How to balance freedom and investor protection? Disclose the downside.

In my view, the best course of action is to protect the money that the investors can least afford to lose and opt for improved disclosure for everything else. Put limits on what can be done with pension pots and other tax-advantaged savings accounts, but then give investors more freedom with the rest of their savings.

Insist on disclosure documents that are standardised and easy to understand for all exchange traded products. Force the sponsors to spell out exactly what can go wrong.

It’s fundamentally better for society if retail investors are engaged in the markets — but they cannot be just lambs driven to slaughter.

These are the wise words of Andrew Park, an American consumerist who argues that people should be protected by disclosure not product. In other words, people should be free to invest where they like , provided they are properly aware of the risk.

It surprised me to read in the FT’s opinion piece that American commentators now refer to Europe and the UK as jurisdictions where retail investors have the freedom to invest while in America, investments in leveraged products such as private equity and crypto-currency are restricted to the wealthy.

There are plenty of unregulated markets where the less well off are allowed to lose their shirt, gambling – both on-line and on course is an example. I don’t see any disclosure when a bet is laid on a 33-1 shot like “you are 33 times as likely to lose your money as to win”. We enter into gambles as adults with money that we know we could lose. We do not give bookies a hard time for not warning us our horse might fall at the final fence.

On the race-track,  the risks are well known and disputes are few. But in investment markets , the risks do need to be understood or investors are “lambs to the slaughter“.

But gambles are landed

There is nothing worse at a race track than being surrounded by people who have made a tidy turn out of backing a horse – while you did not get on.  The thought of missing out on a “good thing” drives punters to follow money , often to a point where the odds have crashed and there is no value in the bet.

This is the herd instinct that leads to bubbles and is the behavior regulators most fear. It creates the environment where the unscrupulous can sell their wares and the unsuspecting buy them.

The recent decision not to include financial scams in the online frauds bill suggests that this Government is prepared to accept that the public are allowed to blow their private money on water melon farms above the Aswam Dam (I knew someone who did this).

By comparison, the crackdown by  the FCA on ill-advised pension transfers is at the other end of the scale. Here consumers are being protected from losing their pensions by not just the FCA but FOS, FSCS and tPR.

Gambles are landed and fortunes lost in the world of retail investment, but when it comes to the tax-privileged world of pension investment, it’s a different story.

A case of us getting it right?

I agree with the FT and with Andrew Park. We have to allow people to invest their free money in ventures that fail and we have to protect people from ill-informed choice where they are playing with tax-privileged money. The idea of a truly self invested personal pension is a non starter, because SIPPs are sponsored by the tax-payer and the tax-payer, via Government can restrict investments in unsuitable assets. But those assets can be invested into with personal wealth , because we are free to spend our money as we like.

There will always be arguments about what falls within the regulatory perimeter. There are grey areas such as offshore SIPPs and mini-bonds. There are clearly areas such as “pension liberation”, where the Regulators were outwitted and there will be more such frauds in future. But for all the scams, there are many successful ventures which are funded by private angels which will give both pleasure and profit.

I hope that I am delivering pleasure and will deliver profit to the 483 private investors with a stake in AgeWage. Ultimately we need growth in our economy and we won’t get growth if we don’t take risk. We need a regulatory framework which controls risk but allows it to be taken , with proper disclosure.

As the article says.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to How to balance freedom and investor protection? Disclose the downside.

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