It used to be so simple back in 1863. If you had money and wanted a good safe return on it then Consols (consolidated three per cent annuities) did what it said on the tin: paid 3 per cent a year guaranteed by the Treasury. As now, they were bought and sold, and you might pick some up for £92-2s-6d, in which case you would still get £3 a year on that – half paid on 5 April and 10 October – which is 3.26 per cent. There was commission to pay the bank but only 2s-6d per £100 – or 1/8 of one per cent, 12½ basis points.
You might be tempted to earn more interest. However, the contemporary personal finance guide from which those figures were taken warns: “In this country 4.5 per cent is generally the highest safe interest you can receive: 4 per cent more usually so. When 6, 7, 8 or more per cent is offered… beware of accepting it as the probability is that you will lose both your principal and interest, as so many have done. Such an interest cannot be given consistently with the safety of the concern.”
Three years after the anonymous banker’s daughter ESG published her Guide to the Unprotected in 1863, a bank called Overend & Gurney went bust after offering shares at £15 which quickly rose to £25 then collapsed to £12.25, leading to a run on the bank and insolvency.
The Bank of England refused to help, leaving it with debts of £11m (equal to more than £1bn today), 200 other businesses bust and thousands of investors hurt. The directors were tried but let off. They were guilty only of a “grave error” rather than fraud, the judge said. Plus ça change.
Needless to say the sensible advice in the Guide sold well, running to five editions by 1891. It has this to say of where to get financial advice:
“Seek a sensible and upright friend, who is a good man of business, to consult as to what concerns are safe or unsafe for investments. Many worthy men are bad men of business, and recommend investments because they think or hear they are good, without knowing anything of the matter.”
The latest annual reports of our regulators, ombudsman and compensation scheme show the total cost of trying to protect people from bad financial advice, deal with complaints and recompense them when bad firms go bust is now more than £1.4bn a year. In other words, we spend more every single year than the collapse of Overend & Gurney cost investors in 1866.
More than a quarter of a billion pounds of that astonishing sum was paid out by the Financial Services Compensation Scheme in 2015/16. That £271m compensated nearly 35,000 people. The good news is that was less and to fewer folk than 2014/15. And it was good news that the amount paid out for bad investment advice fell nearly 60 per cent to £77m from £183m the year before.
But – and it is a big but – the amount paid out for “life and pensions intermediation” more than doubled from £35m to £84m. Almost all of that (£77m) was for bad advice about using pension freedoms to transfer money into a Sipp and hold it in what the FSCS calls “high-risk, non-standard asset classes, which have often become illiquid”. In other words, putting that money into dodgy investments.
And remember, this is only includes bad advice by what it calls “an increasing population of failed adviser firms”. In other words, regulated advisers who then went out of business. It does not include bad advice where the adviser coughs up and stays in business. Nor the probably larger amounts lost to unregulated advisers selling unregulated products outside the FSCS.
The average FSCS pension compensation was £38,600. Pension freedom really does mean the freedom to make big mistakes, like investing in ethical forestry, Cape Verde property, life settlements or carbon credits. If these investments make money for anyone it is usually the high commissions for the introducers.
These losses, tragic though they are for the individuals, are not paid for by good regulated financial advisers. But the bad Sipp advice by the “growing population” of – well, what? Rogue? Stupid? Incompetent? – advisers that go bust is largely paid for by the good guys. The levy charged on firms giving pensions advice soared from £35m in 2014/15 to £119m in 2015/16. Not because they had done anything wrong but because their rogue, stupid or incompetent colleagues had.
I have said before that the cost of these people should be paid out of the fines levied by the FCA rather than by the good, honest, competent regulated advisers who take great care not to recommend bound-to-fail investments. Instead, those fines are now snaffled by the Chancellor and paid out, with suitable publicity, for his own pet projects. Or they were. Perhaps Philip Hammond will take a different view.
Or perhaps there will not be enough in future. The latest figures show the fines in extraordinary decline since ex-FCA boss Martin Wheatley left last July (though he is still being paid until 31 July this year with total remuneration from April 2015 of £827,000). They may not be sufficient to pay the pensioners’ losses these advisers leave in their bankrupt wake.
Finally, here is the (unregulated) advice that opens the first paragraph in Guide to The Unprotected in 1863.
“When an inexperienced person comes into possession of her fortune, especially if it be a small one, her first enquiry is ‘how can I invest my money so as to get the highest possible interest?’. Let her rather seek to place it where capital will be safest.”
It was 3s 6d very well spent. Read it here free archive.org/details/aguidetounprote01welsgoog
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney