When big brands and companies want to objectively assess the level of customer service their employees offer, they can deploy the so-called ‘mystery shopper’, a seemingly ordinary client who is tasked with evaluating the standard of the services on offer.
Even superstar chef Gordon Ramsey is known to use them to assess the quality of his own or other restaurants.
Arguably, a similar exercise could be applied to financial advisory firms, with undercover clients analysing whether the advice given, and products recommended, meet client needs and are suitable to their specific situations.
But is there a place for mystery shoppers in the industry?
The Singapore case study
It seems that in some jurisdictions there is.
For instance, the Monetary Authority of Singapore (MAS) has just released the findings of its third mystery shopping exercise for the financial advice sector.
It was conducted on 500 representatives from 12 insurance providers and licensed advisory businesses between mid-2018 to mid-2019.
The MAS found that suitability had improved since its last exercise in 2011, with 88% of recommendations meeting client needs, up from the previous 70%.
“Most financial adviser representatives helped shoppers make accurate and complete disclosures of their medical conditions,” the Singapore regulator said. “The investment returns illustrated in the insurance policies were properly explained by most financial adviser representatives.”
While the practice outlined several positives, it was also able to point out issues that needed to be addressed, such as a lack of suitability in recommendations made during roadshows, and the inability to identify if the mystery shopper was a vulnerable client.
As a result, the MAS required all 12 firms to address the problems discovered during the exercise and it will also review its own rules and safeguards on the two topics.
So, why don’t we really hear much about this proactive strategy in the UK financial services sector?
Searching through the Financial Conduct Authority’s (FCA) website, this type of exercise has been used a handful of times, but never to assess overall financial advice.
The earliest example I was able to find relates to Santander UK, which was fined £12.4m ($17.1m, €14.4m) for “widespread investment advice failings” in 2014, following a mystery shopping exercise the year before by the regulator’s predecessor, the Financial Services Authority.
In 2015, the same practice was applied to mortgage advice following the implementation of the Mortgage Market Review.
The FCA found that some firms “delivered advice with little or no structure, meaning advisers failed to ensure they had sufficient understanding of customers’ needs and circumstances on which to base their recommendations”.
Again, in 2017, mystery shopping tactics were deployed in a review of the motor finance industry. While the outcome was mainly positive, the watchdog was able to extrapolate areas of concern and address them during the remainder of its review.
The most recent instance of mystery shopping I was able to find relates to retail banking and basic bank accounts in 2020, which uncovered failures in the recommendation and identification processes and a lack of tailored services for vulnerable clients.
While there’s no evidence of a widespread use of mystery shoppers in the financial advice sector, this kind of exercise seems to work and has proven effective in uncovering malpractices in the industry and in taking steps to address them.
Could this lower levies?
When contacted by International Adviser, the FCA said it was not able to reveal whether it plans to deploy mystern shoppers in future, or which sectors it would likely focus on.
But after the recent mis-selling and unsuitable advice scandals – the British Steel Pension Scheme and London Capital & Finance among the biggest of the last five years – surely there must be a case for this to happen.
The FCA has been highly reactive when it comes to instances of unsuitable financial advice and defined benefit pension transfers, and a more proactive approach could reap a wide range of rewards for the industry.
These could include:
- Uncover malpractices before they spread and avoid hurting hundreds if not thousands of clients;
- Which could then lead to addressing those issues before a company is forced to go bust and leave the burden on both the regulator and the lifeboat scheme to pay redress to clients who have been failed; and,
- Ultimately, eradicate the ‘bad apples’ before they become fully rotten and, in turn, lower the financial pressure on regulated firms in having to contribute so much to pay for others’ failings.