How 'Rip-Off Britain' Harms Investors

Published in Investing on 24 November 2011

When fat margins combine with dubious business practices, investors always suffer!

Psychologists estimate that, roughly speaking, two-thirds of any relationship is built on trust. In other words, when trust fails, so too does the bond.

Scaring off customers

Thus, we use the expression 'Vote with your feet' to describe the situation when customers walk away from providers or suppliers who cheat them. Indeed, rip-off pricing and/or sub-standard customer service are no recipe for corporate success.

In short, corporations can only fleece and fiddle customers for so long before these consumers depart for more ethically minded, dependable organisations. Thus, any business that relies on ripping-off customers for its business model will eventually be found wanting.

Three bad business models

To illustrate my argument, here are three consumer scandals that ultimately cost investors billions of pounds:

1. Payment protection insurance (PPI)

For almost a decade, The Motley Fool fought a long, hard battle against rip-off PPI. Indeed, as an ex-insider in this field, I personally slated this 'protection racket' more than 500 times in print.

Way back in 2003, we exposed multiple problems with this accident, sickness and unemployment cover, including sky-high premiums, huge commissions, anti-competitive behaviour, widespread mis-selling, and policies riddled with exclusions and get-out clauses.

After more than a decade of mis-selling, the PPI industry's chickens came home to roost as the Financial Services Authority, Office of Fair Trading and Competition Commission finally cracked down on its dreadful business practices. This year, Britain's biggest banks have set aside more than £9 billion to pay compensation for PPI mis-selling, hitting their already weak share prices yet further.

2. Card protection plans

Card protection plans are another over-priced add-on that I've campaigned against throughout the Noughties. This market is dominated by two players: CPP Group (LSE: CPP) and Sentinel. For an annual fee of, say, £25, these schemes provide emergency support and protection against fraud if your plastic cards are lost or stolen. Both companies also sell identity-theft insurance of limited value.

However, consumer law restricts your liability for card fraud to just £50, which makes the value of these policies highly dubious. What's more, a former marketing manager at one of these firms once admitted to me that they enjoyed "the highest margins in retail financial services".

However, following news in March that CPP faced an FSA investigation into allegations of mis-selling, its shares halved in a single day. Having floated at 235p in March 2010, CPP's shares now trade at 117p, down 50% and at an all-time low. Again, when the regulatory heat was turned up, CPP's investors suffered burnt fingers.

3. HomeServe

HomeServe (LSE: HSV) is the UK's leading home-emergency insurance cover and domestic-repair provider. With three million contracts in force, it flatteringly describes itself as "Britain's fifth emergency service". Once again, I have long argued that the boiler cover and home-emergency plans provided by HomeServe and the like are over-priced and provide poor value to policyholders.

On Hallowe'en, HomeServe investors received a shock when the firm suspended all outbound sales and marketing activity, following a highly critical internal review of its business practices by auditors Deloitte.

As a result, HomeServe shares plummeted by 28% in a single day. Having peaked at 535p earlier this year, they now stand at 240p, having dived as low as 205p on Tuesday, following the latest interim results. Personally, I would no more buy HomeServe shares than I would purchase one of its over-priced policies, so they get the firm thumbs-down from me.

More scandal-hit shares

Of course, consumer rip-offs don't stop with the three names listed above. All too many companies have come a cropper when, sooner or later, regulators started tackling rip-offs.

Another example in this category is debt-management advice and insolvency solutions, including IVAs (Individual Voluntary Arrangements) at, say, £9,000 plus VAT a time. Eventually, this industry's rip-off fees and misleading adverts finished off its London-listed members.

Likewise, I've long been wary of shares in Dixons Retail (LSE: DXNS), because of its over-reliance on profits generated from the sale of high-priced, low-value extended warranties. In a similar vein, I would not buy shares in doorstep lenders such as Provident Financial (LSE: PFG), which charge their low-income borrowers extortionate interest rates often exceeding 2,000% APR.

Red-flag warning

In summary, businesses that use high-pressure selling to flog products of limited consumer value can (and do) enjoy booming growth and profits. However, dubious marketing practices and unsustainable business models do not create long-lasting value for owners. Eventually, such businesses and their shares will come down to Earth.

Thus, when adding a share to your watch list, always check to see whether a company's chunky margins are the result of exceptional business practices, or from ripping off consumers. In addition, bear in mind that directors and managers happy to mis-sell to customers could do the same to shareholders!

More from Cliff D'Arcy:

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BarrenFluffit 24 Nov 2011 , 3:48pm

"£9 billion to pay competition for PPI mis-selling" A new approach to compensation maybe?

Stubert100 24 Nov 2011 , 4:17pm

What a great acticle for shareholders and consumers. I agree with everything said and couldn't have put it better.

rober00 24 Nov 2011 , 6:05pm

You have elucidated the reason why I have never bought shares like those mentioned above, very well Cliff.

pickepics 24 Nov 2011 , 8:29pm

In which case, MF might like to take a look at the business practices of the big 6 utility groups before recommending any of their shares again. Rip off with legal obfuscation by the ombudsman system to shelter them from the competition authorities. This has to lead to legislative changes, consumer relief and investor tears before very much longer. I for one hope they get very severely caned and not allowed to pass the costs on to their long suffering consumers.

dubre 24 Nov 2011 , 8:46pm


Like the many people who have been persuaded to buy new boilers to replace the perfectly good ones they already have.The sales patter usually includes:-

1. we cannot get spares for your existing boiler--mostly untrue &
2. you will save money on gas consumption---often true but never enough to recover the cost of the new installation.

Triassic 24 Nov 2011 , 9:43pm

I must also complain here about the utility companies. I have one of thise new gas and electric meters with built in G3 card which phones the readings to the company and I have access to the data on line. I wanted my annual usage data so as to check I was on the best tariff, could I find it on-line could I heck. The best I could come up with was monthly data which I had to painstakingly click throught 36 screens to add up to an annual figure. The ombudsman should be getting a grip and making it a legal requirment to clearly display usage, daily, monthly and annual, along with the total price paid per unit (and no hidden costs like the service charge, internet charge ao any other charge!!).

tru2me 25 Nov 2011 , 10:07am

Thanks Cliff.
Very relevant article

dejw 25 Nov 2011 , 12:06pm

A very interesting article, thank you.

Rather than attack the suppliers of these "rip off" contracts I would like to consider why is it that they are able to sell these things? Is it that our education system does not educate people how to evaluate propositions?

Or, perhaps, we should criticise the press for not doing more. The newspapers seem very good publicising "one off" murders, rapes etc, but not the nagging, continual exploitation of customers.


piecan 25 Nov 2011 , 12:17pm

As I've said before, prosecute the Directors and senior management. They are the ones who deliberately dream up ways of ripping us off and then, very often, put pressure on employees to do the dirty work. The only way you can stop people doing wrong is to let them know they will be punished.

Vikingdon1 25 Nov 2011 , 1:19pm

What a shame then that on the same day there is another article from Cliff D'Arcy that Dixons shares may be a Multi - Bagger!

pickepics 25 Nov 2011 , 2:11pm

dubre, I won't give a company with with dodgy sales practices a single sou more than I have to. I won't give a bank any investment or insurance business, for instance. Nor would I give a utility my contract for a new, or the maintenance of an old, heating system. I'd rather support a local artisan company anyway, let alone the fact that the rip off merchants simply don't deserve it. I have always found the local guy cheaper, more reliable and actually there when something goes wrong.

I'm thinking more of, as Triassic mentions, obscuring the information we are actually entitled to by law, their treating us as cash cows, inventing excuses to get more money out of us, like charging us if we find a better service elsewhere. No help online and interminable telephone queues only to find the call centre operative doesn't know or isn't allowed to tell us what we need to know. And more and more and more.

Eventually their customers, i.e. every household in the land, will rebel. Their (boardroom's) pals in the govmint and senior civil service will have to comply and bring them to order.

It will cost the utillities dearly. Don't be holding their stocks when it happens. The market will take on its usual sheep mentality and hammer the shares. One out all out. Dividends will have to be cut to meet the costs of compliance because they will not be allowed to milk us further for that purpose. I hope.

Mike10613 25 Nov 2011 , 2:34pm

This is why we don't trust banks, utility companies, telecommunications companies or any form of government; not a lot left is there?

pickepics 25 Nov 2011 , 3:05pm

With a few thousand companies to choose from on LSE and many more thousands on other bourses, Mike10613, I'm sure you'll be able to find something. There are many sectors left to choose something from. ;-)

CunningCliff 25 Nov 2011 , 3:10pm

Vikingdon1, "What a shame then that on the same day there is another article from Cliff D'Arcy that Dixons shares may be a Multi - Bagger!"

Aha, buy Dixons' share price is now so low (10.2p) that even hardened sceptics like me are considering a punt, Vikingdon1! ;0)


CunningCliff 25 Nov 2011 , 3:10pm

Aha, buy Dixons' share price = Aha, but Dixons' share price

BigScaryHaynet 25 Nov 2011 , 3:11pm

Another good article, Cliff - from one of your fervent followers.

How about adding the telecoms providers, with their frequently changing "offers", and distortion of their charges - for example "six months half price" in huge capitals, the 18 month tie-in only mentioned on another page in very small print. Compulsory line rental, again only mentioned in small print. No mention up-front of the fact that when you leave them, you will have to pay your next provider a fee so that your current provider will release the use of the telephone line to them, and that in so doing, you may have to change your telephone number. "Free" telephone calls, but not to mobiles, and probably not to 0845, 0870, etc. If you want to terminate your agreement, without transferring to another provider, you will have to pay a "Termination Fee".
And I cannot determine whether mobile broadband will work in my area without spending a non-refundable £35.

I could go on.

In my experience they are almost all a bunch of sharks using very dubious practices

CunningCliff 25 Nov 2011 , 3:15pm

Thank you all for your kind comments. Clearly, we all agree that we should hate the rip-offs and the rip-off providers' shares, too!


Dozey1 25 Nov 2011 , 5:50pm

I think we should also include building societies with their obsolete accounts paying derisory (or no) interest, which effectively trap the aged and infirm. And those accounts with a short-term 'bonus' advertised at the inflated interest rates and relying on inertia to keep unfortunate investors hooked; not the Foolish ones of course.

TimBlx 25 Nov 2011 , 6:53pm

Could I just add that I use Sentinel (though not the rubbish insurance bit). For 50 quid for 3 years, for both my wife and I, it stores all the card details - passports, membership cards etc as well as bank ones, provides key tags so lost keys get returned and luggage tags without an address on so the crims at airports don't know where we live. And also the possibility of emergency cash. I actually think that is a pretty useful service. Though I agree about all the other examples in the article.

Perhaps we could add paying £15 quid commission to buy and sell shares? There are lots of places that charge that. It's about 3 times the best rate.


snoekie 25 Nov 2011 , 9:34pm

To which I must add Barclays Bank and their Account maintenance fees for an account substantially in credit with little activity.

It took them 18 months and a kick to wake them up that there were perhaps one or two transactions a month, when they originally agreed to pay interest to be set off any transaction charges.

Lay odds they are not the only bank rip off merchants.

vinchainsaw 27 Nov 2011 , 3:19pm

No such article would be complete without mentioning the train companies, First Capital Connect being my most recent target.

Not to even get into the ludicrously complicated fair mechanisms, I just find it absurd that they could've negotiated a fee regime with the government that allows them to increase their fees by inflation plus 2%, year after year.

It doesnt take a genius to work out this is simply not sustainable, especially as its calculated on RPI plus two, not wage inflation plus two.
An already expensive service is now being increased by 8% year on year. My 50 minute trek to work next year will cost me in the region of £380 per month... now thats rip-off Britain at its very best.

vinchainsaw 27 Nov 2011 , 5:07pm

Oh, and just to add to the above: how is it prudent governance to privatise a service that has a monopoly? Where I live, should I not wish to make use of this "service", I need to move. That's a government sanctioned monopoly, and one that can increase its prices at above inlfation rates year after year.

BlahBlahDoh 27 Nov 2011 , 7:20pm

Tesco's "3 FOR THE PRICE OF 1" at artificially inflated prices are also somewhat egregious. They are often good deals, just not as good as made out, as if the marketeers are addicted to deception even when it's unnecessary.

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