Despite various recent warnings over suitability, the investment advice doled out by UK banks and building societies is still a cause for concern in a quarter of cases, a new report by the Financial Services Authority has revealed.

Despite various recent warnings over suitability, the investment advice doled out by UK banks and building societies is still a cause for concern in a quarter of cases, a new report by the Financial Services Authority has revealed.

Between March and September of last year the UK regulator carried out a “mystery shopping” exercise in which 231 “shoppers” went to six major firms in the retail banking sector saying that they wanted to invest a lump sum. In 11 per cent of these instances, the evidence suggests that the advisor gave the customer unsuitable advice, while in 15 per cent of cases the evidence suggests that the advisor did not gather enough information to make sure their advice was suitable – this of course is a significant failure in itself while also making it impossible to assess whether the customer received good or poor advice.

The FSA said that while approximately three-quarters of customers received good advice, there were concerns with the quality of advice in the other quarter. The concerns about advisors’ recommendations centred around three main areas: the level of risk customers were willing and able to take (15 per cent of cases); a failure to properly take into account customers’ financial circumstances and needs (13 per cent of cases); and the length of time customers wanted to hold the investment (6 per cent of cases).

Remedial action, such as retraining advisers and making substantial changes to the advice processes and controls for new business, have already been undertaken by the six institutions involved in the study, the FSA said. They have also been asked to undertake past business reviews to identify historic poor advice and rectify this with customers. One firm, however, has been referred to enforcement over its infractions.

“While we are disappointed by the results of this review, we are encouraged by the action that the firms involved have taken to rectify the situation for their customers,” said Clive Adamson, director of supervision at the FSA.

“Since this review took place, we have introduced new rules on investment advice which have increased the professional standard of the advisors operating in the market and have removed the potential for advisors to recommend products that pay the largest commission but may not be right for the customer.”

Adamson refers, of course, to the Retail Distribution Review package of reforms which came into force at the end of 2012. The headline change which came in under RDR is the abolition of commission payments in favour of pre-agreed fees for advice – a move which is intended to up the objectivity of investment advice and restore faith in what unfortunately continues to be a tarnished industry in the public eye.

This latest mystery shopping exercise is the first carried out by the FSA since its 2008 investigation into Payment Protection Insurance, the results of which are still being felt by the banking industry.