Can the financial institutions continue?

Posted on: 04 February 2009 by Gareth Hargreaves

Independent financial advisor Peter McGahan examines the survival hopes of Britain's banks.

How many financial institutions do you think are financially sound? Do you think they will be able to continue in their current format?

There is a question. No is the short answer, and whilst I don’t think we will return to the days where a bank simply lends money and doesn’t stray into other areas where it has little expertise, the future I expect will be very different.

In my humblest opinion, Mr Brown has long since been looking to own and control banks and their swashbuckling decisions over the last few years will not have helped. Undoubtedly the future of banks and their ability to give face-to-face financial advice is rightly under immense pressure, especially in light of the FSA's recent review of the sector.

I write this column to be passed to the FSA to ask them ,why it is that every customer I see who goes to see a bank adviser, surfaces with an investment bond and an ISA? Maybe I only see the bad ones, I don’t know but in the last 10 years having reviewed numerous bank advisers’ advice, I am stunned by the amount of onshore investment bonds sold - every customer I have seen. This is often followed by a structured or guaranteed contract and I am going to cover these in anticipation of the reply from the FSA.

An investment bond is highly tax inefficient but sold as tax efficient. In a recent budget it was made even more tax inefficient. If you are a higher rate tax payer there are marginal benefits to using one but you are really grasping at straws as a careful use of unit trusts and ISAs or offshore bonds will easily be more tax efficient for the consumer.

In fact, in 20 years of advising I have yet to see a case where an investment bond was more tax favourable than a collective such as a unit trust (outside of advising trusts). I am puzzled. Seek further investment bond advice from an independent financial adviser.

It would be horrible to think that because a bond can pay up to 8% commission and an ISA and unit trust pays 3% that someone so could be distracted.

The biggest area of concern however is that of structured or guaranteed contracts. How do you really know what you are buying and what they are making from you?

Most of these schemes are sold as low risk and simple, but are in fact, too complicated for most financial advisers to understand, never mind an investor.

In the beginning I could see what they were aiming at - the potential for return followed by a protected downside. The protected downside is provided by buying an investment elsewhere such as Barclays, or Lehmans for that matter. The upside is also provided by buying an investment elsewhere such as complex derivatives aimed at producing a return at certain points in the future.

Will they really be guaranteed? It depends on the quality of the guarantee and most people don’t look at that. Lehman's wasn’t even re-rated in the run up to going bust and customers investing in to such 'protected ' plans would have no protection at all.

Barclays often offer this downside protection within many company's plans. The website for Barclay's wealth management currently says that 'on Monday the 13th of October, the FSA is happy with Barclays current capital position and future plans'.

Barclays' share price began October at c£3.50 and closed last week at 50p - a mere 85.7% since that fateful quote. What is that guarantee actually worth now if Barclays were to fail?

These protected products have something cuter in their tail. Ask an adviser how much they really make out of them. By moving down credit curves to provide the protection at cheaper rates, the banks can offer higher headline rates (and much higher risk for you of default) but more importantly much higher profits for themselves as they can keep more.

Do customers really know about this? They do now.

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