care and caution
in dealing with the complainants, given their age, investment
inexperience, previous investment profile and the health of the
husband. It was clear to the Ombudsman that the complainants had
misunderstood the issue of risk and the nature of the investment.
He also found that the Bank, in recommending and rushing through
these investments with an unacceptable degree of haste, had failed
in its duty of care to these customers.
The Ombudsman directed that the full amount of money paid
for the investments, €345,000, should be paid back to the
complainants in return for the surrender of the investments to
the bank.
page) gives a general idea of what sort of
investments are suitable for consumers at
various stages of life.
Questions to ask when buying
a financial product
When considering purchasing or
investing in a financial product,
consumers need to ask themselves certain
key questions. These questions apply to
all consumers but, given their advanced
years, in particular older consumers.
• What are the risks of this investment?
• Does the investment fit my risk
profile? i.e. Is the risk suitable for my
age?
• How much is the initial cost to
purchase this product/investment?
• What additional ongoing costs need to
be paid?
• How liquid is the investment? i.e. how
easy is it to turn the investment back
into cash?
• Are there any costs or penalties
associated with cashing or selling the
investment?
Of course, many consumers are reliant on
the specialised knowledge of advisors for
help with answering these questions.
However, finding the right advisor can
also be a difficult process, especially given
the differences in how advisors operate.
Some advisors are ‘tied agents’. They
work only for one company and deal in
one company’s products. Others are
‘multi-agency intermediaries’ and sell a
range of products from different
companies but receive commissions each
time they are successful in making a sale.
Consumers in need of impartial
financial advice should use a fee-based
‘authorised advisor’. This kind of advisor
offer products from all financial services
providers in the market and are obliged to
recommend the most suitable product for
you. They must act honestly, fairly and in
your best interest.
The Financial Regulator maintains a list
of authorised advisors which can be
found in the register section of its website
(See Useful contacts). Consumer Choice will
be returning to the issue of financial
advice in an upcoming issue.
Older people and financial
inclusion
While most of the emphasis remains
focused on the mis-selling of financial
FINANCE FEBRUARY 2010
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Useful contacts
Irish Insurance
Federation
Insurance House
39 Molesworth Street
Dublin 2
tel (01) 676 1820
fax (01) 676 1943
email [email protected]
www.iif.ie
Financial Services
Ombudsman
3rd Floor
Lincoln Place
Dublin 2
1890 88 20 90
email enquiries@
financialombudsman.ie
www.finanical
ombudsman.ie
Useful website
www.itsyourmoney.ie
Report by
Mark Channing cc
products, there is also an issue around
financial inclusion and older
consumers. Particularly when it comes
to insurance, there are several examples
of ageism.
The cost of car insurance, travel
insurance and hiring a car are often
dearer for older consumers, especially
for those aged over 70, against whom
premiums often seem unfairly loaded.
In some cases, older consumers may
even find difficulty in simply getting
insurance companies to give them
quotations, which acts as a barrier to
shopping around. Even where quotes
are given, there is a suspicion that high
premiums are being used as a tool to
reduce the number of older consumers
that the company covers.
This issue of financial inclusion and
insurance products is an area that the
Government needs to monitor. Driving
represents an important aspect of
independence for many older
consumers and so there are serious
social implications for those that cannot
obtain car insurance or are priced out of
the market. In the UK, a Financial
Inclusion Taskforce was set up to make
recommend and advise HM Treasury on
ways to promote financial inclusion for
groups such as the elderly.
INVESTMENT AGE PROFILES
1 Starting out (Up to age 35) People who are at the beginning of their careers and
financial lives should aim to start a habit of accumulating and saving. Individuals in this
group are expected to live for many more years, so investments in equities, which are
high risk, are appropriate. This is because over the longer-term, the extreme highs and
lows of stock markets should even out. However, in the case of accumulating savings for
the deposit for a house or new car, risk should be avoided and it should be possible to
easily turn investments into cash. Although it is many years away, saving for retirement
should not be ignored.
2 Early-midlife (36-55) This is the capital growth stage of your life. You should continue to
fund your retirement but invest in more growth orientated stocks that reinvest dividends.
As there are still a good number of years to go before retirement it is acceptable to
continue to hold a portion of your assets in riskier investments. However, if paying for
your children’s college education consider five or ten-year secure investment products
which guarantee your capital while also delivering growth.
3 Later-midlife (56-65) At this stage of your investment life, you should consider moving
away from speculative equity investments and move towards growth and income
opportunities. You should turn conservative in your investment mindset. You still want
your investments to grow but with retirement firmly on the horizon this should be at a
much lower level of risk.
4 Retirement & beyond (65+) You have hopefully arrived in a place of financial stability so
the key investment objective now is to stay there. Ideally, you are no longer making
contributions to your retirement fund but instead living on the income generated by these
accounts. Longer term investments, unless they pay out an immediate income, should be
avoided. And where such investments are made they should be carefully evaluated to
ensure they are suitable for your age. If you are a homeowner and your children have
moved away downsizing could be an option. However, be careful of equity release
schemes which can deplete your net worth.
“We agree that it is time to name and shame banks and financial institutions
found to be mis-selling to, or mistreating, their elderly consumers.... we
would also like to see an industry-wide Code of Conduct surrounding the
ways in which financial institutions deal with vulnerable consumers.”
choice comment
As it stands, the Financial Services Ombudsman only publishes information about the type of complaints he receives and does not have the power to name
the financial providers who mis-sell products. However the Ombudsman has said he would be writing to the Department of Finance asking for this to be
changed to enable him to publish the names of institutions found to have acted inappropriately. The fact that he has continually found grave inconsistencies
in how older consumers are treated over the years has undoubtedly helped to form this new position.
We agree that it is time to name and shame banks and financial institutions found to be mis-selling to, or mistreating, their elderly consumers. This
should be done while at the same time protecting the identity of the complainants. It is also imperative that the power to publish should not be watered
down so as to let financial services providers off the hook. In the UK, when the Financial Ombudsman Service was granted the power to name financial
institutions, this power only applied to companies that had 500 or more complaints in a six month period – a threshold condemned by consumer groups as
far too high. Care needs to be taken so that a similar condition is not introduced here in Ireland.
Aside from the issue of publishing the details of offending companies, we would also like to see an industry-wide Code of Conduct surrounding the ways
in which financial institutions deal with vulnerable consumers. Such a code should force banks and other providers to carry out mandatory extra checks
when older or other vulnerable consumers are sold financial products, as well regular audits of previous transactions. The Regulator also needs to play a
more active role by conducting mystery shopping exercises and other similar operations - and where breaches are found, action must be taken.
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