I know a lot of people who work in the financial industry. One on one, they are decent and kind. I’d trust them to look after my handbag in the pub while I went to the Ladies. But you know what? I wouldn’t trust many of them to look after my pension or my ISA. In fact I’m pretty damned sure that if I bought a financial product from them, they would devote themselves to slowly stealing my savings.
I’m not alone in feeling like this. PressChoice does an annual survey asking journalists how much they agree or disagree with the statement ‘the financial services industry conducts itself in an open and honest way’. In 2008 the majority agreed. This year none agreed strongly and a mere 7 per cent agreed a little (I’m assuming this group is mainly fashion journalists married to hedge-fund managers), while 58 per cent now think the industry is ‘actively closed and dishonest’. What a way to have your business described.
But you can’t blame the media. Look at what we see. This is the industry that blew up a housing bubble then crashed it and insisted on being bailed out — showing absolutely no humility in the process. It mismanaged private pensions so badly that journalists have no trouble finding case studies of people who have ended up with pots no bigger in nominal terms than the sum of 40 years’ contributions. It mis-sold so many products that much of the recent uptick in retail sales can be put down to the compensation payments from the mis-selling — and it has routinely overcharged for this mix of incompetence and theft.
Those in doubt need only look at the wheezes still going on today, such as bonuses on savings accounts. You sign up for something you think offers an interest rate of 1.35 per cent. It then turns out that this is not the interest rate; it is mostly the ‘bonus’ and you only get it for a year. The actual interest rate is just 0.1 per cent (a real example from former trusted brand the Post Office). Could anything be more cynically designed?
Really rubbish products tend to get taken care of, one by one, by the regulators: a review into savings account bonuses is on the way. But banks all too often take regulation as a challenge rather than a warning to behave better. Ban bonus teaser rates and you’re making a bet that product innovators can’t come up with something even more exploitative. It’s a bet that the regulator is bound to lose.
In allowing this to happen, the industry is slowly destroying itself. After years of being flogged stuff they don’t need at shockingly awful prices, most customers are so suspicious that they won’t buy the stuff they do need. Half of all mortgages now go to people who don’t buy any insurance to cover them. The disaster that is our pensions provision is well known. Ask anyone why they won’t move their current account and they’ll tell you one of two things. Either that all banks are as bad as each other and they can’t be bothered, as 46 per cent of respondents told a survey last week; or that they don’t dare because they are certain that if they try to move, instead of getting a seamless transfer, they’ll end up overdrawn and inadvertently defaulting on their mortgage.
Of course it isn’t fair to say that there is no good in the industry. There are many fabulous companies and many fine products, to say nothing of a hard core of people doing their best to make sense of it all for the consumer. It’s also possible to find people who adore their independent financial advisers, who stop by their wealth manager’s office just to chat over coffee (I encourage this: get value for your fees) and who are thrilled by their pension arrangements. There just aren’t enough of them.
So how can we make it better? Almost all the problems in the industry are symptomatic of a lack of simplicity and transparency. One of the reasons people shy away from finance is because it seems so unfamiliar, and there’s a view that it’s the customer who needs to deal with this. Jenny McCartney in the Telegraph recently said we must all ‘learn the language of money’. But must we? Why can’t money talk the language of real people?
Take ‘bonus’: to us it means a little something extra. But if an account pays 1.35 per cent of which 1.25 is ‘bonus’, that isn’t a little extra; it’s pretty much the whole thing. Savings account designers should use words as we understand them, and create simple products that we want to own.
The obvious example of this is one of the most popular fund launches of recent times, Terry Smith’s Fundsmith. Not everyone thinks Smith is perfect but he offers a fund that promises no performance fees, no initial fees, no redemption fees, no over-trading, no leverage, no shorting, no hedging, no derivatives, no over-diversification, no closet indexing, and no lack of conviction. It runs by clear rules, with a straight 1 per cent annual fee. It’s not cheap but it is simple.
And there’s another new business out there that’s even simpler, and I think it’s the best role model the financial industry has. It is Wonga. Everyone hates Wonga because its business model is based on lending to the needy at rates into the thousands of per cent. But if you look not at what Wonga charges but what its website says, you’ll see why it works. Want £200 for a week? That will cost you £19.89. Want £400? That’ll be £33.89. Miss a payment? £30.
Wonga is very expensive, but it’s also delightfully clear: 98 per cent of users say it’s ‘easy to use’. And there are a million of them. They like it, trust it, and come back again and again. There’s a lesson here for the rest of the industry. Most firms charge ad valorem because it sounds better: if you have a portfolio of £200,000 they think you won’t be as scared of ‘1 per cent per annum’ as you will by being charged £2,000 a year. Quote a percentage cost and you aren’t actually telling someone the price, you’re just waving a low-sounding number at them.
What’s my point? Maybe price doesn’t matter as much as clarity — and the ability to compare prices. Maybe people just want certainty. They want to be treated honestly. So back to the core question: how can the financial industry fix itself? Be transparent. Be simple. Be like Wonga. Just with slightly lower prices.