An exposé of the ongoing rip off of the British public by the high street banks with particular reference to a BBC Television Panorama programme.
Once again, the BBC has produced an excellent exposé of the biggest rip off ever foisted onto Mankind – banking – this time with its Panorama programme screened last night, Monday. The title of this episode is the rhetorical Can You Trust Your Bank? After the scams and shakedowns we’ve seen in recent years, the British public more than most, might have expected to see if not trust then regulation placed at the heart of banking; alas, there is still no sign that the government and regulators have even begun to get to grips with the problem.
Last October, Panorama exposed the great pensions rip off; Monday’s episode was a revisitation of this from a different angle; the previous programme dealt with funds and fund managers; this one dealt with some of the major salesmen for these funds, the high street banks.
The programme comes hard on the heels of last month’s clampdown by the FSA on the mis-selling of payment protection insurance. On Monday, ahead of this programme, Barclays – one of the major UK high street banks – said they would be repaying on a “no-quibble basis” everyone who had been mis-sold PPI and who had made a claim before April 20. It remains to be seen if the then forthcoming BBC exposé was responsible for this sudden twinge of conscience.
In the programme, people were sent “undercover” into banks to find out exactly what they were selling and what promises they were making fund-wise. The results were not encouraging.
One woman who took early retirement went to her bank, Abbey National – that has now been taken over by Santander – gave them £11,000 to invest, and they turned it into 5,000! When she complained that she had been sold a pup, the bank’s reply was – in effect – tough luck. She took the matter further, and the bank was ordered to repay her £5,000 + interest, but after legal fees, she was still left out of pocket.
The programme presented an anonymous interview with a bank employee. While one must always be careful when evaluating such testimony, this one, unfortunately, had the ring of truth. His claims were amplified by the Editor of Which? who said:
“Banks don’t make any money on selling savings accounts, but they can make quite a lot of money by selling investment products. Bank branch staff are too often incentivised to sell products that...bolster the bank’s profits, not sell products that are right for the customer.”
The management fees charged by the banks sound modest, 2% doesn’t sound much as a set up charge, and a 1.5% annual management charge sounds positively modest, but 1.5% of what? These funds are not deposit accounts that pay interest, they are investment funds that “invest”. But what does that word really mean? It means the people who control the funds use them to play the stock market. One meaning of the word play is to have fun, and yes boys and girls, they are having fun “playing” with your money. In practise this means moving money from A to B from B to C and from C back to A again all the time trying to second guess the market. Another word for this is gambling.
It should be stressed that this type of “investment” is in no way comparable with what might be called productive capitalism. Let us take the humble pineapple. This is grown on a plantation, transported to market, sold, canned, sold again to an exporter perhaps, who exports it and sells it to a retail warehouse or cash and carry, who sells it to your local corner shop, who sells it to you, and you eat it. The cost of the product increases with every transaction because the plantation owner has to pay his workers and make a profit, the cannery has to pay its workers and make a profit including for reinvestment, the shipping line has to pay its staff and make a profit including for reinvestment, and so on, and at the end of the day, you have your dessert. Now contrast this with “playing” the stock market. These funds don’t grow pineapples, bananas or anything else; they don’t manufacture goods, they don’t deliver goods or services to the trade or to the consumer, they don’t put food on the table. They do not generate wealth. All they do is shuffle around bits of paper trying to sell for more than they buy.
On top of that there are fees, commissions and charges. Banks and other “investment houses” have rents and rates and other bills to pay, advertising costs, staff salaries, and of course bonuses. Before any investor can show a profit, all these costs must be paid. Does anyone need a bank to do this?
Even with the best intentions in the world – which clearly the banks and investment funds don’t have – who needs managed funds anyway? Towards the end of the programme, the Panorama team visited a lady who had elected to manage her own portfolio – ie to play the stock market on her own account rather than pay the “professionals” to do it for her. She retired at age sixty and decided to try to make a living out of investing. She told reporter Penny Haslam she thought she might last about six months, nine at best. Four years later she is doing better than any of the victims interviewed for this programme.
Her starting capital was £170,000 of which she kept a third in cash, and needed to generate £10,000 per annum with the rest. She said after a while you get a feel for the market, adding that obviously you can lose, but you’re not paying somebody else to do it for you. And there’s the rub.
This lady is not alone, and if she can do it while the banks can’t, the question must be asked, should banks be allowed to run these funds at all? In fact, should pension funds and unit trusts be permitted to exist?
Two years ago, a seemingly bizarre experiment was performed in South Korea. A six week contest was run by a company, the object of which was to make the most money playing the stock market. There were eleven competitors: ten humans and a parrot. Picking out stocks with its beak, the parrot came third. The explanation for this is well documented but not widely known. Managed funds cannot beat the market because by definition they create the market. As with most things in life there is a normal curve of distribution; a tiny number of funds will perform extremely well, a (hopefully) tiny number will perform very badly, while the majority perform around the average either doing a little better or a little worse. The only way everyone can win is if the companies in which the funds are invested prosper. The best companies in which to invest are blue chips, because they are the best by definition; they have most of them been around for decades or in a few cases centuries in one form or another; any blue chip company will by definition have a proven track record.
That being the case, for people who don’t wish to manage their own portfolios, there is a simple solution. They should be permitted to pay their money into a government managed fund and leave it to accumulate. There would be no churning of shares and only a minimal charge because there would be no trading of shares; the fund would only buy and sell when new funds were added or when people wanted to withdraw money. This could be used to great effect for pension funds because they are tax-exempt, and indeed the British Government has recently set up something like this called NEST.
It remains only to see this or a similar scheme exported to the rest of the world, and we can abolish managed funds in total. And with the rise of the Internet, it remains to be seen if apart from our local branches for shoppers and small traders, we need any banks or so-called investment banks at all.
The programme can be found here for those who can view it; for those who can’t, watch out for it on Youtube.
[The above op-ed was first published June 14, 2011. The associated image - of some coins - has been omitted.]
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