Inappropriate sales in the financial services industry: the limits of the rational calculus?

Abstract

The paper explores the notion of misselling in the context of financial services. Misselling is treated as a special case of error in the classification of a discrete dependent variable. A simulation study is conducted using the sale of mortgage debt to outright owners of property as an example of how inappropriate sales manifest themselves. This is followed by the actual case of endowment mortgage sales. The results and discussion suggests that misselling can be viewed (i) in the context of empirical regularities and a rationalizable view of the data and/or (ii) as a non rationalizable situation where the misselling becomes pathological. The paper highlights the need for a behavioural perspective, in addition to a more conventional economic treatment of the misselling phenomenon.