Systemic People Risks: Product Mis-selling

Patrick McConnell

This chapter will look at examples of the mis-selling of financial products, including auction rate securities (ARS), residential mortgages in the global financial crisis (GFC), payment protection insurance (PPI) and Interest rate hedging products (IRHPs).

PRODUCT FAILURES

Chapter 6 discussed the product lifecycle model of financial products in which there is an evolution of a successful product from development, through growth and maturity to eventual decline. In describing Merton’s process of financial innovation, Bookstaber (2009) highlights the manic pace of the growth of new financial products in the 21st century, each more complex than the previous, and “each new round of instruments was more sophisticated and complex than those that preceded it, although not necessarily understood as well”. It is hardly surprising then that some products fail. Of course, many will fail early in their lifecycle because the inherent problems are detected fairly quickly, but some will grow rapidly before failing. It is these products, such as PPI, that tend to precipitate the largest systemic operational risk losses, simply because they have become adopted across the industry and, more