# >>Banks accused of mis-selling investments to elderly



## Brendan Burgess (27 Jan 2004)

*>>Banks accused of mis-selling investments to elderly*

_By Niall Brady, Sunday Tribune, 25 January 2004_

Hundreds of pensioners may have lost a significant proportion of their life savings in recent years after being advised by their banks to switch their money out of safe deposit accounts and into risky investment products. While the full scale of the looming mis-selling scandal is still unknown, it is being investigated by the government’s new financial watchdog, the Irish Financial Services Regulatory Authority (IFSRA). 

One Sunday Tribune reader has lost more than €20,000 after AIB advised him to switch his savings into a fund that tracks the performance of Europe’s top 50 blue chip companies. Many are former state-owned phone companies and, just like Eircom, they were hammered in the stock market crash of 2001 and 2002. The bank gave the advice even though the 71-year-old pensioner made it clear that he only wanted a low-risk investment and had never previously invested in anything that did not offer cast-iron guarantees.

 Eddie Hobbs of the Consumers’ Association of Ireland, who presents the “Show me the Money” programme on RTE television, is currently representing a number of elderly people who suffered serious losses after taking their banks’ advice. They include the family of a woman who, at 90 years of age, was advised by her bank to lock up her savings in a ten-year bond. The woman is now dead and her family cannot access their inheritance without incurring swinging exit penalties. “A lot of elderly people have a huge degree of trust in banks, failing to recognise that banks have changed fundamentally in the last 10-15 years,” Hobbs says. “Banks are now more akin to financial car salesmen and these people are like sheep to the slaughter. They are a soft target and, once the banks had hoovered up investment business from their other customers, they started hitting the elderly depositors. An extra duty of care should have been given to them and senior management has a lot of questions to answer for allowing elderly people’s money to be moved out of deposit in this way.” 

A lifetime customer of AIB, the Sunday Tribune reader was persuaded to invest €76,184 (IR£60,000) in August 2001 in index funds managed by the bank’s insurance subsidiary, Ark Life. These tracked the Euro Stoxx 50 index but, unlike previous tracker bonds in which our reader had invested, the index funds only offered limited capital protection. This meant that AIB was only willing to protect him from the first 12% fall in the index. After that, investors were on their own, exposing them to an unlimited downside when the stock markets crashed. This was a fatal flaw for a product that was described during the sales process as “a type of tracker bond” even though it failed to provide the full money-back guarantees normally associated with tracker bonds. When the bond matured in August 2003 its value had plunged to €55,319, giving a loss of €20,865. The news came as a bitter blow because, even though AIB had issued annual statements of benefits throughout the investment, it never provided an up-to-date valuation. “I am now 71 years of age and have lost over €20,000 of my life savings on this investment,” our reader says. “I feel AIB acted completely inappropriately and recklessly in selling this investment bond to me.” He is especially angry because of the “fact find” that AIB undertook before the investment was made clearly states that he had no appetite for risk. “AIB failed in its duty of care to me, as a long-standing customer, by recommending a very high risk and totally inappropriate investment bond, by failing to determine my attitude to risk, and by not taking into account my investment experience, age, retired status and recent bereavement.” 

AIB accepts no blame and is refusing to compensate our reader for his losses, adding that “the negative outcome resulted from a decline in stock markets which was outside the bank’s control”. After several months of battling unsuccessfully through AIB’s internal complaints procedures, he has finally taken his case to insurance ombudsman Caroline Gill. “This was marketed as a low-risk investment but it was clearly indicated that there was some risk,” said an AIB spokeswoman. “History shows that it didn’t go the way it should have.” She added that the bank could not comment further while the complaint was being examined by the ombudsman. 

Our reader believes that AIB is deliberately dodging its responsibilities. “If we were to take their line of argument it would imply that AIB is selling investment products on a caveat emptor basis, where no account needs to be taken of the client’s stated attitude to investment risk and circumstances and it’s up to each client to decide if the product is suitable for themselves, and if they don’t see the risks involved then that’s their own fault.” The marketing literature did indeed spell out that “your investment in the AIB index fund could fall in value over the chosen period - and you may not get back the full amount you invested”. But the product was clearly labelled as a “low risk” investment and all of the warnings were dwarfed by illustrations of how the Euro Stoxx 50 index had surged ahead during the bull markets of the 1990s. Potential investors would have had to scrutinise the small print to learn that “past performance is not necessarily a guide to future performance” and that “index values can fall as well as rise”. In this case the index lost almost half its value over the two years of the investment. 

According to one investment expert, our reader may not have been an isolated victim. He believes that AIB may be guilty of systematic mis-selling because it described its index funds as low risk even though everybody who invested in them in 2001 is certain to have lost a substantial portion of their savings. 

A similar scandal erupted in the UK last year, where thousands of pensioners lost heavily after being persuaded to move their savings into precipice bonds, which promised attractive returns but blew up in investors’ faces when stock markets began to nosedive. The scandal has already led to financial watchdogs slapping a £100m (€140m) fine for mis-selling on Lloyds TSB Bank. Similar fines may follow in Ireland if IFSRA chooses to protect consumers using the considerable new powers at its disposal. 

Have you or an elderly relative been sold an unsuitable investment product by a bank or its insurance arm? Tell the Tribune on 01 631 4334 or write to us at 15 Lower Baggot Street, Dublin 2.


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## Aegonite (27 Jan 2004)

*Above*

Typical fare from Niall Brady who is often on accurate on these things. I hope Mr Brady's fishing yields a few further cases.

I don't have misselling examples but I am aware of the substantial increase in attention on older couples deposits over the past three years. Before 2000 Bank branches were disinclined to introduce the older customer to their hungry sales staff at so called private banking divisions, and Life arms but that noticably changed. I wasn't at all surprised at Mr Brady's article, and brendan is equally correct to pursue it.


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## Dogbert (27 Jan 2004)

*Ark Life*

Cheers, Brendan - apologies that you got there before me in posting this. This product pre-dates the IFSRA Fining and shaming procedures, but as the article states individuals who believe the product was not appropriate for them or was misrepresented can, and are, taking their cases to the Insurance Ombudsman. It'll be interesting to see how they get on.

I'd also remake the point (less personally this time) that to an outside observer it ill behoves Ark Life to take potshots at other firms' products while they have skeletons like this in their own cupboard.


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## Noah (27 Jan 2004)

*Shoot the Messenger*

_Doggie_, does your swipe fall under this favourite defence of Mr Ed (remember when the industry was doing its damnest to stop him slaying the ME dragon)?  

I suspect that you are close enough to the underlying financial economics i.e. the value of put options (which is a measure of the risk inherent in the particular product and was quite small at the time) versus the quite starkly inappropriate nature of the latter day GTs, to realise that, as the _Boss_ has already stated, there is absolutely no comparison between the two situations.

Hence my opening comment questioning the genuineness of your shot which I think you to be a cheap one and certainly a very far fetched one.


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## Brendan Burgess (28 Jan 2004)

*Re: AIB  accused of mis-selling tracker bonds*

“AIB failed in its duty of care to me, as a long-standing customer, by recommending a very high risk and totally inappropriate investment bond, by failing to determine my attitude to risk, and by not taking into account my investment experience, age, retired status and recent bereavement.” 

If this is a verbatim quote, the customer seems very articulate and knowledgeable about investment issues and I would have little sympathy for them.

Likewise, I have no problem in advising pensioners to invest in equities instead of deposits. Equities are less risky. More volatile but less risky.

If someone aged 90 was sold a ten year bond, they should be compensated. I am surprised that the bank involved is even arguing the case. If there is systematic misselling, then heads should roll in the bank.

Likewise, if the advertising literature described any equity based investment as low-risk, then heads should roll.

I would argue that anyone selling deposits as low risk is misleading their customers as well. But I suppose it's not up to advertisers to change the opinions of the public to the riskiness of deposits.

Brendan


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## Bernie (28 Jan 2004)

*AIB*

Brendan,

I've little doubt that the quote mentioned was written by a legal representative. 

The selling practices of the bank are nothing short of a scanal and heads should indeed role.  Too many cases have passed my desk on this.

One example: 

An elderly lady came to see me and wanted 33% medium risk, 33% relatively safe, and 33% "no risk" with her redundancy money.  She was very clear on this. 

She went to one of the private banking outfits first.   

Medium Risk        Canada Life's Focus 15

Relatively Safe    International Equity fund (100%) 
                        from the private bank's fund 
                         management branch.

No Risk              Managed Fund of (can you guess?) 

My own assessment of what she needed differd greatly.  In fact she ended up putting the entire fund on deposit (against my advice it has to be said).

One of many that have crossed my desk. 

Bernie


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## 10romans (1 Feb 2004)

*AIB tracker sales to the elderly*

Brendan are you not being a bit hard on the older customers in the Niall Brady article.   Even if they got some legal advice it would not compare with the legal 'might' available to AIB.  The knowledge imbalance between the customer and the bank is also huge.   Even if the paperwork and trails are 'compliance clean' you have got huge sympathy for the elderly customers here - David V Goliath?


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## Brendan Burgess (1 Feb 2004)

*Re: AIB  accused of mis-selling tracker bonds*

Hi 10Romans

Whoever advised a 90 year old to invest in a 10 year product, should be sanctioned.

I advise elderly people to invest in the stockmarket. I point out the risks to them. I point out that it is less risky in the long term than deposits. 

I suppose deposit accounts should carry a warning that you will lose money if inflation exceeds the rate of interest you receive. 

But as AIB were presumably not arguing this point, if they recommended an equity product as low risk, they should be sanctioned. If the customer was not made aware that they could lose money, then AIB should be sanctioned.

I think that the Ombudsman or IFSRA will sort this out and AIB's legal might won't be of any advantage to them.

Brendan


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## bubbles (2 Feb 2004)

*older people and investments strategy*

Brendan, I understand that inflation will automatically erode savings/capital, if the rate of interest being paid is less than the inflation rate.

However, I don't quite understand your thinking on advising elderly people to invest in equities.

Firstly, from what age is one "elderly" ?  I noticed in France, they now talk about  a Fourth Age group (from 70 onwards?)

Secondly, as you point out, equities are volatile, sometimes, very volatile.  Let's say an older person's  (from 55 onwards)  investments go down by 40%:  unless the stock market has a strong and quick recovery,  it's going to be a long time before the losses are recouped and some income is derived from the investments.

An older person does not have the time to wait for equities to recover; if investments are needed to produce a yearly income to boost a pension, I don't see that deposit accouns are going to be such a bad option, particularly if inflation is relatively low and interest rates more or less the same as the inflation rate.

The above is purely intuitive, I have not done any calculations (could not do them, anyway!)

Bubbles


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## Brendan Burgess (3 Feb 2004)

*Re: AIB  accused of mis-selling tracker bonds*

Hi Bubbles

Lark shares your reservations 

Brendan


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## Huzz (8 Feb 2004)

*Niall Brady Follows Up*

Todays Tribune makes for pretty cringing reading if I was a senior exec responsible for a push into the old folks market. This appears very serious indeed or am I misreading the situation. Surely IFSRA should be launching a full scale inspection of the banks DSF


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## Huzz (8 Feb 2004)

*Old Folks and investments*

Buzz, you are reading it correctly.  And yet AIB seems to have been merely following the Gospel according to Brendan.  

What Bren misses is that old folk can learn to manage the slow theft of inflation but find it very hard to live with a sudden plummet in there investments, no matter how theoretically appropriate the advice may have been.


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## Brendan Burgess (9 Feb 2004)

*Re: Niall Brady Follows Up*

Hi Huzz

It is very difficult to explain to elderly people that they should invest in equities. But I do think it is the duty of advisors and commentators to encourage them to do so.

Brendan


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## Sally (9 Feb 2004)

*Brendan*

Brendan, sometimes I give up on some of your thinking. It seems a little too purist and out of step with people, on a human level quite often.

For example I agree that elderly people in theory should have a good exposure to equities, but try communicating that to a 75 year old lady who has a heart problem, and no past experience whatsoever in shares - because thats reality. Most elderly people DONT WANT swings in capital like 30% on the downside - they just don't, and arguing the point to the contrary is simply feeding bank justification for ripping them off for management fees.

Elsewhere you argue that people should view their home as an investment asset and favour agressive trading up against buying rental property. Once again this is a fine theory, and workable by some of the more mechanical thinkers among us, but IN REALITY, most people reach a point where they are happy living where they are, and simply DONT WANT a bigger house somewhere else. I know lots of wealthy people who've made millions in property but never traded up because they and their kids were perfectly content where they were.

Brendan, honestly, before making some of your pronouncements you could first ask yourself if you are being a little too puritanical, or extremist in your view of the world. Moderation does have a payback too, because people prefer common sense, things that fit them, not fit a textbook. I make this comment by the way to be helpful.


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## 10romans (12 Feb 2004)

*aib and old people inequities*

Brendan, 
It is hard to argue against good theory!  But I fear that in situations like those described in the Tribune the theory (and even the paper trail) is fine, but the practical reality of the old peoples experience does not live up to the theoretical standards.   Most of us live in the practical not the theoretical world!

Is this a stupid question? Would the margin made by the bank be better or worse with equity based investments or deposits.  If it is better does this shed any light on what was really going on.    If it is worse, then maybe there is less to the stories from a commercial/financial  viewpoint but the question of competence would still apply.


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## Unreg (15 Feb 2004)

*.*

Tracker bonds are crap in general, especially if one borrows to invest in them.

Forgive me for such a sweeping statement, however I have experience of working in a financial institution where such products were structured.

Basically we took off all the commission that would be paid on a tracker, leaving 93 or 94 pence in the pound. We then rang around some london investment banks to see what they would offer us after 5 years for that. They typically would give us some formula including most of the growth on a index which was expected to stagnate (such as the Nikkei) along wth various others. Of course the dividends for the 5 years were ignored.

I am sure the London bank took another 1 or 2 p in the pound.

After all this, you were down about 8% before you started. If you borrowed to invest, you were typically paying about 5% over base rate = 25% over 5 years.

This means you pay 35% or 7% a year ** just to break even**.

Just decide what your risk profile is, then invest X% in stock market, and (100-X)% in tax-efficient low-risk  savings such as instalment savings / building society certs / SSIA / etc.

I would love to be able to structure fairly-priced trackers (e.g. EuroStoxx/S&P 5-year forwards with 90% guarantee via rolling put options, plus dividend rollup).
Apologies if the above is double-dutch, but I think too many brokers and banks are creaming commissions.


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## Harry (16 Feb 2004)

*Unreg*

Thanks. Just about the best comment I've ever read about what's happening behind the scenes.


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## Henry (16 Feb 2004)

*I cannot believe it*

Unreg has hit the nail on the head.  These Trackers are dubious at the best of times but for AIB to actually lend folk, and old folk at that, the money to invest in them is shocking.


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## Tracker (13 May 2004)

*From RTE.ie ...*

From RTE's website this morning:

Elderly customers repaid for product mis-selling - Several Irish financial institutions have been forced to repay money to elderly customers who were allegedly mis-sold investment products, reports the Irish Times. The Ombudsman for the Credit Institutions, Gerry Murphy, has made a number of findings against financial institutions in recent weeks. Most relate to the sale of high-risk or long-term investment products to elderly or infirm people. 'You have cases where elderly people are being asked to invest their life's savings into what, in any view, are totally inappropriate products,' said Mr Murphy. Mr Murphy, who is unable to identify particular transgressors but can award compensation of up to €100,000, said he had taken a particularly hard line on banks that had been caught inappropriately selling derivative-based products.


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## Brendan Burgess (14 May 2004)

*Re: Unreg*

That's very interesting. I presume that by "derivatives-based products", he means trackers?

If anyone has received one of these Ombudsman's decisions, I would love to see the details.

Brendan


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