The Consumer Duty is three months old and has already been credited with changing the fee structure at St James’ Place (SJP), one of Britain’s most popular advisers, for the better.

By which I mean, of course, cheaper – at least for some clients on some products at some point in the future. Which is good news for its 941,000 clients and the £158bn of their money it holds.

But there is a major problem lurking within the rules surrounding Consumer Duty. It imposes no specific obligation on advisers to declare the single most important consideration for any client who wants the best advice – are they independent or restricted?

SJP is, of course, restricted. Neither status is mentioned in the 67 pages of Consumer Duty rules or the 121 pages of guidance on those rules.

It imposes no specific obligation on advisers to declare the single most important consideration for any client who wants the best advice – independent or restricted?

In my view, every restricted adviser should start their initial conversation with a prospective client along the following lines:

“I am a restricted adviser and so the investment recommendations I make to you will not be the best available. That is because I am only allowed to discuss with you the restricted range of investments I deal with. If you want the best advice, I suggest you find an independent financial adviser. Now, are you happy to proceed with me as your restricted adviser?”

That is a lot earlier and stronger than the ‘oral disclosure’ required by COBS 6.2B.38R, which merely says the adviser must inform the client that the firm “provides restricted advice and the nature of that restriction” and do that “in good time” before investment advice is given.

Being independent is the key information that an adviser is likely to be one of the good guy

Making my recommended statement as the first interaction with the client would mean the adviser could clearly show they had, as they are told to do by the so-called cross-cutting rules (in bold),

• Acted in good faith towards retail customers – by making this clear status disclosure at once
• Avoided causing foreseeable harm to retail customers – by encouraging them to find an independent financial adviser
• Enabled and supported retail customers to pursue their financial objectives – which can best be achieved by independent advice.

If they do not make such a statement, my view is they breach that guidance and fail in their Consumer Duty.

The Financial Conduct Authority told me: “In terms of the Consumer Duty, we expect all firms to provide their customers with the information they need, at the right time, and presented in a way they can understand – to equip customers to make effective decisions supportive of good outcomes.”

If they do not make such a statement, my view is they fail in their Consumer Duty

I believe the Consumer Duty should also ensure advisers state their independent or restricted status on the landing page of their website. That is not likely to find favour with the FCA either, as its register does not state whether a regulated firm or individual offers independent or restricted advice.

Investors who want to find out have to rely on the commercial search engines to do that. Unbiased and VouchedFor show adviser status as independent or restricted on their lists. AdviserBook labels a small number of advisers ‘confirmed independent’ but the vast majority are labelled ‘independent status unconfirmed’. Perhaps they are unconfirmed because ‘restricted’ is a word few advisers ever utter voluntarily and certainly do not put on their websites.

Strangely, independent advisers are sometimes equally reticent about their status. They are much more likely to say they are chartered financial planners than state they are independent.

Consumer Duty should also ensure advisers state their independent or restricted status on the landing page of their website

Some have told me the phrase independent financial adviser (IFA) has itself been tainted. Not least by the likes of IFA Simon Hughes who the FCA banned for life on 22 September from any senior management function in a regulated financial activity after he wrongly advised 188 British Steel pensioners to cash in their final salary pensions.

They lost £10.5m between them but received only £8.4m in compensation from the Financial Services Compensation Scheme. He was not the first and probably won’t be the last. Nevertheless, being independent is the key information that an adviser is likely to be one of the good guys.

Of course, those independent advisers are right to stress they are a chartered – or certified – financial planner. That is the second most important question for a potential customer to ask. If the answer is ‘no’ they should just reply ‘no’ and move on to the next on their list. The FCA register gives no help on this either.

Finally, while I am at it, may I remind all my journalist colleagues that IFA is not a generic abbreviation for ‘financial adviser’? That is a mistake made far too often. It is definitely not an abbreviation for restricted financial adviser – that would be RFA which expands to ‘recommend fast avoidance’.

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

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Sipp fraud is costing cautious and sensible pension investors thousands of pounds a year. These are people who would never trust even a reputable investment firm with a penny of their hard-earned retirement cash.

And they would never be fooled by the charlatans and downright thieves who have fleeced many a saver out of their pensions savings.

But strict rules introduced to frustrate such frauds are preventing them getting a guaranteed 6.2% return on their pension fund.

Instead, they are confined to 3.65%, a potential loss of £25,500 a year for those lucky enough to have a million-pound fund they want to keep safe but grow well above the yield of a FTSE tracker or a gilt fund. And with none of the risks or costs.

These rates are not just table topping, they are table smashing

Investment funds that track stock market indices are the best place for money invested over 20 years or more. But for shorter periods, properly managed cash, moved annually to best buys, can outpace them.

At the moment, of course, cash is king. National Savings & Investments (NS&I) recently launched its Capital Income and Capital Growth Bonds, both paying 6.2% AER to UK residents who can tie their money up for a year and invest online.

Amounts from £500 to £1m are welcome in each and guaranteed by the Treasury. No £85,000 compensation limit here.

These rates are not just table topping, they are table smashing. The closest rivals – and subject to the £85,000 safety limit for compensation – pay around 6%. The return on the bonds is taxable as income but, of course, that does not worry an investment in a pension fund which accrues interest tax-free.

Most will know of the Hartley Pensions case, which saw clients left with very little of the £2.3bn they had invested in their Sipps

Except it can’t. Sipps can be put in the regular instant access NS&I Income Bonds, but they pay only 3.65%. A full 2.55% less than the one-year bonds.

But most Sipp administrators refuse to allow any term deposits in a Sipp because they are classed as non-standard investments. And for every client who has non-standard investments, the Financial Conduct Authority rules make them hold more capital.

A standard cash ‘investment’ is one that can be realised within 30 days. So, easy access accounts count as standard. But anything longer term is non-standard. That rule was introduced in September 2016 partly to forestall charlatans offering unrealistic returns and investing in illiquid or dangerous assets.

Despite it, misselling of Sipp investments is still a real danger. Most will know of the Hartley Pensions case, which saw clients left with very little of the £2.3bn they had invested in their Sipps. Such schemes promise good returns but on investments that inevitably fail, such as storage pods in the North of England.

Someone with £1m will get £62,000 after a year and their original million returned in full

The madness is that there cannot be a safer place for Sipp money than NS&I. It has a limitless guarantee from the Treasury. Unlike the scammers, if it promises a 6.2% return over one year then you will get your money back in 12 months, boosted by 6.2%. Someone with £1m will get £62,000 after a year and their original million returned in full.

But Sipp providers are forced to hold extra capital for such an investment as if it was in Brazilian teak forests and that costs too much for many.

The owner of one small Sipp administrator who wanted to remain anonymous and has a number of clients with cash Sipps, told me: “I don’t think the FCA set out to cause this problem. It is an unintended consequence. But it is Illogical because NS&I bonds are completely safe and cannot go wrong.”

And IFA Mark Meldon, eponymous boss of Meldon and Co, said: “There ought to be a waiver for National Savings products because they fulfil an important social function as a cheap way of raising money for the government. It is stupid and crass to class riskless investments as non-standard investments.”

It is stupid and crass to class riskless investments as non-standard investments

It is sad to see the FCA joining in the bias against cash which permeates every corner of the regulated financial world. I wrote in Money Marketing before that the 2022 Barclays Equity Gilt Study was flawed because it exaggerated the return on investments by calculating them using index movements and ignoring the charges and costs of real world investing.

It also understated the return on cash by using the dreadful Nationwide Invest Direct Account. The 2023 study continues these errors. It uses the lowest rate paid on that account in December 2022 of 0.75% while the best buy one-year bonds that month paid 4.36%.

Even a best buy easy access account paid 3%, four times the rate the study used. It loads the dice in both directions, so cash inevitably seems a poor option to advisers who rely on it.

Given the regulator’s usual glacial pace, something might happen in, what, 2026?

For the people eccentric enough to want a capital not-at-risk investment with a high guaranteed return, investing a Sipp in cash can be difficult anyway. Many Sipp administrators, including the larger ones, simply won’t allow it. And even those which will are hit by the FCA capital rules which make it too expensive to allow best buys which cannot be cashed inside 30 days.

But there may just be light at the end of this dark tunnel. Asked for a comment on this problem, the FCA said: “We are aware of the issues, take the concerns seriously and are considering next steps.” Given the regulator’s usual glacial pace, something might happen in, what, 2026?

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

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Chancellor Jeremy Hunt is being encouraged to use the unexpected £5.4bn surplus reported in January to cut taxes in the Budget.

But that is not the only money he has to play with. He could raise almost £30bn by ending some anomalies and use that to begin to thaw frozen tax allowances to benefit every taxpayer.

It used to be that unearned income was taxed more heavily than income earned from employment. Unearned income comes from capital – dividends on shares, capital gains and rents.

Some of those may involve some work on the part of the owner but they are not earnings in the sense of being an employee or self-employed.

In 1972, Conservative chancellor Anthony Barber introduced a surcharge on investment income of 15%. It was finally abolished by Nigel Lawson in 1984.

Raising tax on dividends towards the standard rates would bring in around £1bn for each 1.25 percentage points

Now, of course, the opposite is true. Unearned income is taxed more lightly than taxes on wages. Tax on income above the personal allowance earned from employment is 20% and another 12% is paid in National Insurance contributions (NICs), so full time employees work until after lunch on Tuesday to pay the taxes on their earnings.

Unearned income is taxed less. First, there are no NICs on income from rent, dividends or capital gains – a saving of 12%. Second, the rates of tax on dividends and capital gains are far less than the standard rates of income tax.

Dividend rates are 8.75% at basic rate, 33.75% at higher rate and 39.35% at top rate – all at a big discount off the 20%, 40% and 45% on earned income. Raising tax on dividends towards the standard rates would bring in around £1bn for each 1.25 percentage points.

A start could be made by adding 5.65 percentage points to bring the top rate up to 45%, the higher rate to 39.4% and the basic rate to 14.4%. That would bring in £4.5bn. Dividend taxpayers would still benefit from the extra £1,000 tax free allowance in 2023/24, though that will be cut again to £500 in 2024/25.

The standard rate for NICs is 12% but the rate is slashed to 2% on earnings over £50,270. The opposite of progressive taxation

The personal tax allowance of £12,570 does not apply to capital gains. Instead, there is a special tax-free allowance, currently £12,300 but due to be slashed to £6,000 from April and halved again to £3,000 from April 2024.

The tax rates above that are currently 18% on gains on a residential property and 10% on other gains for basic rate income taxpayers, with higher rates of 28% and 20% for higher and top rate income taxpayers.

Increasing those raises about £1bn for each overall percentage point increase. Most of that comes from higher and top-rate taxpayers. Bringing those up to standard rates of income tax could raise over £10bn a year.

The chancellor should also end the enterprise investment scheme, seed enterprise investment scheme and venture capital trust tax reliefs, which are used by a few tens of thousands of people in the top income decile to avoid tax they would otherwise pay. Between them, they cost the rest of us around £1bn a year.

The freeze means basic rate taxpayers will pay an extra £340 in the year and higher rate taxpayers an extra £1,720

The standard rate for NICs is 12% but the rate is slashed to 2% on earnings over £50,270. The opposite of progressive taxation. If that was raised to the standard rate, £11bn would hit the chancellor’s coffers, with another £1.6bn from the self-employed.

That assumes the self-employed continue to pay just 9% standard rate for their NICs, even though they get virtually identical benefits. Their state pension, which takes the bulk of the money paid in NICs, is the same (before 2016/17 it was often less) and they get equal bereavement and maternity benefits.

The case for the lower standard rate can no longer be made and raising it to 12% would bring in £1.7bn a year from the self-employed on top of the savings from ending the 2% rate.

Those changes raise almost £30bn. It sounds a lot but is exactly the amount snaffled in 2024/25 by the six-year freeze on tax allowances. The personal tax allowance of £12,570 and the threshold for higher rate tax of £50,270 were last fixed in 2021/22 and, under Hunt’s current plans, will not change again until 2028/29.

If these allowances had risen with inflation, as the law says they should, then from April the personal allowance would be £14,270 and higher rate tax would begin at £57,170.

The freeze means basic rate taxpayers will pay an extra £340 in the year and higher rate taxpayers an extra £1,720. Those frozen thresholds also apply to NICs and the Office for Budget Responsibility estimates the big freeze will bring in an extra £150bn over the six years to 2027/28.

Money taken from every taxpayer. Time to start giving it back.

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

The post Paul Lewis: How Hunt can give back to taxpayers this Budget appeared first on Money Marketing.

Another year, another £213m in fines imposed on financial services firms and individuals by the Financial Conduct Authority.

Not a record; in fact one of the lowest totals in the 10 years of the FCA’s existence and barely a third of what it cost to run it in 2021/22.

But still a lot of money. Enough, for example, to run the Money & Pensions Service for nearly 18 months.

In 10 years, the FCA has levied 247 fines, totalling £4.54bn. No other lawful industry requires such policing

So, may I present the FCA Fines Awards for 2022. First, please welcome the winner of Newcomer of the Year: TSB. The bank has never been in the fines table since its 2013 split from Lloyds.

And what a debut! The £29.8m penalty for its collapsing IT system of 2018, which left millions of customers without access to their money or banking, was just the start. The Prudential Regulation Authority added its own fine of £18.9m and TSB paid out £32.7m in customer redress on top — a total cost of £81.4m.

Well done, TSB.

The FCA found senior individuals at the bank had seen and ignored corrupt relationships

But even that eye-watering total does not win the Biggest Fine of the Year award. That accolade goes to Santander, a familiar figure in the all-time greats with 10 penalties since 2002 totalling £165.3m. The bulk of that was the latest £107.8m fine for failing to put adequate money-laundering checks in place.

Money laundering has been one of the biggest fine generators of recent years, second only to cheating other banks over foreign exchange rates.

Across the board

Most of the money — 78% — raised from fines in 2022 came from banks. However, they accounted for just six of the penalties.

The other 20 were split between brokers (mainly for market abuse), investment firms (some of which failed to manage conflicts of interest), traders and one hapless individual, Sir Christopher Gent, fined £80,000 for unlawfully disclosing inside information.

JLT Specialty had been fined in 2013. Nine years later, despite improvements in its procedures, the FCA fined it again

Sadly, financial advisers also featured, all guilty of misselling.

Bank House Investment Management and five of its advisers missold pension transfers without the proper permissions and put the pensions of 265 individuals, worth a total of £8.5m, into illiquid and unsuitable investments. They also put their interests above those of customers.

They were fined fairly modest amounts, ranging from £42,898 to £361,071 — a total of £1.5m between them. The individuals, who were also banned from any regulated activities, appealed to the Upper Tribunal but lost.

The company went into administration. The clients are unlikely to receive any compensation.

Another year, another £213m in fines imposed on financial services firms and individuals

TFS Loans failed to treat fairly its customers who had acted as guarantors of business loans. The firm failed to assess whether the guarantors could afford the monthly payments if they had to. It was fined £811,900 but is also in administration, so that may not be paid.

Repeat offender

JLT Specialty had been fined before in 2013 for failing to have controls in place to prevent bribery and corruption in commission paid to people in the supply chain. Nine years later, despite improvements in its procedures, the FCA fined it again for failings related to anti-bribery and corruption in the general insurance and protection sector.

It co-operated with the regulator and its fine was reduced to just under £7.9m.

The firm failed to assess whether the guarantors could afford the monthly payments if they had to

Julius Baer International is a private bank based in Zurich that provides investment and wealth management for some UK clients. Its website says: “For more than 130 years, we have managed our clients’ wealth and served them as trusted, truly personal and holistic advisers.”

But the FCA found senior individuals at the bank had seen and ignored corrupt relationships, and it said these weaknesses “create the circumstances in which financial crime of the most serious kind can flourish”.

May I present the FCA Fines Awards for 2022. First, please welcome the winner of Newcomer of the Year: TSB

Three individuals who worked for the firm were banned by the FCA but have referred their cases to the Upper Tribunal. The decisions on them and the bank — totalling 329 pages — can be found at fca.org.uk; search ‘Julius Baer’.

During its first decade the FCA has levied 247 fines, totalling £4.54bn. No other lawful industry requires such policing.

Paul Lewis is a financial journalist, host of Radio 4’s Money Box and author of ‘Money Box — a money toolkit for life’

This article featured in the February 2023 edition of MM. If you would like to subscribe to the monthly magazine, please click here.

The post Paul Lewis: An (FCA) fine mess appeared first on Money Marketing.

Every week or so I get an email offering me a sure-fire return on my money of 6%, 7% or 8% a year.

All I have to do is secure the right to buy a canal-side property with a 20% deposit on the £115,000 apartments, which are only a few minutes from shops and offices.

They haven’t been built yet but the artist’s impressions show spacious 40m² units with lots of glass to enjoy the views of the water.

I am told that property in this northern city is rising in price by 9.7% a year, yet still well below the national average.

And local rental increases are even bigger. Hence the guaranteed return.

Unlike the apartment pedlars, the firms making these promises are regulated

These emails have saved me a fortune. I have never sent them a penny. The same principle has won me thousands on the National Lottery — I’ve never bought a ticket.

But recently a much more tempting offer has come my way: a guaranteed return of 4.55% a year for five years; capital not at risk.

On the maximum safe investment of £85,000, that is an income of £3,867 a year. Guaranteed.

As a pensioner I could get a smidge more by giving my money to an insurance company and buying an annuity, but the capital is not so much at risk as guaranteed to disappear on the day I die. I don’t gamble, especially with an insurance company, about my death. It always wins.

Regulatory protection

Suppose I do not want to tie up my money for five years? Well, I can get 4.41% a year over two years, which is only £119  a year less than with the five-year deal. Capital not at risk.

I defy any adviser to guarantee a return of 4.8% over the next five years in investments — especially with capital not at risk

And, unlike the apartment pedlars, the businesses making these promises are Financial Conduct Authority regulated and covered by the Financial Services Compensation Scheme. So, should things go horribly wrong, my capital would still not be at risk, though the anticipated returns might come to an end a bit early.

A year ago, the best safe return over five years was 2.05%, and a year before that it was 1.55%. Anyone who committed to those would be feeling very sick today. But that was the era of nano-rates, when Barclays Bank paid 0.01% on its Everyday Saver account. Barclays’ UK profits in 2021 were £8.4bn; now we know why. Savers struggled to get even single figures on an instant access account.

I remind them inflation affects the value of investments just as much as it does cash

So where does this guaranteed, ‘capital not at risk’, long-term income from cash deposits leave traditional investments — apart from far behind?

Investors will say even 4.55% a year is much less than half the rate of inflation in November when the Consumer Prices Index showed a rise in prices of 10.7%. .

‘So,’ they smile, ‘capital not at risk? Of course it is. Inflation at that rate will mean your £85,000 will be worth less than £50,000 by 2028. I don’t call a £35,000 loss “capital not at risk”!’

I remind them inflation affects the value of investments just as much as it does cash. And, although the value of capital invested can rise ahead of inflation, it can also plummet.

A year ago, the best safe return over five years was 2.05%, and a year before that it was 1.55%

So, there is not an adviser on the planet (or at least not a regulated adviser in the UK) who will tell you how much your invested capital will be worth in five years’ time in nominal terms, never mind after inflation.

Flawed study

‘OK, but what about the Barclays Equity Gilt Study that shows investment in shares consistently outperforms cash in the long term?’ they say.

Sadly, that is a flawed study. First, it exaggerates the return on investment by taking no account of charges levied on investors in the real world. Second, it understates the return on cash by using the rate paid by just one building society account, which, since 1998, has been Nationwide’s InvestDirect account.

In 2021, when the research for the 2022 study was done, that account paid 0.01%. But in the middle of that year the best ‘no notice’ account paid 50 times as much and the best one-year account paid 90 times as much.

Of course, in the long term a balanced portfolio of investments will outperform cash.

I don’t gamble, especially with an insurance company, about my death. It always wins

But capital is at risk, there are no guarantees, and most people underestimate just how long ‘long term’ is. Some say as little as five years. But I defy any adviser to guarantee a return of 4.8% over the next five years in investments — especially with capital not at risk.

What to do with a spare £85,000? That is the cash conundrum.

Paul Lewis is a financial journalist, host of Radio 4’s Money Box and author of ‘Money Box – a money toolkit for life’

This article featured in the January 2023 edition of MM. If you would like to subscribe to the monthly magazine, please click here.

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Four chancellors in four months. And now three prime ministers. As I write, we do not know who will replace Liz Truss. But with her resignation her short-lived economic theory, Trussonomics, has gone.

The grownups have come home and brought with them what Truss used to deride as “abacus economics” — in other words, making sure every penny we spend is funded by a penny we earn.

Truss used to think that was so old-fashioned, when you could — as the last chancellor but two, Rishi Sunak, put it — “stick it on the country’s credit card”.

The problem with borrowing money is someone needs to lend it to you. And the credit cards issued by international investors and pension funds demanded much higher annual percentage rates to meet the ambitions of Trussonomics — £46bn of unfunded tax giveaways announced in just 26 minutes. Not handouts, which in Trussonomics were wrong, but just — quote —letting people and businesses keep more of their own money — unquote.

The party’s militant wing had marched in and laid waste to every balanced book in the library

In fact, the total was a lot more than £46bn. That was per year. And, just days before now ex-chancellor Kwasi Kwarteng’s ‘mini-Budget’ — which, like the Dodo in Alice’s Adventures in Wonderland, promised tax prizes for everybody — Trussonomics had pledged to subsidise every electricity and gas bill in the UK — household and business — at a cost of £60bn just in the first six months.

For households, the promise extended to October 2024, with the total cost potentially exceeding £100bn.

‘Smithereens’

Trussonomics had its fans. The Daily Mail headlined, “At last, a true Tory Budget,” while Sunday Telegraph editor Allister Heath wrote, “The best Budget I have ever heard a British chancellor deliver… the spreadsheet-wielding socialists blown to smithereens by Kwarteng’s stunning neo-Reaganite peroration.”

The militant wing of the party had marched in and laid waste to every balanced book in the library.

Fear spread in Tory ranks. Not so much about the unaffordability of the promises as about their own unelectability

It lasted three weeks. The pound plummeted. Pension funds cried for help as they lost their bets, placed with borrowed money, on which way gilt returns would go. The Bank of England obliged with £20bn magicked out of its quantitative easing tree. And the arcane world of international finance hit home when the interest rates charged on mortgages went through the roof that people could no longer afford.

Millions would face monthly repayments rising by hundreds of pounds. And every month that passed there would be tens of thousands more middle-class households plunged into hardship as rates below 2% ended.

Fear spread in Tory ranks. Not so much about the unaffordability of the promises as about their own unelectability. The party called up its political wing, who got out their socialist spreadsheets and, in a three-day rout, did more U-turns than a roomful of line dancers.

If you see tears in Jeremy Hunt’s eyes, it is decisions that are causing them, not distress

Apart from the house price boosting cut in stamp duty and the third change in a year to National Insurance Contributions (NICs), the only policy to survive this bonfire of inanities was scrapping the cap on bankers’ bonuses because, as latest chancellor Jeremy Hunt explained, “we will get more tax from rich bankers”.

‘Eye-watering difficulty’

Altogether, £32bn of tax giveaways were ditched. But paying for the £20bn left and the £60bn for the energy bill handouts — now reduced to six months for both businesses and households — will require what Hunt called “decisions of eye-watering difficulty”. So, if you see tears in his eyes, it is decisions that are causing them, not distress.

One sneaky tax reversal that will save £1bn a year concerned income tax on dividends. The three rates were all raised by 1.25 percentage points last April. It was a pacifier to people who asked why those who lived on dividends should be exempt from paying more tax towards the NHS and care services when people who worked were paying an extra 1.25% of earnings.

Every month there would be tens of thousands more middle-class households plunged into hardship as rates below 2% ended

The higher NICs will end on 6 November. But the Kwarteng promise of a corresponding cut in dividend income tax rates next April has been U-turned.

Meanwhile, advisers can only sit and wait while the FTSE100 is roughly where it was at the turn of the century, the pound hovers around $1.12, and the best safe return is a savings account paying, as I write, 4.6% over one year and 5.05% a year for the next five, with no risk to capital.

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

This article featured in the November 2022 edition of MM. If you would like to subscribe to the monthly magazine, please click here.

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By all means skim the 161 page Policy Statement PS22/9 and the121 page non-Handbook Guidance FG22/5 published at the end of July.

But all you really need to do is put your self in your customers’ shoes and think ‘would I like to be treated like this?’

If the answer is ‘no’ then it does not pass the Consumer Duty test.

Here are just a few ways that no customer or even you would like to be treated. 

Restricted advice

No-one would choose restricted advice confined to the products created by the advice firm or its network or a panel of firms.

My view is that only independent financial advice can meet the Consumer Duty.

But if you believe restricted advice can do so then call it restricted advice.

Right up front. On your brochures and websites.

Or to be really honest call it sales. Because that is what it is.

The FCA says communications should “equip customers with the right information, at the right time, to understand the product or service in question and make effective decisions.”

They need to know.

Wealth tax

Hands up if you charge your customers a percentage of the money you invest for them which normally you like to call their wealth.

If your hand is up that means the other is in their pocket taking their money.

Even the Government does not charge a wealth tax on the living. And given the choice no one would agree to pay one. 

So charge a fee in pounds like any other profession.

If a client prefers 1% a year to a £1,450 fee it is either because 1% sounds so much smaller or they can’t work out that if they have £250,000 after seven months it is the same. 

Website

Where are your charges on your website? Are they on the first screen or buried away in ‘About Us’?

Or do you believe that putting them on the website would just confuse customers? Or perhaps you shop so often in London’s Bond Street you have never seen goods with prices on?

To fulfil the Consumer Duty put them on page 1.

Active management

Every serious study of fund management has found that in the long-term passive funds give better returns to investors than active ones both in good times and bad.

So how can you justify even for a nanosecond never mind 20 years selling an active fund where charges are higher and performance is worse?

The Consumer Duty would demand you explained all that. And then who would buy them? So just stop selling them now.

Cash accounts

Most people would like some money in cash and most advisers would recommend that.

And remember if you quote cash returns in real terms after inflation, then to fit in with your Consumer Duty, you must also deflate investment returns. 

Remember that cash funds are not cash. A cash fund is more like Liza’s bucket than a savings account.

Cash can now easily earn over 3% a year risk free.

Cash funds generally lose money after charges. If you must sell them at least explain that. 

Charges

It is still ridiculously difficult to find out what the total charges taken from an investment are.

Just tell the truth, the whole truth and nothing but the truth.

Like this: If you invest £100,000 as we recommend then you will pay a total of xxx every year for all the various costs and charges some of which goes to us and some to other people.

Your investment will have to produce a return of x% a year just to pay these charges.

After that the money is yours. Unless you want to take it out when we will charge you another y%. 

If the shoe fits

Just six of my hobby-horses and their uncomfortable shoes to stand in.

If you tell clients the whole truth plainly you won’t go far wrong with your Consumer Duty.

Much better than scouring those 282 pages for loopholes to let you carry on as before.

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

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Hard Times. There could not be a more appropriate Charles Dickens novel for the moment we are in.

It began: ‘Facts alone are wanted in life. Plant nothing else, and root out everything else. You can only form the minds of reasoning animals upon facts: nothing else will ever be of any service to them.’

Printing money, even electronically, usually leads to inflation

So here are the facts — and they are very frightening to reasoning animals such as Money Marketing readers.

As a long-time sceptic towards the Monetary Policy Committee (MPC), I was surprised when I worked out the average rate of inflation during its 25 years of existence. This year is its Silver Jubilee — the first meeting was on 6 June 1997 — marking a quarter of a century since the Bank of England (BoE) was freed from political pressure and allowed to set the Bank rate the economy needed.

Around once a month, nine people meet to do just that. Eight times out of 10 they decide to do nothing. When a tweak is needed, three out of four times it is up or down by only a quarter point; as it was in June when, against many expectations and the wishes of three of its members, the MPC tweaked Bank rate up from 1% to 1.25%.

Earlier this year I was waving around a tenner, saying it would be a nine-quid note by Christmas. Now that seems optimistic

The US Federal Reserve, tackling rather lower inflation than we have here, went for a three-quarter percentage point rise from the same 1% base.

Long-term UK inflation

The MPC target is to keep inflation measured by the Consumer Prices Index (CPI) at 2% (pedants will recall it was 2.5% as measured by RPIX [RPI All Items Excluding Mortgage Interest] until it changed in November 2003).

The arithmetic shows that, from June 1997 to the start of this year, CPI has grown by the equivalent of 2.03% a year.

But the latest rise in inflation threatens to derail that long-term success.

BoE data shows the average one-year fixed-rate savings account pays 0.89%. No one can live on that

CPI inflation reached 9.1% in May and, after more than a year of rising prices, the annual CPI rise over the MPC’s 25 years is creeping up.

The Bank, of course, forecasts annual inflation will fall back to 2% “in the medium term” because its policies always work. But even it forecasts it will be “slightly above” 11% in October.

Earlier this year I was waving around a tenner, saying it would be a nine-quid note by Christmas. Now that seems optimistic.

Shock inflation rise

This vertiginous rise in inflation came from nowhere. In July 2021, CPI was bang on target. Five months earlier it had been 0.4%. Now CPI at 9.1% is the highest it has been since February 1982 — but then it was falling.

The Fed, tackling rather lower inflation than we have here, went for a three-quarter percentage point rise from the same 1% base

It was June 1979 when it last rose through 9.1% and it stayed in double figures until March 1982. So history tells us we could be in for a long period of high inflation.

And so does current affairs. Around the world the end of most Covid restrictions is boosting demand. And war is reducing supply. That iron rule of economics means prices can go only one way.

The majority of the population have never seen anything like it. When inflation last bit they were either not born or too young to care.

Older readers will recall June 1979 when CPI inflation was 9.3% and rising (we called it 11.4% RPI [Retail Prices Index] then, which is 11.7% today).

History tells us we could be in for a long period of high inflation. And so does current affairs

Then Bank rate was 14%, mortgage rates were about to increase to 12.5% and building society accounts paid 7.75% on savings, which rose to 10.25% in November. Many pensioners happily lived on that.

Today, with CPI inflation at 9.1%, the Bank rate is 1.25%, two-year fixed-rate mortgages have risen to a seven-year high of just over 3%, and BoE data shows the average one-year fixed-rate savings account pays 0.89%. No one can live on that.

Hard Times indeed.

Faced with finding a way to boost demand when inflation had gone negative but the Bank rate had been cut to the bone, the BoE invented a second lever to control the economy: quantitative easing. It magicked up £895bn out of thin air.

There could not be a more appropriate Charles Dickens novel for the moment we are in

This seemed to work at the time. But perhaps too well. Printing money, even electronically, usually leads to inflation.

Unless the BoE finds a magic new lever to control inflation while it rages around the world, there are harder times to come.

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

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This article featured in the August 2022 edition of MM. 

If you would like to subscribe to the monthly magazine, please click here.

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It did not turn out at quite that much, but at its present rate of growth it will only be a year or two before it reaches that milestone. 

The FCA’s answer is to do its job better. In the long term that is of course welcome. Stable doors should always be shut quickly without consulting the horses while you oil the bolts.

In March the FCA did that when it used emergency powers (who knew it had them?) to act without consultation and freeze the assets at a couple of days’ notice of the 90 firms who may have mis-sold pension transfers to British Steel Pension Scheme members to ensure they kept the funds to compensate their victims. 

Stable doors should always be shut quickly without consulting the horses

Financial Services Compensation

The levy paid by firms to fund the FSCS is the opposite of the principle of polluter pays. It is the good guys paying for the bad. That would not matter so much if the scheme just compensated the victims of the inevitable careless, unfortunate, and badly capitalised firms.

But it also compensates for the flock of phoenixes that have fleeced one set of customers and now reincarnate themselves with new feathers and a siren song to attract in more. At one time the Financial Services register had more lifeboats than the RNLI. No wonder the cost of this approaches a billion a year. 

banks dominate the fines imposed by the regulator over the last 22 years

Some firms of course should pay – the banks who dominate the fines imposed by the regulator over the last 22 years have only themselves to blame for the high cost of regulation.

My table of those fines reveals that all the big banks have been involved in cheating each other over Forex and Libor, failing to prevent money laundering, or mis-selling to the public. So I have no problem with them footing the compensation bill even for the firms which exist to enrich themselves rather than their customers. 

But when it comes to financial advisers I feel differently. I have been writing and saying that people who need professional financial advice should go to a good independent financial adviser since, well, since the term was invented at the end of the last century.

And most – no, almost all – of the advisers that fulfil my criteria of independence, chartered, and willing to charge through fees rather than an annual wealth tax, are good guys. They have the white Stetson and the silver bullets.

people who need professional financial advice should go to a good independent financial adviser

Of course, some may go wrong. Not least those who mis-sold pension transfers to workers in the British Steel Pension Scheme who have now had their assets frozen. But on the whole there are fewer bad apples per barrel than in many industries. So why do these good guys have to pay for the mis-selling bad guys?

Seven years ago, I suggested in these pages that the cost of compensating the victims of the bad guys should be paid from the fines levied on the financial services industry. So I was delighted to read that my idea has been taken up by the Personal Investment Management and Financial Advice Association (PIMFA).

In February it called on the FCA to use the £783,000 it fined Barclays Bank in February towards the cost of the FSCS and pointed out that in 2021 the FCA levied fines totalling more than half a billion pounds. That would be nearly enough to pay for the £584 million compensation awarded by FSCS in 2020/21. 

Standing between this sensible idea and its implementation is the impenetrable bastion of the Treasury.

All we need now is a Chancellor who needs to polish his image by taking a bold decision

In 2013 Chancellor George Osborne decided to snaffle the net proceeds of FCA fines for the Treasury and give some of the money to service charities.

That decision would have to be reversed before they could be used to ensure, as I put it here on 30 July 2015, that “the bad guys would be paying for the really bad guys. Which would be a lot fairer on the good guys.”

All we need now is a Chancellor who needs to polish his image by taking a bold decision.

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I’ve never been a fan of funeral plans. Or, come to that, funeral directors. Last year two regulators stepped in to tell the industry to clean up its act. First the CMA told undertakers to show their prices clearly and in a standard format so customers could compare one with another. A warning there perhaps for financial advisers many of whom do not show their prices at all, never mind clearly and certainly not in a standard format. It also banned firms from giving backhanders to hospices or nursing homes which passed grieving relatives on to them. These so-called ‘sunlight remedies’ began last September.  

A couple of months earlier the FCA had stepped in to say that in a year it would regulate firms that provided funeral plans. These take thousands of pounds off people now to pay for their funeral after they die. Nearly 200,000 are sold each year with an average price of more than £3,000 and 1.6 million are live.  

An FCA matter

But from 29 July 2022 this multibillion-pound industry will be regulated by the FCA. With less than five months to go the latest figures from the FCA (8 March) show 20 of the 65 providers have not applied for regulation and three others have withdrawn their application. I understand that was on advice from the FCA that it would reject them. So far none of the 42 submitted applications has been approved. 

It is still not clear what will happen to the tens – possibly hundreds – of thousands of customers of these 23 non-regulated firms which will have to cease trading by 29 July. Ideally, they will sell their book to a bigger provider. The FCA told me it is working hard to make that happen.

Latest figures from the FCA show 20 of the 65 providers have not applied for regulation, while three others have withdrawn their application.

One large provider, Dignity, said in February it was working with the FCA to “minimise potentially negative consequences on customers” though details remain unclear. Customers of unregulated firms which are not rescued could lose some or all the money they have paid in. It should be held in a trust but the Treasury and the FCA fear that poor financial management of these unsupervised trusts could mean there are insufficient funds leading to “poor outcomes for consumers if firms fail”. Even a well-run trust will have to pay the cost of early redemption of investments which were timed to meet withdrawals as customers died. One industry expert told me customers could get back as little as 50% of the money they paid in.  

A fundamental failing

Funeral plans have always been a bad idea. People pay money now on the promise that after they are dead – and can no longer bring a complaint – their grieving relatives will be presented with the funeral they wanted, pre-paid. Except it often did not work out like that. The FCA found that the plans were poor value for money and did not guarantee a suitable funeral fully paid for when the planholder died. These plans were sold through cold calling and high-pressure sales, which will both be banned from 29 July. The FCA will also ban commission payments to agents who introduce customers. Perhaps a sign of things to come for other financial products.  

Funeral plans have always been a bad idea. People pay money now on the promise that after they are dead their grieving relatives will be presented with the funeral they wanted, pre-paid.

They are a bad idea for another reason, regulated or not. If an estate is worth anything over a few thousand pounds then the deceased’s obsequies are the first call on that money so they are paid for anyway. If someone does not leave enough to pay for a funeral then chances are they cannot afford to pay for it in advance even through an ‘easy’ instalment plan. Any decent relative would want them to spend their limited income on as good a life as they could afford while they lived.  

There is third consideration. Funerals are for the living not the dead. So the living should choose how to send the dead off. A funeral plan takes that freedom away from them and extends financial control over a spouse or children beyond the pre-paid grave. In life that is called coercive control.  

Paul Lewis is a financial journalist and host of Radio 4’s Money Box 

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Psst! Wanna cash in a pension? Know what I mean? Nudge nudge, wink wink.

That is what the promise made by former chancellor George Osborne has come to. Eight years — and three chancellors — ago, he promised everyone “advice” if they decided to take the momentous step of turning a pension fund — that had promised them security in retirement — into cash.

He told parliament: “We’re going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution [DC] pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have….

“I am providing £20m over the next two years to work with consumer groups and industry to develop this new right to advice.”

Advice. Face to face, no less. And free.

No amount of nudges, winks, smiles or hope will stop people doing what they want with their money

Osborne said it three times in that Budget speech on 19 March 2014 and, as the Bellman cried in Lewis Carroll’s The Hunting of the Snark: ‘I have said it thrice: what I tell you three times is true.’

The face-to-face advice would apply to everyone — everyone — seeking to cash in their DC pension.

Diluted promise

Of course, it did not happen. As I wrote in January, advice has been weakened to guidance, then signposting, and now helping.

But even that is rejected by most people. The latest official research indicates 97% of those who cash in a pension do not go to the signposter-in-chief — the publicly funded Pension Wise.

Most people will prefer to cash in the retirement of certainty to fund the Lamborghini of desire

The government decided to start nudging. To be clear, these are not just any old nudges. They are not even M&S Nudges. They are the Stronger Nudge.

The Department for Work & Pensions has even held Stronger Nudge trials, with results published in the Stronger Nudge Evaluation Report. If you did not know all this was true, you would be incredulous by now.

The purpose of this Stronger Nudge is to increase the number of people who go to Pension Wise and obtain guidance about whether cashing in the pot — that has been contributed to by them, their employer and of course all the rest of us taxpayers — is a good idea or not.

Official research indicates 97% of those who cash in a pension do not go to the signposter-in-chief — the publicly funded Pension Wise

Only 3% of the control group who received no Stronger Nudges went on to get Pension Wise guidance. In 2020, nearly 1.4 million people cashed in over £9.4bn of tax-subsidised pensions. On these figures, that would leave 1.35 million of them without guidance and just 41,850 with it.

After a Stronger Nudge, the percentage who went on to get guidance more than trebled to 11%, but that still leaves 89% who resisted the Stronger Nudge. That would mean 1.24 million people cashing in £8.4bn of taxpayer-subsidised savings in 2020 without getting guidance as to whether it was a good idea.

Pensions Dashboard

The work and pensions select committee of MPs believes this is because it was Not A Strong Enough Nudge. It has produced its own plans for an Even Stronger Nudge, and called in the distant apparition of the Pensions Dashboard to “provide an important additional tool”.

But perhaps all along the Nudge is the wrong approach. To further quote Carroll:

They sought it with thimbles, they sought it with care;

They pursued it with forks and hope;

They threatened its life with a railway-share;

They charmed it with smiles and soap.

Those methods did not find the Snark either, but one thing got close. Do we need a trial of a Wink because that almost caught the Snark?

And even the Baker, though stupid and stout,

Made an effort to wink with one eye.

But then,

He had softly and suddenly vanished away —

For the Snark was a Boojum, you see.

So let us give up on the trial of a Bigger Wink and accept that most people will prefer to cash in the retirement of certainty to fund the Lamborghini of desire.

Advice has been weakened to guidance, then signposting, and now helping

That is what freedom is all about. And no amount of nudges, winks, smiles or hope will stop them.

Paul Lewis is a financial journalist and host of Radio 4’s Money Box

This article featured in the February 2022 edition of MM. 

If you would like to subscribe to the monthly magazine please click here.

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