Failures in Complaint Handling

In UK, there is a special category of investment products called Structured Capital at Risk Product (SCARP), which is a "precipice bond" which provides a fixed level of income (which can be drawn down or accumulated) over a fixed investment period. It offers limited protection against the loss of the capital invested in the first place and whether or not customers get their original capital back depends on the performance of an index, or more than one index, or a selection of stocks.

From time to time FSA has reminded retail investors about the risk of investing in SCARP which has no capital guarantee and carries a long investment horizon. Some financial institutions were also fined by FSA for mis-selling of SCARP. For instance, recently FSA fined Sesame Ltd £330,000 for failing to treat its customers fairly by not handling complaints concerning SCARP adequately.

The problems with Sesame's complaints handling were identified as part of FSA's thematic review of SCARP during Mar and Aug 2004. FSA found that between Mar 2003 and Oct 2004 Sesame incorrectly rejected complaints from approximately 350 customers. These customers had lost nearly £5.9m. The complaints related to sales made by Sesame's legacy networks, which at least reflected the following problems:

• Sales of SCARP were made to retired customers who were unable to absorb the downside risk.
• Customers' risk attitude was wrongly recorded on customer files.
• Salespersons misled customers by describing SCARP as a low risk investment.
• Legacy networks and complanint handlers had applied inconsistent risk ratings to SCARP.
• Sesame did not take adequate action when it became aware of the increasing number of SCARP complaints.

After FSA identified the problems, Sesame took prompt action to ensure all affected customers were compensated and engaged external advisers to review its SCARP complaint handling procedures and train its staff.

Complaint handling function is more important for financial firms serving the retail market. If the management turns a blind eye to complaints, they will eventually suffer.