Rogue investment should be bard
The expensively produced brochure received by Roger, a Moneywise reader from Doncaster, launched its sales pitch with a reassuring quote from William Shakespeare: “I advise you, as long as the capitalist system lasts, vote for gold.”
The quote is from The Merchant of Venice, which may not offer the best example of a happy and well-regulated financial services industry. But then neither does the brochure, which comes from an investment company in the Capital Asset Group.
The group has traded over $450 million (about £225 million) in the precious and industrial metals markets and boasts that it is “one of the global leaders in the offering of physical commodities to private investors” working with “erudite independent financial advisors”. It recommends that individual investors place up to 15% of their savings in commodities.
Capital Asset Group has offices in the US, Spain and the United Arab Emirates. In the UK, it has offices in Chelmsford, Nottingham and Edinburgh, as well as at Canary Wharf in London, a short walk from the headquarters of the Financial Services Authority.
It all sounds very reassuring – except that the group is not authorised by the FSA to offer investments, nor is its US headquarters licensed by watchdogs there. Yet oddly, nobody is breaking the law.
You see, when the glossy brochure is followed up by a telephone call from a Capital Asset Group salesman, although he will sound like a commodities broker and speak knowledgeably about trends in the price of gold, silver and copper, legally he is just a scrap metal dealer. While genuine commodities brokers offer a piece of paper that lets you bet on a price movement within a fixed period, the Capital Asset Group actually sells you a lump of metal. So, under FSA rules, its product is no more of an investment than a house, car or antique.
In practice, of course, all you get is a piece of paper that says your metal is stored in a warehouse. But in theory you could drive up, produce your receipt, demand your metal and drive off with it.
While Capital Asset Group is doing nothing unlawful, its clients should realise that, as the company is not authorised by the FSA, they will not be able to complain to the Financial Ombudsman if something goes wrong, nor will they be able to make a claim with the official compensation scheme.
And there is a further twist in this tale that could load the dice against the investor. The group does not just sell pieces of metal. It also offers loans so that you can invest more. For example, put down £2,500 for an industrial metal such as zinc or copper, and Capital Asset Group will sell you metal worth £10,000.
The idea is that this leverage increases your profits by letting you invest money you don’t have. But the downside is that it can also increase your losses, and the risk here is greater because you are gambling that metal prices will rise faster than the interest charges that mount up as soon as you agree to the loan.
Of course, you can pour money in to cover any fall in metal prices, but you might be throwing good money after bad. The winner, whatever happens, will be Capital Asset Group, and typically the investor will come a poor second.
Tony Hetherington is Consumer Champion of the Year 2006
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.