Wednesday, November 13, 2013

The criminal history of scandal in UK financial services

"...I`m taking two weeks off from painting to clean the house up and sort out my financial affairs; like the dreadful endowments we took out that have barely reached half their planned targets and the bloody awful Pensions that have been eaten up by fees. And that fucking  `Gan` policy they said was too big to fail . Thieving bastards, I`m pooped already..."

A friend of mine writes a message on a social networking web-page.

A quick phone call elicits that over the years, he has been sold financial products that are not fit for purpose, are not suitable for his needs, and are either diminishing in value, literally in front of his eyes as the fees charged exceed the earnings, or have collapsed because the original company has gone into bankruptcy and other product providers have stepped in and taken over the residual investment fund. They, in turn have mismanaged the fund as well, until there is virtually nothing left of the original investment, which he was told was guaranteed against failure because of its association with a major European investment fund!

My poor friend has been completely and utterly screwed by the sly words and incomprehensible figures produced by the financial product providers, so much so that he now has no relevant investment benefit to look forward to after years of savings, despite adhering to the accepted norms of every element of 'best practice' in the financial investment business, taking independent advice, and being guided by professional advisers as to where to invest his small capital nest-egg!

For many years, the ordinary British people have been the sacrificial victims of the financial services industry. Unlike the USA, where even working-class blue-collar workers will invest in securities, particularly the shares of the company for whom they work, for the vast majority of British people, the idea of buying stocks and shares, or engaging in the act of 'investing' for growth, was not something they did.

The tradition in the UK was that British working people, wherever possible, 'saved' money, hence the popularity of mutually-owned 'building societies' or 'friendly societies'!

One of the most popular methods of saving was through what were termed 'industrial policies', small savings accounts organised and run by insurance companies, into which a working family could put a couple of pence each week. This was 'saving' at a very fundamental level, but it was undertaken for a most fundamental purpose, so that the person whose name was on the policy could bury themselves with dignity. It was the alternative option to being buried in a pauper's grave, at the expense of the Parish.

These were basic ways of putting money away for a rainy day, and they did not involve a great deal of sophistication, and for many years, they were all the market demanded in terms of providing financial services for the poor, and the labouring classes.

The relationship between the City of London and the working populace has always been a tenuous one. It was well known that the ordinary man and woman had access to a significant amount of raw 'cash' which the investment industry wanted to attract for investment purposes, and the City of London had among its members, a large number of insurance companies who were in a position to provide investment services. The real question was how to part the man from his money (so to speak) and get it into the hands of the City.

Thus developed a generation of individuals who promenaded around the hinterland between the City and the residential communities, men and women whose role it was to sell insurance-backed investment services, investment products which were designed and controlled through the insurance market community.

We shall call these people 'Intermediaries'!

They have been defined as; "...An entity that acts as the middleman between two parties in a financial transaction. While a commercial bank is a typical financial intermediary, this category also includes other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds and pension funds..."

The primary and overriding function of the intermediary was to put together people with money to lend, with people who wished to borrow. The intermediary would be rewarded with a commission payment, usually based upon the value of the amount borrowed. 

The early intermediaries were professionals who acted between fellow professionals, and were therefore deemed to be capable of providing a  good and adequate service to their clients, all of whom knew the ways of the market.

However, all too quickly, the intermediaries became the primary source of investment advice to a vast number of gullible investment 'virgins', ordinary men and women who were venturing, many for the first time, into a financial market, looking for life assurance products, savings facilities, pensions and above all, mortgages.

Suddenly, the financial professionals were dealing with a group of people who had no financial knowledge or expertise whatsoever, and who were literally being led like lambs to the proverbial slaughter in a financial abattoir, from which only the product providers and the intermediaries stood to make a killing!

Most financial products were very carefully designed and calculated by their actuary architects to take the fullest advantage of the existing laws regarding taxation allowances, interest rates, and inflation rates. They were extremely complicated constructs and they needed a great deal of financial knowledge to fully understand their ramifications, and very few of their new clients possessed this knowledge.

In addition, what virtually none of these innocents understood was that the financial sector had no rules or regulations in the early days about what could and could not be said when it came to selling financial products, the only rules which applied were 'caveat emptor'!

The intermediaries were happy to take their new market as they found it, and without any exaggeration, they filled their boots with commissions. Many of them became extremely wealthy from selling their clients financial products which were expensive, and which did not provide value for money. A few of them became spectacularly wealthy, literally millionaires, continuing to make money from treating their clients like mushrooms, selling them financial products which were not in their financial interests, but which no doubt paid significant amounts of sales commission. Some of them, a few, became household names and some, through a series of extremely dubious practices and indeed, downright criminality, made so much money that they became too big to jail!

So, certainly by 1986, the UK was confronted with a new financial market which was ripe for the plucking. A new untried and untested financial regulatory regime, a market competing aggressively for new business,  and a whole new potential reservoir of clients, all anxious to spend the money they were making from their new Yuppie jobs!

The only message was 'sell', 'sell', 'sell', and the army of intermediaries did not need any encouragement to pile into the new opportunities.

I was the Director of Enforcement and Investigations at FIMBRA ( Financial Intermediaries, Managers and Brokers Regulatory Association) for 2 years, the self-regulating organisation which was formed to regulate and supervise the vast army of life assurance and pensions salesmen who wanted to operate on a self-employed basis, as opposed to being employed as 'tied agents' by a specific company of product providers.

This vast mass of financial intermediaries swarmed across the landscape like a plague. They were on every street corner, in shops and small offices. They gave themselves fancy titles, usually with the words 'Financial Services' in the title, and they existed to sell a wide variety of financial products to all and sundry.

This was the important point. As self-employed intermediaries, they were able to act as 'principals' in all contractual matters. They could sell any financial product they wanted, and indeed, one of their required functions as FIMBRA members was to give what was called 'best advice'. This meant that they were required to undertake a full financial fact find of their potential client's means and needs, and then to shop around, using their skill and judgement, to find a product suitable for their client's requirements.

Their duties were to act in the client's best interests, and to subordinate their own interests in the process. Well, that was the legal theory anyway!  Their sales methods relied heavily on amplifying the client's sense of guilt, pointing to pictures of his loving wife and children and appealing to his emotions to think what would happen to them if he were not around to provide for them? If, having identified a product that would meet their client's financial needs, they then found themselves conflicted with another product which would not be so suitable for his requirements, but which paid a higher commission rate, then their legal duty was clear. It was to think of the best interests of the client and to put his interests first, regardless of the fact that they were going to earn less commission.

And if you believe that is what happened, then no doubt you still believe in the tooth fairy, and that the bogeyman lives in a hollow log behind the municipal library!

My time at FIMBRA taught me that the financial intermediaries, for the most part, were among the most unprincipled, and financially insecure practitioners who ever had control of a client's funds. I don't remember many of them walking through my office door when they had to come and see me, most of them just slithered under it!

They flogged dodgy insurance endowment policies, which paid fantastic commission rates, and which were supposed to run, in so many cases, in tandem with a mortgage, so much so that all the time the client was paying his annual premiums into the policy, he was saving to pay off the capital of his principal sum borrowed, 'while gaining the benefit of life cover' as it was always so neatly put!

I could not possibly work out the number of unwitting clients who were bamboozled into an endowment policy insurance backed mortgage, but it was huge. As a young police officer, I myself was one such because when I got married, the Building Society refused me a mortgage loan on the basis that I hadn't been saving with them long enough, but then introduced me to a mortgage broker who just managed to organise a mortgage for me from the same Building Society, coupled with an expensive Endowment Policy, on which he earned a huge sum of commission.

I know, I know, I spent years trying to work out how that particular piece of smoke and mirrors worked, until I realised that I had been simply taken for a schmuck, along with hundreds of thousands of others.

Later, when I came to sell the house and move on, I was told that the existing policy would not cover a new mortgage, and I would need to buy another one. Yes, I know, gullible or what?

Another scam was what became known as 'All of Life' Policies where insurance policies were sold to unsuspecting couples, in which the life of the assured was covered until his death. The figures were so complicated that it was not until some years after starting that the hapless investor realised that his annual premiums were growing at exponential rates, indeed, in so many cases, the product had to be cashed in before fruition because the insured simply couldn't afford to pay the cost of the premiums. The insurance companies had the benefit of literally 'free' cash  for years before the likelihood of having to pay out any benefits, and then the policies were cancelled before the bitter end, literally a licence to print money.

This was followed by the great Pensions swindle when many thousands of workers in occupational pension schemes offering final salary pension benefits, were defrauded out of their original schemes, and encouraged to invest in private 'portable' pensions. These were then raped by the pension providers in terms of costs and fees, so much so that many pensioners ended up with a small percentage of what they had saved. It was at this time that the cruel misnomer 'mis-selling' was first coined.

Unit Trust savings schemes whereby the client's investments (sometimes many thousands of pounds) were placed in the company's bank accounts and never paid over to the Unit Trust company until 6 months after the contracts were opened, leaving the client at huge risk in the event of anything happening to the intermediary. One big company in the West of England specialised in this form of swindle, but proved to be too big to jail when an investigation proved what they had been doing!

Privatised share offerings proved irresistible to some of the big players and some made big fees on supporting these new product opportunities.

PPI insurance policies of course were just another of the scams offered by the intermediaries, and the great problem was that they could and did literally make up any lie or untruth, or misleading statement to give credence to their activities. The difficulty was that until such time as the policy did not pay off or mature in the way in which it was anticipated, no-one could know that the original representations were not truthful.

In these and many other ways too awful to recount, the British people have been routinely screwed and defrauded by the financial salesmen who were so used to lying and misleading their clients, that telling bloody great big untruths simply became a way of business.

This must help to explain why it was that a whole generation of banksters and other financial salesmen found absolutely no difficulty in defrauding customers of PPI policies, interest rate swaps, and other financial products during the run-up to the financial crisis. They were so used to telling lies and defrauding customers that it simply became second nature for them to carry on as before. There was no moral obligation they felt necessary to uphold, there was no ethical environment which made deceiving a customer an anathema!

It amazes me now that anyone would willingly part with their money to any financial intermediary or investment adviser. There is simply no fair and honest market into which the small investor can place his savings, without running the risk of being sold a pup. This should be a matter of significant concern to the Government and the regulators because it means that nowhere is safe for the investor and that means that more and more investors will try and avoid the markets and those financial advisers who serve them. Oh, I am sure there are a few out there who have principles and try to give their clients a fair deal, but I am only really saying this because I don't want to run the risk of receiving a tsunami of complaints from advisers complaining that I have been unfair to them, and traduced their 'fine' reputations. I read those letters before and I didn't believe them then, and I won't believe them now!

I cannot believe that my friend is the only person who has been routinely screwed by his experiences with the investment markets. The worst thing is that he is a man who brings joy to other people's lives as a fine artist, whose paintings are colourful and beautiful, and one of them hangs over my desk. Sadly, this gentle, talented, artistic man is just one, I am convinced, among many hundreds of thousands who have been parted from their savings by unprincipled salesmen and women, unprincipled crooks who have themselves lived a life of luxury, having stolen a great deal of money.

My years at FIMBRA were surreal ones, in the end I found I couldn't stand the complicity and the complacency being demonstrated by those whose jobs were supposed to be aimed at preventing the very scams we were uncovering and then busily covering up. It was an awful time, and one for which I still carry the scars, maybe a tale for another time.

After I left, a friend told me that in my absence, the organisation had attracted a new name, and that FIMBRA was now routinely known as 'Fuck It, My Broker's Run Away'.


AbogadoNZ said...

What a sorry story all round for you and your friend Rowan. It is abundantly clear financial intermediaries can;t be trusted - then or now. The regulatory regime was written on the assumption the market was peopled by those who had a 'gentleman' code of conduct'. The trouble is that is nothing but a chimera. Where to from here - well stop investing and/or saving in anything but a mutual for a start. When looking at commission it was normal for the broker to get 90% (or more) of the first year's premium and a trailing commission of 10% thereafter. Hardly a surprise there was nothing to pay of your mortgage with - the company would have to beat the market by 50%+ to get anywhere near it. Root an branch reform starting with making the banks fall over has to be a start. Letting a bank create a bad bank into which to put its toxic loans has to stop as this is just creating shed-loads of debt for our children/grandchildren. Austerity is not the right programme when there is trillions locked away in tax havens.

Amazed! said...

I concur with your article, having myself been 'tied' to an outfit for a few years, known in the trade as Allied Crowbar - wink, wink.

I sold pensions, life assurance and critical illness cover with an honest intent but agree with what you have written. I left this business 22 years ago.

Imagine my surprise when I recently met up with a furmer client who expressed his heartfelt thanks to me for selling him so hard. His wife was diagnosed with cancer after purchasing policies from me and survived. She received a £90,000 tax free cash payout from the critical illness plan, and has been receiving £1500 per month as income replacement for the past 5 years and will continue to do so for the next 10! In addition, her insurance also makes the monthly payments into her pension plan that she had to stop making as she could no longer works.

Just a little light to shine into a very dark business.

Johnm said...

Seems like the US has the same, or greater, problem:

Roger Moore said...

Sounds almost like a modern day Charles Dickens story. Nice piece of writing!

--Roger, Wiesbaden

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