The story of the plight of Mr and Mrs Green continues.*
In Chapter 5, we learnt that Mr and Mrs Green inherited £800,000 and went to see their local LloydsTSB adviser for advice .
In this chapter, we will learn more about the alarming story of how Lloyds Bank allowed their trusting customers, Mr and Mrs Green to be poorly advised -which meant that they overpaid £64,000 charges and unnecessary tax.
What is alarming about this story is that the Lloyds Bank management were aware that Mr and Mrs Green were being poorly advised but seemingly did nothing to prevent this mis-selling.
So let us return to the scene. You will recall in chapter 5 that the narrative is told as a story in the person of the son of Mr and Mrs Green. This story is based on a real life incident.*
Let me re-introduce myself. I am the son of Mr and Mrs Green- my dear parents, who were fortunate enough to inherit £800,000. As they had previously invested a modest sum with a Lloyds Bank* financial adviser, who had an office in their local branch*-they decided to ask him for his advice on how best to invest this inheritance.
£800,000 is a lot of money. In fact, I made a calculation that with their own modest portfolio of £30,000, and the value of their house and possessions -my parents overall wealth was approaching £1.2 million.
So I thought it wise just to check up on Mum and Dad to make sure all was okay with the advice they were seeking. My parents are of a generation who absolutely trust their bank, their doctor, and their lawyer, without any questions.
My generation has learnt to ask questions.
You will recall that when I rang my parents and spoke to my mother- she was happy that she had invested the £800,000 on the advice of Mr Brown. Mr Brown had advised them to invest the whole amount into one Investment Bond just to keep things simple and straightforward.
But my mother had also told me that Lloyds Bank had sent a lady from the Lloyds Private Bank to attend the meeting, but that she had decided to take the advice of Mr Brown-and invest with him-rather than invest the money with Lloyds Private Bank.
“Yes, dear, we met with Mr Brown on two occasions to discuss what to do and he was ever so helpful. So we’ve invested money with him as we know him and he knows our situation and he is such a friendly man. So we thought we’d stick with him rather than the lady from Lloyds Private bank-who also at the meeting. We don’t want anything too complicated dear.
“Well, dear, the advice was to invest the money in this investment bond; it is quite straightforward really.
“Mr Brown explained it was low risk which suits us as we don’t want anything too complicated. It’s such a relief!”
So being the curious man that I am ,I was a bit perplexed that there was effectively two advisers present at the meeting with my parents ;one adviser from their local LloydsTSB branch and another adviser from the local office of Lloyds Private Bank.
So without telling Mum and Dad and not wanting to alarm them in anyway -I decided to do my own research and I rang up the local office of Lloyds Private Bank. The receptionist put me through to a certain Mr Jones.
Mr Jones introduced himself and explained that he was a Private Banking investment adviser and had been at Lloyds Private Bank for six years. He explained that he had eight relevant qualifications and an Advanced Diploma.
You explain to Mr Jones that your parents have just received £800,000 as an inheritance and that you are ringing around to help them out on their research. You also explained that your parents had a modest portfolio, which had been invested by the local financial adviser of Lloyds Bank,whom they knew quite well. So you put your first question to Mr Jones the Lloyds Private Banker.
“Mr Jones should my parents invest the money with Mr Brown the local financial adviser at their Lloyds TSB branch?
Mr Jones is empathic in his reply.
“No, absolutely not.The whole point of having a Private Bank is to cater for those Lloyds customers who have investment assets of £250,000 and above.** Typically the average investment level we deal with is about £500,000. Lloyds Private Bank advice is geared to provide professional advice to cover all aspects personal financial planning, such as tax planning and the preservation of family wealth with the proper use of trusts for inheritance tax planning.
“Also the typical Lloyds Private Banker advises on more complex pensions advice, and is usually qualified to advise on planning for Long Term care costs in later life.”
“So Mr Jones does Mr Brown have the appropriate qualifications and expertise to provide advice to my parents on these issues of tax planning ,planning for inheritance tax, the use of trusts; and as you say, long term care planning ?
“No, again I say -absolutely not. Lloyds Bank internal rules should not allow Mr Brown to provide advice in these areas as he is has no licence or qualification to do so. Also, the UK regulatory law prevents Mr Brown from giving any advice on these subjects at all.
“In any case,in theory, he should be prevented from giving advice to any clients who have more than the £100,000 of investable assets. This is a Lloyds Bank internal rule.
But there can be exceptions to this internal rule. If the clients insist that they want to stay with their original adviser, such as Mr Brown and if that adviser’s advice is appropriate and suitable for the clients then an exception may be granted.”
“So what can Mr Brown advise on?”
“Mr Brown holds very basic qualifications and sells a restricted range of products from Scottish Widows or from Lloyds Bank”***
“Only from Scottish Widows and Lloyds Bank? Why?”
“Mr Brown being a Lloyds Bank financial adviser is known as a tied adviser,which means he is tied to Lloyds Bank products and products Scottish Widows. The Lloyds Private Banker can, in theory, choose from a far wider range of providers and are not tied to the bank’s products.
“Mr Brown is only allowed to give advice to clients who have investment of up to £100,000. He is absolutely not allowed to talk about any other aspects in financial planning for which he has no experience, qualifications or licence .
How can Mr Brown advise on these subjects ?He has no knowledge or training in these quite complex subjects.”
Now I am beginning to get worried knowing that my Mum and Dad had invested the whole amount of £800,000 with Mr Brown- so I continued my questions.
“Now Mr Jones-what if Mr Brown had recommended that my parents invest the £800,000 into one investment product called an Investment Bond -what would you say?”
“Well Mr Green I would say that such advice is highly inappropriate and breaks every principle in good financial planning. It is not meant to happen in this bank.”
“Well Mr Green where do you want me to start? I’ll be appalled if for some reason your parents have been recommended such advice. Firstly, there is a massive difference in charges and costs. There is no effective tax planning and there is no overall strategy to use tax allowances and the legitimate use of trusts to preserve the family wealth. These are basic principles in financial planning.”
Mr Jones continues.
“If the money was invested in a tax efficient portfolio via Lloyds Private Bank then the setup costs could be negotiated from 1% to 0% because of the large amount of capital being invested.
“Investment Bonds set up costs and commissions normally range from 3% to 6%, which is £24,000-£48,000 .In addition, Investment Bonds are not tax efficient and are unable to properly use the available tax allowances.
“These Investment Bonds are hugely expensive and if you parents decided to withdraw their money earlier than expected-for example if in year 2, they needed their money, for whatever reason- they could pay early encashment charges of 3-4% depending on the Bond being used.For example we would ensure that the portfolio would take take full advantage of the available ISA allowances and reinvest the requited capital into ISA’s each year at no cost.Each ISA would still form part of the portfolio.
So over three years your parents would have an extra £42,000 in tax free ISA’s and over five years this would be £70,000. All arranged at no extra costs.
“But with Mr Brown’s advice your parents are prevented from taking any capital from their Investmen Bond as they would be penalised for withdrawing their money.And if for any reason they wanted to withdraw all their capital they would lose between £24,000 -£32,000 of their original investment.
“In fact your Mum and Dad are being hit by a treble whammy”
“A treble whammy?”
“Because not only are they prevented from using their capital to maximise tax planning allowances by investing in tax free ISA’s each year ,they are also unable to use their capital gains tax allowances which amount to potential annual tax free income of £18,000.
“And they get hit by these early encashment penalties.”
So it’s a right royal screw up.”
“If they had decided to invest with us at the Private Bank they would be able to get the proper tax advice and continue each year to invest in tax free Isa’s ;and if they needed to withdraw their money,then they would receive the investment value of their money at the time- less a £500 encashment charge.”
“There is a big difference between £24,000 or £32,000 and £500 as an early encashment charge.And your dear parents will be paying tax which is completely avoidable.”
A sickly feeling is starting to grow in my stomach. With a sense of foreboding and dread I ask Mr Jones more questions.
“Mr Jones, could you do a calculation as to how much extra my parents would pay in charges and avoidable tax if they took Mr Brown’s advice?
“Yes happy to- let me ring you back in, say 30 minutes?”
I am now beginning to get seriously worried; sweat beads have appeared on all over my forehead and the sickly feeling in my stomach is making me feel nauseous. I go outside into my back garden for some fresh air. I walk around my garden, taking in deep breaths and then go back into house, sit down, compose myself and wait Mr Jones to ring back.
Mr Jones rings back after half an hour.
“Mr Green I would say that in this situation with your parents investing £800,000 into just one Investment Bond, or even two or more similar type investments- then my conservative estimate would be that over a three-year period the extra costs and taxes could be at least £64,000.
Over a five-year period, the extra costs and taxes could be as high as £100,000. If your parents were to die without proper inheritance tax planning and the proper use of trusts then your parents’ estate could be liable for £300,000 inheritance tax.
If your parents invest with the Private Bank then the £64,000 is completely avoidable. With good inheritance planning the projected £300,000 can be substantially reduced by as much as 50%.
“Our advice would be to provide a complete strategy which would ensure the £800,000 was used to cover all aspects of personal financial planning.
“That means tax planning, charges, trusts and inheritance tax planning. We can also consider the extra dimension of the possibility of expensive care costs in later life.”
I feel sick. I accidentally drop the phone on the floor.
“Mr Green? Are you there? Are you all right?”
I slowly reach down to pick up the phone ; sweat pours off my forehead .The sweat pours over the phone handset .I wipe the wet handset over my trousers and rub it up and down my t-shirt.
“Sorry Mr Jones, just give me a moment”.
I walk into my kitchen and I have to grab the sideboard as I am feeling faint.
I slowly get a glass down from my cupboard and pour myself some water .I need to drink water –lots of water .I need to calm down.
I tell myself;-
“Calm down! Relax!”
So I try and calm down and relax. I try to take deep breaths. The sweat continues, dripping down my t-shirt; I am still feeling nauseous.
“What is going on at Lloyds Bank?”–I ask myself?
“This is incredible and unbelievable.
“Is this a case of fraud? I thought this sort of practice went on in places like Russia Uzbekistan and, Somalia.
“But in the United Kingdom? What is going on at Lloyds Bank?”
But I was conscious that Mr Jones was still on the phone, waiting patiently.
I begin to calm down. I wipe the sweat away from my forehead with my hand. I compose myself.
“Mr Jones, what if I told you this has actually happened to my dear parents who just 5 weeks ago invested the whole £800,000 with their Financial Adviser at their local LloydsTSB Branch?
“Can you explain why my parents appear to have been so poorly treated?”
“Mr Green ,if your parents did get persuaded to invest the £800,000 with the local Lloyds Bank financial adviser, then I would suggest you have serious grounds for concern.
“It is technically a breach in the Financial Services and Markets Act and is what appears to be unlawful conduct.
“Many would say it is fraud.
“I am in complete sympathy with you on this and yes I’m afraid to say this sort of thing can and does happen within Lloyds Bank.
“I have known about similar incidences whereby the management allowed this sort of behaviour because it suited the bank and maximised charges; and hence helped reach targets and their bonuses were triggered.
“You will understand that I have to protect myself here, so perhaps we could meet somewhere so I can explain matters “off the record”.
“I am well aware that this happens at this bank and it is why I have handed in my notice and secured another job with a highly regarded Independent Financial Adviser. I cannot wait to leave.”
“As I am leaving Lloyds Bank I have no problem is explaining how your parents were effectively stitched up .But you have to promise me you will never use my name and tell anyone that we have been talking about this.
“But if you were to ask me why this has happened to your parents and if there was a simple sound bite answer?
“It is a combination of fear and greed.Fear and greed allowed this to happen .I can tell you more when we meet.”
I promise Mr Jones that of course I will respect his request and I tell him I am forever grateful to him.
I then rush into my garden and just in time too. I am violently sick, painfully so –convulsing retching.
I am sick because of the implications of what Mr Jones has told me.
Is Lloyds Bank corrupt? How widespread is this sort of behaviour?
Read in chapter 8.
Hear how Mr Jones explains how the Lloyds Bank management appear to unlawfully exploit their own clients and abuse their trust in the pursuit of targets and bonuses.
Read how the Lloyds Bank’s management appeared to have knowingly ignored UK regulatory law;which is the lawful obligation to treat customers fairly,honestly and with transparency.
Learn how Senior Directors were made aware of an incident similar to this in April 2010 and refused to properly investigate.****
They still refuse to properly investigate this and other similar incidents.
November 1st 2011.
* This story is a fictional narrative based on a real life incident.
**All references to Lloyds Bank refer to LloydsTSB which is the Retail arm of Lloyds Bank.
*** 1. Lloyds Bank had, at the time, 3 separate sales forces each with different products, management and compliance structures. Each level of adviser has different qualifications and licences which determines the scope of advice on offer.
2. The bank uses a system known as the “segmentation of advice” based upon the amount of investable assets the clients possess. Investable assets are liquid assets such as cash, shares, gilts, national savings, mutual funds such as unit trusts and insurance Bonds. Property is not included in this system of segmentation of advice.
3. Up to £100,000 of investable assets the advice was offered by a Financial Adviser.
£100,000-£250,000 advice was offered by a Senior Financial Adviser.
£250,000 plus-advice was offered by Lloyds Private Bank. Within Lloyds Private Bank- the Mayfair service dealt with High net worth clients, who had over £1m to invest.
4. This 3 tiered system changed to a 2 tier system and now £250,000 is the marginal threshold between the Financial Adviser and the Private Wealth Adviser.
**** I submitted formal complaints to the regulator the Financial Services Authority (FSA) in May 2011 on alleged widespread breaches in the Financial Services and Markets Act 2000.The FSA have recently confirmed that an investigation is on-going and involved 2 other state agencies including the police.
Separate Formal Complaints are being prepared and guidance and advice is currently being sought from the FSA.