The trouble starts when companies either don’t tell the whole truth in the first place, or when they don’t rectify commercially fortuitous misconceptions. To an extent, everyone connected with the financial services industry is guilty. The public, and even some sections of the media, are inclined to believe what they want to believe when something new and attractive appears on the scene. Only later, when things start to go wrong, those same enthusiasts will invariably look for someone else to blame for their own lack of nous.
Take, for example, the P2P sector. Only five years ago, when the alternative finance revolution was in its early stages and commentators and politicians alike were buzzing with enthusiasm, the public was not discouraged from viewing investment in P2P loans as a new and more lucrative form of savings. It wasn’t true then and it isn’t true now. But this wasn’t spelt out until the regulators decreed that all firms marketing such products should clearly describe them as investments and that, as such, investors would not enjoy the protection of the FSCS. Despite the questionable value of that protection, we’ve heard little else since from our detractors.
The point is, it should be incumbent on us all to remind investors that higher returns come at a price – it’s called ‘risk’.
The failure of Lendy has acted as a useful reminder that property isn’t always a sure fire way to profit because it isn’t readily convertible into cash. Neil Woodford has demonstrated that shares in unquoted companies can also be hard to shift in a fire sale. Investors in H2O Asset Management have had the same problem. Liquidity isn’t a given, and it isn’t good business to allow investors to believe that it is.
So long as the risks are pointed out honestly and clearly from the outset, investors can’t complain that they were never made aware of the potential pitfalls. The FCA has a clear mandate to protect the public, but there are no guarantees. There will be the occasional mistake and from time to time people will lose money. What we can do at our end is tell the truth and make sure that speed of transaction, whilst important, is no substitute for proper credit analysis. Risk is not a dirty word when put in the context of reward.