The government wants our financial regulator to get tough. Mark Hoban, financial services minister, said last week that the new Financial Conduct Authority (FCA), which will be in place by early 2013, will intervene far sooner to stop scandals such as payment protection insurance and endowment mis-selling.
It may also be given powers to ban toxic products for up to a year while it investigates their sale, something that is common in other countries. Japan’s regulator suspended all sales operations (including advertising) at the retail division of Citibank Japan for a month in July 2009 while it investigated compliance failings. Expect nothing so decisive from our own Financial Services Authority.
Here, consumers are still prey to high-pressure selling of toxic schemes such as structured products, even though the FSA has had them under review for two years.
So while Hoban’s tough talking is welcome, I’m not holding my breath. The FSA also published a document setting out the FCA’s key principles last week, but it was full of lofty aims and frustratingly short on detail. In the meantime, banks and financial firms continue to flog complex and opaque products to unsuspecting consumers.
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The FSA admits that, in the past, it has sided with the industry over consumers — it is funded by financial firms, after all — and in future wants to be more engaged and intervene earlier if it thinks consumers could lose out.
However, it will now consult on these principles for another few months — just to check the industry is in agreement — rather than simply getting on with the job.
If it wants to be more in tune with consumers, it need look no farther than these pages. We were warning of the risks of payment protection insurance, endowments and structured products backed by Lehman Brothers months, if not years, before the FSA got involved.
Diana Wright’s column is always a good early-warning sign of budding scandals. She has recently had two letters from elderly readers who were sold corporate bond funds by Santander when all they really wanted was a savings account. In both cases, they had lost more than £1,000 by the time they realised their mistake. This was reimbursed by Santander, but should not have happened in the first place.
I’m convinced these two letters are the tip of the iceberg, but is the FSA interested? If it is, it won’t tell me — or you, the people who will lose out. It claims it is already more “judgment” rather than “outcome” based. This means that instead of waiting for evidence of mis-selling from a particular company, its supervisors can act if they think there is a risk.
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In future it will also have a “market analysis team”, to spot early-warning signs such as artificially high interest rates on products. This doesn’t help consumers now, though. By the time the FCA comes into being, interest rates will have risen and firms will have moved on from corporate bond funds and structured products to the next hot product. So, while the FSA consults again, here are toxic products that should come with risk warnings.
Structured products
These promise the best of both worlds — usually a sign you should avoid them. They generally offer a return linked to an index, such as the FTSE 100 plus the “promise” to return your capital at the end of the term, usually five or six years. However, it is an expensive way to get access to the stock market. Banks and building societies usually earn commission of 4% to 7% for selling the schemes, which will reduce returns, and you do not receive dividends, which make up the bulk of stock market returns over time.
The FSA is reviewing structured products and will report on its findings in the autumn, and is talking to providers about design and selling.
Combination bonds
Potential mis-selling is virtually built into these products. You are offered an artificially high interest rate on a savings account but only if you put some of your money into an investment product. If it can’t be sold on its own merits, why invest in it?
Corporate bond funds
There is nothing inherently wrong with corporate bond funds if you understand the risks. The funds, which invest in IOUs issued by companies, yield about 4% or 5% and so are an easy sell to savers earning a quarter of that on their savings accounts. But when interest rates rise, the prices of high-quality corporate bonds tend to fall (and yields rise) — potentially leading to capital losses for bond funds.
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Interest rates could remain on hold for a year or so, but as soon as markets get wind of the first increase, losses on corporate bonds funds could be painful.
Kathryn Cooper is editor of the Money section