There are times when it pays to beat your breast, repeat mea culpa at least three times, and say sorry. Paul Smee, director general of the Association of Independent Financial Advisers, would have done well to remind himself of this before he faced the pitbull terriers who sit on the Treasury select committee, which is reviewing the difficult task of how to restore confidence in the long-term savings industry.
Instead of admitting that some IFAs have been less than diligent, particularly when it comes to selling precipice bonds, Smee tried to defend what the MPs on the committee see as indefensible.
The select committee produced the irrefutable facts that 250,000 individuals, mostly elderly people, invested around £5bn in precipice bonds. They have lost an estimated £2bn of their life savings as a result of stockmarket falls.
Moreover, some 80 per cent of sales were made through IFAs who had promoted the bonds using direct mailshots. The MPs wanted to know why Aifa did not warn its member IFA firms of the potential misselling risks.
Smee responded by saying that Aifa was only just being set up at the time most of the precipice bonds were being marketed and, in any case, there was a compensation fund that would bail out these hapless investors.
Anyone could have told Smee this was not what the MPs wanted to hear. They wanted him to grovel, admit some IFAs had got it wrong and apologise for not having warned advisers of the potential misselling risk.
What Smee should have said is that it is easy to be critical with hindsight. He should have pointed out that in the late 90s and the start of 2000, when many of these stock market performance-linked bonds were being promoted, there were those who rightly thought the stock market was overheated and was ready for a downward readjustment.
This was precisely why many IFAs, not to mention the high-street banks that sold a lot of precipice bonds, thought the product was a good bet.
Investors, who might otherwise have risked their money in mutual funds, would benefit from any continued rise in the market but, unless the market fell by what was then assumed to be an unthinkable amount, they would get their money back. At the time it looked like a no-lose situation. Many expected a market setback but virtually nobody predicted a fall of over 50 per cent and a stockmarket decline lasting more than three years – it is still languishing.
The FTSE 100 index hit 6,930 on December 30, 1999 and then fell over the coming two-and-a-quarter years to bottom out at 3,287 on March 12, 2003 – a fall of 53 per cent.
Given that most of these bonds were fiveor six-year investments, the likelihood of the market falling enough to trigger a potential loss of capital – and, most importantly, still being below the trigger point when the bond matured – seemed so unlikely at the time that many IFAs undoubtedly thought the risk was minimal. Who can blame them?
No doubt some IFAs were irresponsible in the way they promoted precipice bonds if they presented them as being comparable with a bank deposit account. Complainants' cases against such intermediaries will no doubt be upheld when they reach the Financial Ombudsman Service.
But many IFAs offered these bonds as a safer alternative to mutual funds, Isas and direct investment in shares, and sold them to investors who might otherwise have put their money into far riskier investments. It is difficult to see where any misselling has occurred in this situation.
Perhaps the Treasury select committee would like to bear this in mind before heaping more criticism on the IFA industry. With their knee-jerk assumption that somebody must be at fault – just because people lost money in what has been shown to be unprecedented stockmarket circumstances – the MPs are displaying even more ignorance and naivety than some of the unfortunate investors.
The ombudsman is expecting 4,000 to 5,000 complaints concerning precipice bonds. Hopefully, he will bear in mind the background of the investors, whether or not they had held equity-based investments previously, and what claims were made by the IFA before he decides whether misselling has occurred.