The Dark Side of Money
By Alan Steel
Saturday 21 July 2012
Before 1986 there was no regulation protecting investors from the unscrupulous. The events leading to the Financial Services Act involved unlikely partners - Pink Floyd and The Bank of England. Financial Advisers Norton Warburg 8 years earlier managed to con the pop group out of £2 million. They also ripped off former employees of the Bank who had promoted their services. Something had to be done.
The then Government appointed Professor Jim Gower to come up with proposals. He made his considered recommendations. All financial sales of savings, investment, pension and mortgages should be included in the new law. To minimise the chance of future mis-selling, the production of products should be separated from their distribution. In simple words, if you produced an investment plan, you couldn't sell it - that would have to be done by unrelated advisers.
You can imagine the fury of the Banks, Building Societies and Insurance Companies, especially the likes of Equitable Life with their own sales force. They stood to lose millions in lost commissions. They had clout with Politicians. Despite Gower's argument his plan would make it easier to control quality and reduce bias, the powerful lobby of the Institutions won the day. Gower's proposals were watered down, and Institutions could carry on manufacturing products and control distribution. Mortgages were excluded.
If the Gower proposals had become law there would not have been the scandals and rip offs that's plagued investors since. Equitable Life would not have been able to con customers and Pension and Endowment mis-selling at worst would have been minimal.
The Act was passed in 1986. Bodies were set up at great expense. The Securities and Investment Board was formed, and underneath, other Regulators were given roles to play. It didn't work, so the various bits were put in one body 8 years later to fix things - the Personal Investment Authority. It proved to be a disaster too, so Gordon Brown - the man who'd put an end to Boom and Bust - dumped all of it into a bigger shambles - the Financial Services Authority in 1997. While all this was going on and hundreds of millions spent on these toothless bodies, mis-selling of Pensions, Endowments, Investments and Savings schemes continued unabated. Equitable Life was named by me in April 1997 but Regulators ignored warnings for over 3 years.
Recently they failed to spot the Northern Rock, RBS, HBOS or Barclays' disasters brewing. Hundreds of Millions of pounds of costs, if not more, down the pan, for what? At the last count Regulators employ 3800, with the top dog on a basic of £850,000! And over the years despite not spotting disasters in advance, a few Knighthoods have been thrown around. You couldn't make this up.
Now they tell us the new body will fix things. RDR is the answer. Rogues will be sent packing. You will now know what you are paying in costs and why. Commission will be no more. Natural wastage will get rid of advisers over age 50 (didn't do RBS any good when they did that). And from January only those who have passed new exams will be left. Perfect!
Now why didn't they get rid of the rogue salesmen by listening to the complaints of others in the industry? No, they wouldn't listen to whistleblowing. Commission amounts should have been on page one of disclosure documents. Disclosure could have been explained in simple terms. Commission is not compulsory, why not explain that? It's also VAT free, fees are not. And VAT these days is 20%. Customers, despite what's being said, will end up paying more.
Exams do not guarantee good advice. The best advice comes from experienced caring knowledgeable people with integrity and commonsense. I am not aware of any exam that measures commonsense and integrity. Do you? When Pink Floyd lost their savings they were able to make another bestselling album - The Wall - to recover. Ordinary investors don't have that option.
Given the records of failed regulation over the last 26 years, it wouldn't surprise me to see the latest changes having to be rethought yet again. Give it 5 years maximum. Be very careful.
We Don't Need More Regulation
We Don't Need More Weak Controls
All In All It's Just Another Cost For Sod All
Written for publication in The Scotsman
Saturday 21 July 2012