Love it or loathe it, any version of capitalism worthy of the name depends on one thing: a healthy appreciation of risk. Putting your capital to work has been the mantra of the upwardly mobile since time immemorial. But it always contained a simple assumption: the responsibility, and the risks, were on you.
Could that be about to change? Next year will see the introduction of new regulations obligating banks and other financial firms to reimburse anyone who loses their money to scammers. Even applying a conservative estimate, this could see banks paying out more than £1 billion to those who have been defrauded – a big hit to their balance sheets.
Break out the small violins, you might think – particularly if you’re one of the 207,372 Brits who were duped into passing their savings to fraudsters last year. But while many of us sympathise with the notion of the vulnerable pensioner tricked by a telephone conman impersonating their building society, could these radical new rules end up going much further?
After all, where do you draw the line between an outright scam and a foolish investment? That was the argument made – largely in vain – by the banks themselves in their submission to the regulators. The industry body Finance UK warns that the new code could see feckless speculators getting their money back, with the rest of us paying higher costs to make up for it.
It’s not hard to understand their concerns. If you spend more than an hour a day browsing the internet, you will undoubtedly have seen the proliferation of “scam” adverts touting duff investments. But could you honestly see yourself falling for one?
The most common kind typically features a stolen image of a trusted figure – typically Martin Lewis or one of the BBC’s “Dragons” – alongside a bombastic claim about a new cryptocurrency generating double-digit returns in the time it takes to open up an ISA. You couldn’t find a better definition of “too good to be true” if you tried.
Others are slightly more sinister. Rather than the age-old capitalist notion of growing your nest egg, they look to seduce the greedy and gullible with a very different notion: money for nothing.
“Here’s how to make £22,000 in just a few hours,” boasts one financial guru who regularly appears in adverts when I browse YouTube. “Escape the rat race through passive income,” reads another video. Underneath the braggadocio is a clear message: honest work is for suckers. Now pay me £10,000 and I’ll show you just how I make my money instead.
What moral obligation should we feel towards someone who ends up falling for such a grift? As a long-term rat-racer myself, I know which way my sympathies lie. What’s more, many people hand over their cash despite having already been warned by their banks. (UK Finance says the industry saved would-be victims from losing £1.8 billion in 2022, by encouraging them to think twice).
Even in more sympathetic cases – like when call-centre scammers impersonate trusted contacts – there are moral questions about creating a presumption that everyone should get their money back. It may well help pacify those who have been duped, but does it also dampen the impetus to go after those who tricked them in the first place?
You might not be surprised to learn that the prosecution rates for those kinds of crimes are pitiful – even by the low standards of British policing. According to the Home Office, only one in 200 frauds results in a successful prosecution. You don’t have to be a hardened cynic to wonder whether these new rules are about covering up the costs of that failure.
Given the need to avoid a spat with the regulators, the banks are staying pretty quiet about the rules – at least in public. Many focus instead on behind-the-scenes “engagement”, pushing for small tweaks that will sugar the pill. Sit down with them in private, though, and it’s all rather different.
Amongst City money managers, there is growing outcry at how regulators – and indeed many customers – now approach the question of risk. Shortly after the pandemic, a senior figure at a major retail investment platform expressed dismay to me at how many long-term clients were selling up blue-chip funds in order to buy cryptocurrencies elsewhere. Many of these cryptospeculators were well into retirement.
At the time, I didn’t share his outrage. If the asset-rich of middle England wanted to make a quick buck on Dogecoin (a cryptocurrency that literally began as an internet in-joke before surging some 7000 per cent and then crashing to earth) who was I to stop them? But the idea they might then expect a bailout after handing their savings to Tunbridge Wells’ answer to Sam Bankman-Fried is rather hard to swallow.
If recent decades of economic history have reminded us of one thing it’s that over-insulating wealth from risk can be just as dangerous (if not more so) than old-style laissez faire capitalism. Just look at the Great Financial Crash. Would overstretched buyers have taken on so much risk if they hadn’t seen how central banks and politicians repeatedly bent over backwards to protect the housing market?
Are we falling into a similar trap here? For its part, the regulator in question (a division of the Financial Conduct Authority known as the Payment Systems Regulator) says its rules aren’t there to protect people participating in sketchy investment schemes. Yet banks have challenged the regulator to clarify how that distinction will work in practice.
Rather than making the City more dynamic and competitive, the UK’s proposed reforms are being held up as a cautionary tale elsewhere
What’s more, these new rules haven’t come out of the blue. Across the UK financial system, regulators are increasingly seeing their role as protecting us from taking on “excessive risk”. Retail trading platforms now carry cigarette-style health warnings, for example, about the number of people who lose money. The FCA has also mooted a 24-hour “cooling-off period” for anyone buying cryptocurrencies.
Sensing a change in the winds, some banks are trying to get ahead of it. In March, NatWest announced new caps on how much money customers can move into crypto exchanges. Nationwide now asks for a face-to-face meeting with some customers before letting them make a large Bitcoin purchase.
It may sound harmless for now, but this mollycoddling attitude to risk has consequences for those who still play by the old rules. City fund managers, for example, are still expected to invest their own money to demonstrate their credibility. If they get it wrong, they can lose their job – and their investors will lose their savings.
It’s rather striking, too, that this is happening when the Conservatives are committed to reviving the fortunes of the City of London. Yet rather than making the City more dynamic and competitive, the proposed reforms are being held up as a cautionary tale elsewhere. Australia’s banking association has warned that emulating the UK approach could end up encouraging fraudsters to target their customers.
Given the vast scale of “authorised” frauds – with £400 million lost last year – there is clearly room for a more hands-on approach. But it’s also clear from the current conversation just how far we’ve moved from the once sacred logic of popular capitalism – with regulations now aimed at idiot-proofing the decisions of the few, rather than keeping the market running smoothly.
Of course, the danger is that the rest of us end up lumped with the consequences. If you think moving your money around is a cumbersome process right now – with card readers and text passwords and the like – just wait and see what happens when banks are expected to treat every single transaction as a potential payout in waiting.
Too much of this and you hobble the very fundamentals of market capitalism, making us poorer in the long run (and thus more susceptible to those touting “get rich quick” schemes…). Capitalism without personal responsibility is a disaster waiting to happen. Let’s hope we’re not about to find out the hard way again.
Robert Jackman is a writer and interviewer for The Spectator, Daily Telegraph, Spear’s and others
