Ten ways to spot a consumer financial scandal
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When it comes to spotting financial scandals, hindsight is a wonderful thing. But foresight is much more valuable. In all my years working as a financial journalist, I have noticed an alarming predictability in the types of scandals and duff investments that unwary consumers fall victim to. At the FT Weekend Festival a couple of weekends ago, I gave FT Money readers the benefit of my experience — and here are my top 10 suggestions of what to watch out for.
1 Beware of banks
When it comes to financial scandals, banks lead the field. From 2012 to 2016, the world’s banks collectively forked out £264bn for what CCP Research Foundation politely calls The Cost of Conduct.
What does this mean? In short, the total amount of fines, penalties and consumer redress that regulators have forced the banks to cough up.
CCP’s ranking of the 10 global banks that have incurred the steepest “costs of conduct” includes all four of the UK majors — RBS, Lloyds, Barclays, and HSBC — which between them account for £70bn, or just over a quarter of the total.
That figure includes redress for selling 64m largely useless Payment Protection Insurance (PPI) contracts to 30m customers. UK banks have paid out nearly £30bn in compensation and set aside another £10bn to settle future claims, yet fewer than half of those who had a PPI policy have actually made a claim.
The Financial Conduct Authority has decided to protect the public (or is it the banks?) by setting an absolute deadline for PPI claims of 29 August 2019. To quote Arnold Schwarzenegger, “Do it now!” Making a claim on the website www.resolver.co.uk is free, or do it yourself using www.which.co.uk/ppi — but avoid the parasitic claims companies who will keep up to 40 per cent of your redress should you succeed.
2 Chancellor’s cut
Over the past two and a quarter tax years more than one million over-55s have taken a total of £12.7bn out of their pension funds under pension freedoms unlocked by the former chancellor George Osborne. When they do that, HM Revenue & Customs takes its cut before the owner sees a penny. It’s an alternative form of PAYE (Pay And Yell ‘Eek!’).
In the month that you get the money, HMRC assumes you have had a pay rise and will get that much every month in future. So it takes a whopping amount of tax — often at the additional rate of 45 per cent. In theory, it will pay any excess back at some point in the future. In practice, it is safer to claim on form P55. But many basic- rate taxpayers still end up paying higher-rate tax on a chunk of their pension fund. Avoid it by taking your maximum tax-free lump sum and spread the rest over the following tax years.
3 Guaranteed losses
Any form of investment which promises a “guaranteed return” should be viewed with extreme scepticism — even more so if it is described as “risk free”. I was not too worried that anyone would believe a (hastily withdrawn) email offer which was sent to me recently for an investment which claimed it would pay 40 per cent a month risk free and guaranteed. I mean, even Charles Ponzi himself only promised 50 per cent every three months in 1926. The more worrying emails are for investments promising returns of 10 per cent or 12 per cent — as made by the world’s biggest fraudster Bernard Madoff — or indeed anything over 8 per cent.
Cautious IFAs say the best that most investors can hope for is 6 per cent a year. View any promise of a higher return as a guarantee of a loss. Binary options, for example, which, as the name suggests, usually give you a clear choice between two things — often losing all your money, or losing some of it.
4 Cold calls
The government’s proposed ban on cold calls has now been firmly pencilled in to begin on the 12th of never or, as the government puts it, “when Parliamentary time allows”. Even when it does, no one has explained to me why thieves who risk jail would stop calling us for fear of an investigation by the Information Commissioner. Meanwhile, assume that any cold call, text, or email is a fraud and put the phone down or delete it unread. No one ever lost money by refusing a cold call offer.
5 Beware going abroad
Many investment opportunities are outside the UK — often literally on the other side of the world. Investing in sustainable forestry in South America or ecological bamboo production in Asia might sound attractive, as would housing developments in far-flung places we have never visited. But what are the risks? Contracts are made under foreign laws and in another language with unknown consumer protection. Walk away.
6 Do you know the market?
Never invest in anything you do not know the market for. Are you an expert in student accommodation? Have you researched the return on storage solutions? Do you know who buys graphene or rare earth metals? If not, then why believe research reports by the firm that is trying to sell you the investment? Say goodbye.
7 Don’t eat greens
Green investments might feel like a worthy way of saving the planet as you save for retirement — but they could cost you dearly. Recent examples include biofuel energy schemes tipped by various financial advisers who have since been banned from investing their clients’ pension money in non-standard investments. Solar panels are often not sustainable when it comes to earning money.
The Serious Fraud Office is now investigating Ethical Forestry, which collapsed into liquidation after promising more than 3,000 people (who parted with a minimum £18,000 each) they could reap up to £1m over 24 years by investing in planting trees and then turning them into planks. Planks indeed. Companies like these are often unregulated collective investment schemes — UCIS for short. The clue is in the name — unregulated. Pick a scheme that goes wrong, and “you kiss” your money goodbye.
8 Buyer’s market
Be wary of investments that have a fixed holding period. If you cannot sell penalty free when you want to, ask why. Locking in your money for years is a way of preventing any examination of how the investment is doing. Whether it is car parking spaces, shipping containers, or skiing chalets in eastern Europe, these investments will be much harder (even impossible) to sell second-hand than they are to buy. Just say no.
9 Quick, before they’re gone!
Even my local cinema does it — would you like to upgrade to a VIP seat before they’re all gone? Funnily enough, when you go in to see the film, all the VIP seats are empty. Anything billed as “running out”, “only a few remaining” or “don’t miss this one” is a scam. Turn it down.
10 And finally . . .
There comes a time in life when you can stop accumulating and start decumulating. Or, as I call it, spending! Many people who fall victim to the sorts of scams I’ve listed above are older people, who want to invest the spare cash they have in the hope their children will get a nice inheritance. It’s your money — so enjoy it while you can. Surely that has to be a better investment?
Paul Lewis presents Money Box on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney