It is astonishing to think that investors who have been compensated by the Financial Services Compensation Scheme go on to lose some, or perhaps all, of their compensation money all over again with another dodgy firm.
She too was baffled how people could lose their money twice. The phrase ‘once bitten twice shy’ comes to mind.
Initially, I must say my view was that investors who lose their money twice, likely chasing the same or similar unrealistic returns they did in the first place, deserved little sympathy.
If you have lost your nest egg once to an unscrupulous financial services firm then losing the compensation you get from the FSCS to a similar firm all over again is pretty dumb.
However, the more I thought about this the more I realised that it was not the investors’ fault. They were guilty only of trusting a firm with a convincing website or a firm claiming to offer “guaranteed” or unrealistic returns and the like.
In fact this goes to the root of what’s wrong with consumer protection. Investors, at least some of them, are gullible. The are dumb (at times), they are greedy, stupid, call them what you like – they make mistakes, often huge ones. They hand over their cash far too readily to a convincing sales story.
Their big mistake is to trust untrustworthy firms who should have been strangled at birth. There are simply too many crooks in financial services and people will probably carry on losing money for ever. When they do the FSCS, or something similar, is the final safety-net. It’s not optional if any faith in financial services is to be maintained.
So what’s to be done to stop ‘double disasters’ from happening again. The answer to this is unbelievably complicated, if not possible to achieve but here are a few ideas.
Firstly, all financial products of any kind where consumers hand over their money must covered by financial regulation and protection schemes. No London Capital & Finance ‘mini-bond’ wriggling out of regulatory perimeters. Everything in. No loopholes, no products outside regulation or half-in, half-out.
Secondly, I would like to see the FCA and other regulators given the power to immediately suspend any products or companies where it has well founded suspicions that thing are not right. This might, just might, have saved LCF investors, and the FSCS, awful lot of money. We need a financial crime hotline – like 101 or 999 – where consumers can report concerns about a financial provider.
Finally, and it’s not a new idea, consumers need to undertake financial education before buying a financial product, not afterwards. We do not allow people to drive a car unless they have a licence and insurance. The same must one day apply to investing money. Investors must be savvy, understand what they are doing and the risks and what protection schemes cover their investment. That’s rare now but it must become the norm.
Without this the FSCS levy will grow like topsy and ultimately kill off much of the advice sector.
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Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience. This topical comment on the Financial Planning news appears most weeks. Follow @FPT_Kevin