Paul Lewis: Paying a huge price for incompetent advisers

Paul Lewis

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’ programmeYou can follow him on Twitter @paullewismoney

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Comments

There are 23 comments at the moment, we would love to hear your opinion too.

  1. I have had a pop at Paul Lewis several times so credit where it is due, the Guide to the Unprotected sounds like a very sound and interesting primer and I must see if I can get a copy on Kindle for some light bedtime reading. And I can’t disagree with anything in the article.

    A shame that we can’t say the same for some of the dross masquerading as financial self-help guides these days.

  2. Funny how, despite the arrival of the internet, leveraged derivative funds, high frequency trading etc etc etc, so much of the content of this book is as true today as it was when written

  3. In January 2013 I reported a case to the FSA where one of my clients (a widow) had been approached by an “adviser” telling her that South American rainforest was the place to invest – guaranteed interest and return of capital after 10 years. She had said “that sounds interesting” to the first contact. She was then referred to an regulated adviser to transfer to a SIPP to invest in the rainforest without any comeback about the investment advice. The FSA responded having looked at all of the paperwork stating that this was an unregulated investment and therefore could not get involved. If only they had …….

  4. Has Mr Lewis passed R01? The FSCS is when firms can’t meet their obligations not for giving inappropriate advice

    • If you read it again carefully you will see that what I said was correct.

    • But assuming there is a tame IFA involved who gave regulated advice on transferring the pension, it is always the FSCS (i.e. we) which ends up paying out when the fraudsters leg it to Dubai and/or phoenix, so Mr Lewis’ answer is correct even if he has not shown all his working.

  5. What Paul also needs to realise is that incompetent journalism may also have led to detrimental behaviour and losses for investors. Two weeks ago on Radio 4’s Moneybox there was an article on gated commercial property funds but I was surprised about the failure to highlight the benefits of closed end investment trusts which are not required to sell assets, at below fair value or distressed prices to pay exiting investors. On the same programme an article identified 300 separate pension charges, read out one by one by a presenter. There was no caveats that many of these may be different names for the same charge nor that the vast majority of these charges will not apply to any individual pension plan. At the same time there was no challenge to a guest’s assertion that costs of 1% p.a. would wipe out 25% of the fund and 50% for a 2% p.a. Paul failed to explain that an assumption of 4% p.a. investment growth is just that and not the upper limit of returns. Higher returns results in lower reductions in yield.

    I wonder how many people decided that saving into a pension plan or investing in a commercial property fund are a waste of time and money based on these reports. We can track the losses caused by bad advice by IFAs but not the potential losses for many who followed the guidance of ill-informed journalism. I wonder what sum that would add up to.

    • There is a procedure for complaining about BBC radio programmes. Your complaint would be considered and responded to by the editor and then you could take it further if you wished.

  6. Thank Paul

  7. I agree with Sascha above, however what don’t agree with is that bogus/dodgy firms who default are constantly referred to as advisers. They are get rich quick, snake oil charlatans who prey on the gullible.

    Why do I have to pay for these corrupt people? Only today I’ve had an e-mail from a bunch of shysters offering an airport car park scheme in the SE guaranteeing 8% net.

    Actually what are the authorities doing about these people apart from levying larger fees on honest firms?

  8. Just the usual rubbish from Paul Lewis, with a thin thread of truth running through it. For many years life settlement funds were the underlying safety net for many funds. these funds are still used by the alternative houses. However we all know there are lots of rouge, stupid and very incompetent journalists, who comment upon matters they are not qualified for, even when they dress like a secondary modern school music teacher, or an off duty vicar.

  9. “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….”. I guess this could be interpreted on various levels. Just saying.

  10. We are due to get our combined FCA/FOS/FSCS/MAS/Pensions Guidance bill any day now a big chunk of which will be the FSCS levy.

    Frankly I don’t care whether this levy is down to bad luck, poor judgement, or commission grabbing charlatans. Whatever the cause it is because the consumer today is no better protected than they were before 1988.

    We have a regulatory regime that has consistently failed the consumer, and at extraordinary cost for nearly 30 years.

    It really is time to get rid of the regulator and start again with something simple, inexpensive and easy to understand that attacks the rogues and protects the consumer.

    Don’t hold your breath too many highly paid individuals looking to protect their empires for them ever to put the consumer at the centre of their objectives.

    As David Crozier rightly said on Twitter the other day “why is it easier for someone to borrow or gamble £10,000 than it is for them to invest that money in an ISA?”

    The answer of course is incompetent regulators

  11. It seems that the messingers (some undoubtedly inept, some even venal) are being blamed.
    The blame should lie with those who introduced ‘freedom’ and the providers and advisers who so fulsomely welcomed it – with their eyes firmly fixed on an enhanced pay day.
    Perhaps some of this huge expenditure should have been aimed at enhancing annuity rates and examining the charging stuctures which surround them.
    Sorry Paul, I think you are shooting at the wrong target.

  12. Anybody who bangs the drum regarding the unfairness of the current FSCS system is OK in my book!

    Further, let’s just stop/re-categorise this whole un-regulated investments advice process via regulated firms; we know that in the vast majority of cases it is flawed and by now I have no doubt that the FCA do too.. So, over to them, let’s have that in the FAMR!!

  13. I concur with Nick – there are numerous ‘elephants in the room’ that continue to be exploited by those who either have insufficient knowledge to understand the risks or do so knowingly in order to earn commission.

    One being that people can (and are incentivised to via the tax system!) gear up to invest in property but this would be seen as madness (and there would be no tax incentive) doing the same to invest in any other asset class. Why is that?

    Another being that commissions can be paid on non advice products (and therefore drives the behaviour outlined above). It creates issues with life cover, annuities and UCIS etc.

    I know many will disagree but if commission was banned outright on absolutely everything, I have no doubt that many of these behaviours would disappear overnight.

  14. Surely all this mis-selling cost to the public is just made up. The RDR sorted it all out. Everything’s just dandy.

  15. I cannot relate to the headline. In the majority of cases this is not incompetence but activity that borders on criminality – certainly unethical. Furthermore I find the term advisers mildly irritating because these people – in the main – are not advisers. Order takers, salesmen whatever. It is a sad fact of life that if you have money people will want a share of it and are not too bothered how they do it.
    Nevertheless, it is a sad indictment of the law enforcers that they have never got to grips with the problem.
    We ask all our clients if they want products that are protected by the FSCS. Perhaps the FCA could insist that all clients that receive advice are presented with that question and if the answer is yes than a prescribed leaflet along the lines of “At your risk” would assist.
    Yes I know that some products not covered by the FSCS are appropriate in a few cases but are they really essential for mainstream financial planning? of the FSCS.

  16. To Paul Lewis, In sympathy with Michael Grant’s above comment I too heard with utter dismay the lady on Radio 4’s Moneybox droning on for an eternity about “hidden” charging structures on pensions, the vast majority of which were consigned to history years ago. All this is likely to achieve is to put off new pension investors – how irresponsible / incompetent is that?!!

    • The list was not ours but research from Transparency Taskforce which is current. If you have are saying that TT got it wrong then read the report and get back to them. If what you say turns out to be correct then we would be delighted to cover it when we return in September.

  17. Thomas Frodsham 26th July 2016 at 11:32 pm

    Paul isn’t, that what your researchers are meant to do before broadcasting I.e check the facts are correct, or did that not suit the agenda. There are no hidden charges in pensions now, in fact most investors will pay three at the most dependant if they have ongoing reviews from the adviser and/ or a platform. With some pension providers now you could have a decent direct investment with an annual management of less than 0.5%

  18. To Paul Lewis, Further to your challenge two comments above, I have been in touch with Transparency Task Force and have spoken at length to Andy Agathangelou who has sent me a copy of the report listing 300 charges to pension schemes. Almost all of these relate solely to the charges imposed on occupational pension schemes which confirms my assertion that your broadcast on Moneybox was totally misleading as it inferred that these charges relate to all pension contracts, including personal pensions. I demand that this is made clear in September Moneybox which is too late really because the damage has already been done. The result of your irresponsible journalism is that a present generation of pension investors will have been put off from investing! Money Marketing please ensure that this post is brought to the attention of Paul lewis!

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