Bad advice about dodgy investments is costing the financial services industry tens of millions a year.
The chief of Britain’s compensation service that pays out when investments go wrong revealed some astonishing details of how much scammers are costing their victims.
Mark Neale, CEO of the Financial Services Compensation Scheme (FSCS) told an industry conference that 80% of claims against poor advisers involved dodgy investments like forestry and storage pod schemes.
He added that most of the £125 million compensation from the FSCS related to people handing over their pension cash to advisers promoting high risk investments.
“Most people do receive good advice, but it does go wrong and that tends to be in high interest investments where desperate people are looking for income,” said Neale.
Pension advice distrust
“They typically involve advice from a regulated firm to take out a pension scheme and transfer it into a Sipp, and sometimes to hold it in very risky illiquid assets – storage pods and tropical forestry are fairly typical.”
Neale also argued that advisers pushing risky investments should pay more towards funding the FSCS.
“Our research shows that the protection we provide is encouraging people to go and seek advice. There is still a lot of distrust – around pensions particularly – and the FSCS scheme is reassuring, but clearly costs do have to be pooled across the industry,” he said.
“The FCA has recommended making a broader, deeper pool. It’s not for us to say how that should be done, but we think fees according to risk is appropriate – firms that do recommend unregulated products should pay a higher levy.”
Experienced investors get ripped off, too
Neale explained that disgruntled investors can apply for compensation for being sold dodgy products because their advice is regulated, even though the investments they are selling are not and they do not need any extra regulation to promote them.
He and Financial Conduct Authority director of competition Mary Stark, who was also at the conference, doubted removing unregulated investments from the scope of the FSCS would stop investors buying into them.
They also disagreed with the FCA approving some investments or restricting them to experienced investors only.
“The relationship between how sophisticated you are and how likely you are to be ripped off is not totally linear. Many of these investors are highly experienced,” said Stark.