COMMENT
Be Your Own Financial Watchdog!

By Cliff D'Arcy
March 9, 2006

I have to say that I'm very disappointed indeed with the outcome of the Competition Commission's inquiry into the store-card market -- and that's an understatement!

I first dubbed store cards "the Devil's Debt" when I worked in the lending sector in the early Nineties, in reference to their sky-high interest rates and payment protection insurance premiums. For example, although the Bank of England's base rate is a mere 4.5% a year, which is low by historical standards, all but three store cards charge annual interest rates of more than 25% APR. No kidding!

To be honest, I'd high hopes that the Competition Commission would do something radical, such as introduce an interest-rate cap on store cards, but its recommendations were very much a damp squib. Although the Commission agreed that borrowers were being overcharged by store-card issuers, its only real remedy is to introduce "wealth warnings" in early 2007 for cards which charge over 25% APR.

Thus, I predict that firms will bring down their rates to 24.9% APR and then go on merrily making money hand over fist from unsuspecting or unsophisticated borrowers, particularly those on low incomes.

Alas, when it comes to tackling financial scandals, government watchdogs have proved pretty toothless, with too many inquiries ending in a whitewash. For example, in my view, the investigation into extended warranties didn't go far enough, because it failed to tackle the bad behaviours at the root of the problem.

Another product which is presently under scrutiny is payment protection insurance, which meets your monthly mortgage, loan or card repayments if you are unable to work due to accident, sickness or unemployment. Almost three years after I urged it to investigate this rip-off protection (because I'd worked in this market for eleven years previously), the Office of Fair Trading launched a market study into PPI last December.

However, given prior half-hearted outcomes, I'm not going to hold my breath waiting for the OFT's report into PPI. What this ropey market really needs is for a major player to break ranks by beginning to sell decent cover at a fair price. Sadly, not one is prepared to sacrifice the fantastic profits to be made from selling PPI!

When I cast my mind back over almost nineteen years in financial services, one thing that really sticks out is the never-ending stream of financial scandals. In my time in this industry, I've been dismayed by mis-selling scandals involving personal pensions, mortgage endowments, high-income precipice bonds, free-standing AVCs, split-capital investment trusts, maximum investment plans, blah, blah, blah. The list goes on and on!

Frankly, the brutal reality is this: you cannot rely on the OFT, the Financial Services Authority or other watchdogs to protect your interests. Sadly, there will always be unscrupulous companies and salespeople waiting to flog rip-off products to you. Therefore, my conclusion is this: you can only rely on your own wits and common sense to steer you clear of financial misfortune.

Hence, be sceptical, even cynical, when someone's trying to sell you something, and be sure to ask the right questions, such as:

• How much will this cost me in charges?
• Does it come with any guarantees?
• What are the risks, and could I lose money?
• For how long am I locked in, and when can I get out?
• Are there cheaper products available elsewhere?

You can read more in A Plain English Guide To Investment.

Lastly, here's my closing piece of advice: any product which offers an annual return of over, say, 5½% a year (slightly more than the best savings accounts pay) will involve some risk to your capital. Hence, tread carefully, because it's a jungle out there!

More: Try this cheap, simple stock-market investment | Your tax-free ISA allowance runs out on 5 April!