The Uncle Buck saga has proven once again that the principles of investment have not changed: risk versus reward still exists. We need a new levy system to ensure fairness
If you were to receive an offer today via internet marketing and social media from an unknown, fairly new finance company, with a net worth of less than £250k, to invest in five-year bonds issued by a company you have never heard of, which would pay a whopping 7.46% p.a., would you invest? Or might you pause and ask yourself what the catch is?
If your further due diligence reveals that most of the money raised is then lent to an organisation that provides payday loans through an outlet called ‘Uncle Buck’ (slogan: Ask Uncle), would you proceed?
Now add in linked companies with funds flowing between Cyprus and the Cayman Islands and you may decide that this is one on which to pass.
You would be sensible. However, 1,800 investors thought differently.
This is the story of Basset & Gold (B&G), whose name may seem vaguely familiar as the former sponsor of West Ham United Football Club’s shirts. B&G collapsed in April 2020 having sold almost £36m of bonds to retail investors over the past five years, many of whom are now seeking compensation. The investors can do so, not because the bonds failed, but because they were sold by Basset and Gold Finance, a subsidiary of B&G authorised by the UK FCA, and there is a strong possibility of mis-selling. The Financial Services Compensation Scheme (FSCS) is encouraging claimants to register their interest, and it is expected that claims will be received for about £20m.
Expecting the entire sector to pay up for the errors of a few is a form of collective punishment
The FSCS is entirely funded by the finance sector. Therefore, the cost of any claim it pays out is passed back to the firms in the sector. This has led to a significant increase in the contribution levied by the FSCS on all firms, with, for example, St James’s Place seeing its share of the burden increase to £27.8m in the first half of 2020 from £16.1m in the same period in 2019, a rise of 72%.
The FSCS has long been criticised for penalising well-managed firms for the errors of poorly managed ones, and the B&G collapse gives critics new ammunition. Expecting the entire sector to, once again, pay up for the errors of a few is a form of collective punishment, which seems redolent of more brutal times and goes against the concept of fairness, a core pillar of integrity.
But what has happened to caveat emptor? Where is the responsibility of the investor?
In the Basset & Gold case, did the investor pause for a moment to consider whether the reward – almost 7.5% p.a. – was in line with the market, then returning closer to 1%, and then make an informed judgement?
Even if the sales literature does turn out to have misrepresented the true position, where is common sense in this process? If something seems too good to be true, it probably is. An offer of 7.5% when the market was 1% for a risk-free product should have signalled loudly that this was a high-risk investment.
What has happened to caveat emptor?Have we now moved so far away from the fundamental principles of investment that the risk/reward ratio is not something with which retail investors should be concerned?
Of course, in real life, things are rarely so cut and dried. There are usually contributory factors that make either binary option – a full loss or a full recovery – unfair to one party.
Therefore, given that the role of the FSCS has attracted significant interest from MPs, and may well be the subject of a Treasury Select Committee enquiry, here are two suggestions for the committee.
First, move away from providing a blanket 100% compensation approach towards one that reflects the circumstances of the investment. Those who chase higher rewards in inherently more risky products should not expect the same level of comfort as those who, for example, leave their money with the main clearing banks.
Second, the regulator should build on the principle of senior management accountability. If a court has confirmed that individuals in a firm clearly have mis-sold, then, just like health and safety legislation, the directors need to be held personally liable and criminally accountable so that they pay up, rather than the burden falling on firms that have adhered to the highest standards of ethical and professional practice.
A combination of assigning responsibility to where it is deserved and a change in the level of compensation to reflect the risk/reward ratio of the original investment would help swing this compensation pendulum back towards the middle ground.