Hidden charges expose failures of FSA

SURELY I'm not the only person with the opinion that hundreds of millions of pounds have been wasted over the past 30 odd years on financial regulation?

In the 1980s the Gower report – authored by Professor Laurence Gower – culminated in a watered down Financial Services Act thanks to banks' unhappiness at proposals to separate the creation of financial products from the sales process. They reckoned they would lose their invaluable commissions earned from unwary customers.

There's been various academic proposals and tinkering since, geared supposedly at hard disclosure of charges and commissions, which recent research shows has had little impact.

And now some august committee has published a document titled "The Future of Banking Commission". Apparently, "commission" here refers to the body of people who put the report together rather than the word "commission" which accounts for heavy charges for many unsuitable financial products.

But recent independent research demonstrates that as many as 60 per cent of bank customers, when buying a financial product from them, think there's no charge, or don't know how much is being charged. And yet regulators still insist the hard disclosure of charges is fully transparent. Who do they think they're kidding?

Let me give you an example. A month ago my cousin, whose husband died six years ago, and who's now 76 years old, approached me, confused and worried, seeking my independent advice. It concerned a report she had received from a wealth planning manager who was acting on behalf of a well-known national bank.

Just after her husband died, the same salesman from the same bank sold her what was then called a Guaranteed Investment Plan. At the time he said there would be no need for him to see her for at least five years, for some reason she couldn't remember, but which should be obvious to those in the know.

It usually takes about five years for high levels of commission to be slowly removed from the investment by actuarial magic so the extra charges don't come to light when the investment is cashed in. So – surprise, surprise – with the charges having been removed, she was approached by the salesman to review the investment. And the bad news was, despite the fact she has had no income from the plan at all, the value is more or less what she invested all those years ago.

Now that's strange when you consider a cautious alternative investments for someone like her is Invesco Perpetual Income Fund, up over 40 per cent in five 5 years and Troy Trojan Fund up over 50 per cent.

But the salesman advised her to cash the investment and start again. He sent a 14-page report, full of words she didn't fully understand. And there was attached at the end a further six or seven pages of what's known as key facts. It consisted mainly of more confusing words, a few complicated tables and some hieroglyphics. The report suggested she get rid of the existing investment, replacing it with an Investment Bond – no word of alternatives such as Isas or unit trusts. The charges are 40 per cent higher than those in the existing plan. There was a pathetic attempt at justifying this.

So what will be the benefits? That's a hard question to answer, because she won't receive income for the first couple of years and then only 2 per cent a year. By the time the heavier charges are offset, she'll be 81 years old.

What she didn't notice was that in the key facts section, what appeared to be the last page, because it was blank, wasn't. Tucked behind it was a further page with a paragraph which showed the cost of giving the advice to her was more than 7,000, or 5 per cent of her investment.

This is what millions of pounds of regulatory interference has achieved. This is what the Financial Services Authority calls hard disclosure and transparency. Frankly it's a joke as well as a disgrace. If you're about to buy a financial product, perhaps as a result of poor deposit or stock-market returns, be very careful. Ignore the sales hype, complicated words and mathematical tables in the so-called report. Go to the back page and look at the cost, which is coming out of your pocket.

And when the report mentions words such as "for arranging this contract x will provide y with remuneration and services valued at 7,000 or whatever", be very clear what it really means is "you're paying us that, and we'll see you again five years from now to get more".

Alan Steel is chairman of Alan Steel Asset Management Ltd. www.alansteel.com