FSCS
Calls for More Funds to Handle Rising Numbers of Investment Claims |
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The Financial Services
Compensation Scheme [FSCS] is today [Monday] alerting authorised firms that it
will need to increase its Management Expenses Levy Limit for 2004/05 to enable
it to handle further increases in the number of investment claims being received
by the Scheme, particularly relating to mortgage endowments. FSCS is the fund
of last resort for customers of authorised financial services firms. Its role
is to protect customers of a firm that is unable to pay claims against it,
usually because it has ceased business. |
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"The Scheme plays a vital
role in maintaining consumer confidence and reassuring them that if a financial
services firm fails they will be protected," says Ron Devlin, Interim
Chief Executive. |
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"Despite allowing for a
substantial increase in endowment claims when we did our budget planning in
October 2003, at double the rate then being received, the number of enquiries
and claims coming to the Scheme has exceeded all expectations," says Ron
Devlin. "Claim volumes increased dramatically in the last six months of
2003/04 and current trends suggest that these increases will continue for the
foreseeable future. We are also having to take into account claims that might
come to the Scheme which relate to "precipice" bonds, following the
failures of investment firms that sold these products." |
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FSCS has set up dedicated teams
to handle endowment and other investment cases, but more resources are now
needed to handle further increases in the numbers of claims being received. |
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The
FSA will be consulting on increasing FSCS' Management Expenses Levy
Limit from £12.5m, set in March 2004, to £17.6m later this month. When the
original Limit was published the FSA alerted firms that this might need
to change if claims continued to rise. To help firms manage their cash flow,
any increase in management expenses won't be levied until 2005/06. Compensation
costs are also likely to rise. FSCS does not intend raising further levies for
increased compensation costs during 2004/05, although this will have to be kept
under review.
SCRUTINEER: FOR THE INSTITUTIONS, THE BEAR MARKET IS ALIVE AND KICKING |
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IT NEVER does to place too much
reliance on one set of numbers. That caveat notwithstanding, there were numbers
released last week so remarkable as to demand greater attention than they
received. I refer to the latest figures on institutional investment - or, more
accurately, disinvestment. |
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In the first three months of
this year, total net new investment by the giant insurance companies and
pension funds across all asset categories slumped from £ 22.4 billion in the
previous quarter to just £ 7.6bn. This is less than half the figure recorded
for the first quarter of 2003. |
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The figures for net new
investment in UK company shares are even more remarkable. In the first quarter
of this year there was a net disinvestment of £ 2.8bn against an inflow in
the same period last year of £ 935 million. |
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Now such an outflow may be
considered as cause for relief given that Standard Life dumped £ 7.5bn of
shares in the first week of the year. But this is no one-off, rogue statistic
but confirmation of a pattern. In fact, this is the fourth quarter in
succession that institutional investors have been net sellers of UK shares. |
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The total net disinvestment
over the 12 months to end-March comes to almost £ 8bn. And over the ten
quarters since Q4 2001, institutional investors have been net sellers in no
less than eight of them. Total net disinvestment over this period comes to £
25.6bn. |
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From the standpoint of
institutional investors, it does rather look as if the dotcom bubble-and-bust
bear market has not ended at all. The selling goes on. |
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Contrary to the marketing bumf
pushed to intermediaries and the lay public last year about UK shares looking
cheap and the market presenting a buying opportunity, not only did the pension
funds and insurance companies sell more UK shares than they bought last year,
but this net selling has also continued into this year. |
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Overall, the institutions'
dominance of the UK stock market is on the retreat, their ownership of "UK
plc" falling from 52.7 per cent of the market in 1997 to 48.7 per cent by
the end of 2003. And judging by recent commentary on pension fund and long-term
insurance fund asset allocation, the percentage of total assets held in UK
shares is set to fall considerably further. |
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It is in this context that
hopes of "shareholder democracy" and a growing institutional check on
the behaviour of UK company boards should be set. It is also in this context
that the UK's overall disenchantment with savings should be seen, as
institutional investment is a function of household savings. |
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More worrying for private
investors is how much of a recovery in the UK market overall can be expected
when UK institutions have been, and are likely to remain, significant net
sellers of UK shares. As such, they represent a potential tap on the market. |
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The retreat of the institutions
means that the fastest growing ownership sector of UK plc now is the overseas
or international investor. This may be seen as part of the wider, historical
process of globalisation. But this process is far from smooth and linear, and
cross-border portfolio flows are notoriously fickle. Any deterioration in
sentiment over sterling sparking a rush for the exits would point to stormy
times ahead for the UK market. |
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Projecting the future |
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SHOULD those who manage or sell
pension plans and long-term endowment policies be allowed to project in their
marketing literature what such policies might be worth at maturity? And, if so,
how should that information be presented? |
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John Tiner, head of the
Financial Services Authority (FSA), is launching discussion this week on
the issue of projection rates. All views, we are told, will be considered, from
those arguing for a wide "fan chart" projection to those who say that
all projections should be banned. |
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The first question any
prospective purchaser of a long-term savings contract wants to ask is how much
the policy or pension plan is likely to be worth on maturity. |
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Few issues in investment now create
more mayhem over so many fields: legal, regulatory, statistical, even
existential - do not such projections form a significant part of a purchasers'
decision to proceed, and thus render the fund manager or financial intermediary
legally liable if, in 20 years' time the projections turned out to be wrong? |
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And who can say with any
confidence what the world, never mind the markets and the tax regime, may be
like in 20 or 30 years' time? |
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Currently, the industry is
allowed to quote rates of return of 4, 6 and 8 per cent a year for taxed
products, and 5, 7 and 9 per cent for pension funds and ISAs to reflect their
tax-sheltered status. |
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The absurdity of this "one
size fits all" projection regime can be seen in the fact that they are
applicable to all long-term savings products regardless of whether the
underlying fund is invested in shares, property, fixed interest securities or
other assets, or in an ever changing mix of these. |
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To give an extreme example,
these "illustrative projections" are uniformly used whether the fund
is invested in UK gilt-edged stocks, Russian oil plays or Latin American small
companies. The most unsafe illustration of all is to project current returns
into the future. |
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Better, surely, say some, to
provide a full statement of risks and ban all projections. But how full would a
statement have to be to protect a company or adviser from accusations of
misleading the purchaser and mis-selling? |
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Prospective purchasers could,
perhaps, be supplied by the FSA's 80-page discussion document on
stochastic modelling, or a free copy of Why Stock Markets Crash: Critical
Events in Complex Financial Systems by Didier Sornette. |
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Somehow
I can't see them being handed out with the cheerful Stakeholder pension form at
the Tesco check-out.
Invest in business not home property |
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Caroline Speirs Finance MY WIFE
and I wanted to 'buy to let', but we think now is not the best time as interest
rates have gone up. We still would like to invest in property somehow, so what
other ways are there? We have a small mortgage on our own home which will be
paid off in six years' time, and we were thinking of putting down about £
10,000. |
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YOU could consider investing in
the commercial property market instead of the housing market. It's a much
smaller market, £ 247 billion as opposed to £ 2,800 billion, but returns are
forecast to be around 8 or 9 per cent over the next three years. |
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There are three ways of
investing in commercial property, apart from buying a property yourselves:
listed shares; authorised, unitised investment vehicles; and unregulated,
unauthorised investment vehicles. |
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There are four companies that
trade in property and whose shares you can buy. Shares are volatile and, I'm
afraid to say, property shares are even more volatile than the average FTSE-250
share. One of the reasons for this is that the companies can 'gear up', in
other words, borrow more than they have as security in order to speculate. This
makes them quite risky. |
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There are many authorised,
unitised property funds as these are used by pension plans and life assurance
policies linked to investments, as well as there being a few unit trusts. The
word 'unitised' means that you buy units of a fund where investors' money is
pooled so that much larger properties can be bought than if you were buying on
your own. As the funds are authorised by the Financial Services Authority
(which gives you some consumer protection) they have to stick to FSA
rules, which means they must have 20 per cent liquidity at all times. In other
words, 20 per cent must be held in cash. This can dampen the returns as well as
reduce the risk of the investment. |
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Then there are unauthorised or
unregulated investment funds which tend to be either unit trusts or limited partnerships.
These have less consumer protection than authorised and regulated funds; they
don't have to hold 20 per cent in cash so are less liquid. That means that you
might have to wait until property can be sold when you want to cash in your
investment, which is not always convenient. |
What you need to do is take
independent financial advice to see which, if any, of these types of investment
is in line with what you are looking for, and matches the amount you want to
invest.
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