Let me illustrate why compliance regulations are not working by sharing with you a real account of what can go wrong. If this starts to sound like sour grapes, forgive me – it is not meant to.
However, when I overheard two people at a party discussing their finances and imminent retirements with deep cynicism, I could not help but feel the whole system was not achieving the consumer protection we all long for.
The story starts with my usual scouring of the weekend financial press. As I wrestled with the multitude of sections of a well-known broadsheet, out dropped a glossy, professional looking “supplement”.
Emblazoned on the front of this “advert” were statements that seemed to suggest the range of investments inside were “protected” and “capital secure” – all at “no initial charge”. This looked too good to be true, so I went rooting for answers.
Buried deep in the small print at the back of the brochure was the key features section. This proceeded to list various charges and reductions in yields that further small print reassured you did not affect the returns shown. Apparently, they had already been taken into account in the returns shown.
My curiosity got the better of me and I wanted to know more. To make sure I was not imagining things, I ran it past several friendly (well qualified) contacts, including one of the “featured” investment houses.
To my genuine surprise, none of them could work it out either. But it gets worse.
I telephoned the firm behind the offer pretending to be a customer. I wanted to see if they could shed any light on the “no charges” bit, as I honestly did not follow what was going on.
At this stage I seriously thought they were onto something new and wonderful, and I felt we should know about it. The adviser I spoke to fumbled around trying to put in easy terms what was happening with the charges.
He was at least honest enough to suggest that it really was a “five-year type of investment” and that I should be confident of being able to leave my money as long as that. Good on him I thought – until he started to dig a hole.
He carried on by suggesting that for an Isa you had to have the money invested for at least four years before getting the full tax advantage – so really, he said, it was only a year more than an Isa, and five years was not too bad.
I pressed him on this, saying I had not heard of “the four-year rule”, but he insisted it was so. I said I was grateful for him pointing it out but would have to rethink because five years was probably too long. He seemed to understand and we finished our discussion.
Now, strangely enough, I do not really have a problem with the individual adviser, as all professions have their rotten apples – this fact alone will never change.
What I do have a problem with is the flagrant way a “top” firm of advisers, with allegedly stringent compliance rules, can get away with this sort of practice unnoticed. They clearly tried to make the whole thing incomprehensible in order to fudge the charges and yet claim that there were none – or at least any up front.
Furthermore, they tried to give the impression that it was “protected” – only after five years. I bet not many “normal” people out there would spot that.
Now before anyone accuses me of being inept, remember I was not alone. Worryingly, I was not the intended market for the advert – it was the unfortunate readers of the paper. If I failed to understand this, how is your average Isa investor meant to?
I cannot help but think that a cursory glance by their compliance officer should have resulted in the draft advertisement being tossed back with various expletives.
This sort of monitoring is easy – you see if it is too complicated or opaque and if it is, you stop it. I truly hope that if our regulator were to see this they would ban it from a great height.
If this is still happening, what are the rest of us fighting for?
Tom Kean is compliance officer at The Analysts