April financial services news round up

April 30, 2008 | posted by Pam Atherton in Banking, Investments, Pensions, Savings, Uncategorized | comments (1)

April saw the publication of two reports - the FSA’s interim feedback on the Retail Distribution Review and Lord Hunt’s review of the Financial Ombudsman Service.

RDR 

Many respondents to the RDR called for a ‘simpler’ landscape, with a clear distinction between advice and sales, with the FSA suggesting three components - advice, sales and money guidance.

The General Financial Adviser category has been jettisoned, raising the prospect of tied and multi tied advisers having to choose between the advice and sales categories.

Advice could only be given by independent advisers, who would have to reach minimum professional standards and advise on a ‘whole of market’ basis. Remuneration would have to be agreed with the client, and not influenced in any way by the provider.

Salesmen would have to conduct business on a ‘non advised’ basis, although they would still have to operate within the current regulatory framework.

Money guidance is a newly proposed information and guidance service along the lines proposed by the Thoresen Review, which the FSA is taking forward as a ‘Pathfinder’ project to see how this service might develop as a national service.

The BBA attacked the proposals because they would limit the service they currently operate for the mass market and would present consumers with a stark choice between expensive financial advice or a non advised sale.

The FSA acknowledged that it needed to do more work in this area, saying it was in discussions with banks about allowing them to continue to offer advice on their own products.

Edinburgh declaration

Meanwhile, the Chartered Insurance Institute, the Institute of Financial Planning, the Securities & Investment Institute and Chartered Institute of Bankers in Scotland signed a joint declaration of principles setting out how they will supervise advisers in the future.

They called for a single independent professional standards board to create, oversee and develop high standards, with the power to expel advisers from the industry.

Review of FOS

The Hunt review of the Financial Ombudsman Service called for a crackdown on claims-chasers, including a fee for vexatious claims and moves to force them to use more transparent advertising.

The review also called for FOS decision letters to contain the proposed amount of compensation rather than a formula, and for the worst performers in terms of uphold rates to be named and shamed.

But he rejected calls for consumers to have to pay a fee, suggesting that a higher fee should apply to enforced ‘deadlock’ cases and differential pricing for ‘assessment’ and ‘investigation’ cases.

Personal accounts

On the personal accounts front, the European Commission informally agreed that employees can be auto-enrolled into GPPs when personal accounts are introduced in 2012.

Standard Life is lobbying the House of Lords to pressurise the Government to change the exemption test for personal accounts and to look at a dual earnings model using band earnings and basic earnings. (TheGovernment wants the exemption test for personal accounts to be based on total band earnings).

Meanwhile the Personal Accounts Delivery Authority (PADA) came in for criticism for spending £830,000 a month on consultants and £6.7m between August and March 2008.

There were sharply differing views on how people should be charged for personal accounts, with the ABI and NAPF both opting for an annual management charge plus a contribution charge, whereas the IMA and the AIC favoured an AMC only.

Wraps

Elsewhere, the FSA warned it was concerned about potential for conflicts of interest, extra consumer costs and inappropriate advice when using wrap platforms.

In its feedback statement to last summer’s platform discussion paper, the FSA pledged to visit a number of adviser firms of all sizes to ensure they are using platforms appropriately.

Many advisers were not treating customers fairly, if they failed to manage potential conflicts of interest, such as where the adviser holds shares in a platform.

Resolution

Meanwhile, the near-£5bn sale of Resolution to Hugh Osmond’s Pearl Group neared completion, opening the way for Royal London to acquire some of Resolution’s assets from Pearl for £1.2bn.

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More uncertainty for financial advisers

April 29, 2008 | posted by Pam Atherton in Uncategorized | comments (0)

The Financial Services Authority today issued a feedback statement to the responses  received to the ‘Retail Distribution Review’ - a discussion paper first published in June last year on the future delivery of financial services in the UK.

The RDR discussion paper, for anyone who hasn’t read it, asked for proposals as to how the financial services industry could make “more consumers have sufficient confidence in the market to want to use its products and services more often. To achieve this, we need an industry that more clearly acts in the best interests of its customers and treats them fairly.”

It has been a complete mystery to most people as to why exactly the FSA needed to embark on this particular exercise just now, given that financial advisers have had to cope with endless regulatory change over the last 20 years, with little tangible benefit to the consumer - from the maximum commission agreement of the 1980s, to polarisation in the 1990s, and more recently depolarisation.

 The industry has also had to cope simultaneously with numerous EU directives - from the Distance Marketing Directive to Mifid and even one called MAD (yes, really) which I believe stands for the Market Abuse Directive.

Today’s feedback statement was underwhelming to say the least. Given that the FSA has received over 900 responses from an industry anxious to know its fate, it is dispppointing that the FSA could come up with nothing better than to effectively say: “Thanks, guys, but we need more time to consult and, by the way, it’s still up to you to find “market led solutions” on “professional standards, remuneration arrangements and the provision of simple services to consumers.”

The FSA’s press release continues to state the bleedingly obvious: “We think a simple landscape is important if consumers are to understand the industry and have trust and confidence in those they are dealing with….. However, we do not underestimate the significant difficulties that come from this simple picture and we need to deepen our understanding of the impacts on consumers and firms….”

So clearly, nothing has been decided and advisers (and their clients) will have to await clarification in October this year, when the FSA is due to issue its final proposals and a timetable for implementation.

Most IFAs I have spoken to think the whole exercise is a complete waste of time, as was depolarisation before it, which many people regarded as a retrograde step. Polarisation had worked reasonably well for around 10 years and the general public was starting to understand the difference between an IFA and a tied agent.

What the FSA has proposed in the RDR would simply add further confusion to an already confused public. The best thing the FSA could do would be to ditch the whole exercise and let advisers just get on with the job of advising their clients. 

Right now they need more regulatory upheaval like a whole in the head.

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Battle lines drawn in bitter pensions dispute

April 28, 2008 | posted by Pam Atherton in Investments, Pensions, Private equity | comments (2)

 Who would have thought that strike action over a final salary pension scheme would shut down the pipeline that carries nearly half of Britain’s North Sea oil, leading to fears of oil shortages and petrol rationing?

If you had asked a group of workers 20 years ago what they thought of their company pension, they would probably have said: “What pension?”

In those days, most workers were automatically enrolled into their company’s final salary pension scheme as a condition of employment and were often unware that they belonged to a scheme, let alone a final salary one.

Two decades later, having witnessed the Maxwell scandal, the mis-selling of personal pensions and the fight for redress by those final salary schemes, workers have belatedly woken up to the true value of occupational schemes.

But it is interesting to note that the 1,200 strikers at the Grangemouth refinery, near Edinburgh, are fighting against the closure of their scheme to new members, not to existing members.

The scheme is relatively new, with no pensions in payment and therefore in surplus. So the employer, Ineos’s,  decision to close the scheme to new members appears to be mean and penny pinching.

For the workers of Grangemouth and elsewhere, the coin has finally dropped that the closure of company pension schemes will damage the retirement prospects of  their children and grandchildren, who will have to make do with money purchase arrangements such as group personal pensions, which will never be able to replicate the benefits provided by a final salary scheme.

Workers in GPPs will be disappointed with the level of pension they receive when they come to retirement, unless they have had a very generous employer, made massive contributions themselves, or both.

In practice, when employers shift from final salary to money purchase arrangements, the employer contribution typically halves  from around 15 per cent to 6 per cent. Workers are left to make their own investment decisions which few are equipped to do without advice.  When they come to retirement they are left at the mercy of their fund’ s performance and annuity rates.

The trades unions have been flat-footed with regard to preserving final salary schemes. They were largely conspicuous by their absence during the personal pension mis-selling scandal - possibly because they didn’t want to rock the boat, given that millions of their members belong to gold-plated public sector schemes, paid for by the taxpayer.

As for winning redress for workers who lost their pensions through company insolvencies, that battle was fought and won by pensions expert, Ros Altmann.

Today 75 per cent of final salary schemes are closed to new members and some schemes have been shut down altogether. The unions are now fighting a rearguard battle to save what’s left of the final salary industry when the time to do so was in 1997, with the axing of the tax credit on dividends.

Ineos, for its part, should consider other options to closing its scheme to new members - such as a shift to a career average basis or some form of risk sharing, such as abandoning the inflation-linking of pensions in payment, and raising the retirement age in line with increases in longevity.

For the time being, however, both sides appear to be entrenched. It will be intersting to see who blinks first.

   

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Dramatic increase in second charge loans

April 25, 2008 | posted by Pam Atherton in Banking, Credit Cards, Loans, Mortgages, Store Cards | comments (3)

The dramatic growth in second charge loans being secured by creditors against debtors’ homes reflects the increased determination of creditors to get their money back, as the  the credit crunch drives up the number of households in serious debt.

The number of court orders issued by lenders to secure these charging orders rose 42 per cent in 2007 to 131,644, according to the Ministry of Justice.

Lenders have traditionally pursued debtors through the small claims courts for repayment, but the  rise in the size of unsecured household debt and the upsurge in bankruptcies have prompted creditors to  apply for a second charge on debtors’ property when that fails.

While charging orders rarely result in homeowners being re-possessed, they are a useful way for  creditors to ensure that they get repaid when the house is eventually sold, because a charging order will rank as as a second mortgage and be paid after the principal mortgage and any consolidated loans have been settled.

John Fairhurst of debt advisory company, Payplan, says the number of people with charging orders on their properties could be much higher than the official figures suggest, because the latter don’t account for instances where debtors voluntarily give their creditor a second charge on their home, in return for for a freeze on their debt or some other inducement.

Fairhust says: “A charging order gives comfort to the creditor that if the debtor goes bankrupt, they will get their money back, with interest. They are treating these orders almost as an insurance policy for repayment.

“The typical client we see has £40,000 of unsecured debt in the  form of credit card debt and personal loan,  which the creditor is unlikely to get back of in a bankruptcy,  whereas a second charge on a property will rank third or fourth. So it’s worthwhile for creditors to spend £200-£300 on a charging order.”

Payplan expects an upsurge in bankruptcies and IVAs later this year as the credit crunch limits the availability of easy credit for those with poor payment histories. The debt advisory firm makes its money by charging creditors 10 per cent of any money it recovers as a result of putting clients onto a debt management plan, although a few companies such as GE Capital refuse to do so.

“Some debt recovery organisations working on behalf of the big banks have become very aggressive of late, so I expect to see more charging orders in the coming months,” says Fairhurst.

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Bank charge disputes will run and run

April 24, 2008 | posted by Pam Atherton in Banking, Credit Cards, Store Cards | comments (3)

 A High Court judge has ruled that the Office of Fair Trading (OFT) can apply consumer contract regulations to decide if bank overdraft charges are fair or not.

But the long awaited ruling will do little to unblock the log jam of disputes between banks and their customers which have been kept on hold at county courts up and down the UK since July last year.

Mr Justice Andrew Smith said that his ruling did not necessarily mean that the banks’ overdraft charges were unfair, leaving the door wide open for further test cases against individual banks for unfair and excessive overdraft charges.

Since the row over bank charges first erupted in 2006, hundreds of thousands of aggrieved bank customers have taken their banks to the county court in a bid to reclaim penalty charges for overdrafts.

The BBC estimates the banks refunded about £784m to nearly 378,000 customers in 2007, but analysts at Credit Suisse estimate  the potential bill could be as high as £5bn.

Because of the number of claims was blocking up the county courts and the fact that county court judgement do not set a precedent, the OFT agreed in July 2007, with seven banks and the Nationwide building society, to bring a test case in the High Court to decide whether the OFT had the power under consumer contract regulations to regulate overdraft charges.

Further High Court hearings are expected in order to bring some clarification as to what is a fair level of charges. Banks typically charge £25-30 for a bounced cheque, but an ex Yorkshire Bank employee told the BBC last year that the actual cost to the bank of dealing with unauthorised overdrafts was just £2 per cheque.

The OFT has successfully forced banks to cut their credit card default charges to no more than £12 last year and earlier this month it ordered Clydesdale Bank to reduce penalty charges on its store cards from £22.50 to £12. It remains to be seen if it is as successful with bank overdraft charges.

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Scourge of online card fraud continues apace

April 23, 2008 | posted by Pam Atherton in Banking, Credit Cards | comments (3)

Fraudulent use of debit and credit cards, via phone and online transactions, cost credit card companies and retailers an eye watering £290.5m in 2007.

But an undercover study conducted by BBC journalists shows that the figure would be nearer to £500m, if failed attempts by fraudsters to purchase goods and services online were taken into account.

Getting hold of someone’s credit card details is pretty easy. There are websites selling this type of information and machines which can clone  cards with just one swipe, not to mention the interception of credit and debit cards in the post.

Having had my Goldfish credit card compromised three times in the space of one year, I can testify to how prevalent this particular crime is. All the fraudulent transactions were for ‘card not present’ purchases - many of which were for hotel bookings and train tickets where it would be hard to track down the end user.

According to the Association of Payment Clearing Services (APACS), there was an overall rise in the fraudulent use of UK credit and debit cards in 2007 of 25 per cent, with losses totalling £535m.

While £290.5m of this was ‘card not present’ fraud, representing a 37 per cent rise on the previous year, the increase in online card fraud is less than the growth of online shopping.

In fact,  the bulk card fraud is due to stolen and counterfeit cards used abroad.

It still makes you wonder how the credit card companies and the banks manage to make any money, given the ease and growing nature of this crime.

So what are the banks and card issuers doing to fight back?  

APACs spokeswoman Sandra Quinn says: “We have a joint payment industry and police intelligence unit and we share data on points of compromise where a large number of goods have been delivered to the same  address. But in an environment where the police need to prioritise their resources, cyber crime is not top priority.”

So it looks like there is no escaping the need for cardholders to scrutinise their card statements ever more carefully and to think twice before using cards in non-mainstream outlets. 

According to Sandra Quinn, 25 per cent of the top retailers have superior security systems which makes them less vulnerable to fraud by staff.

Quinn also suggests that shoppers use one card for online purchases, another for overseas usage and a third card for all other transactions. “That way, you can spot fraudulent activity and where it took  much more quickly,” she says.

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Is this the beginning of the end, or the end of the beginning?

April 22, 2008 | posted by Pam Atherton in Banking, House prices, Loans, Mortgages | comments (3)

“Will it work?” are the words on everyone’s lips in response to the £50bn lifeline thrown to UK banks yesterday by the Bank of  England.

The scheme, designed to alleviate the log jam in the money markets, will involve the Bank of England swapping around £60bn of banks’ mortgage liablities for nine month Treasury bills worth around £50bn, rising to £100bn in the coming months.
While we have seen nothing like this since the secondary banking crisis in the 1970s and the support is likely to remain in place for three  years, the scheme is limited in scope.

 It will only apply to mortgages, loans and credit card debt issued before the end of December 2007 as the BoE clearly doesn’t want to encourage new lending.

In addition, all these loans will have to be converted into AAA-rated securities before they can be swapped for Treasury paper.

But will this support scheme do the trick and will hard pressed homeowners feel any benefit any time soon?

I very much doubt it. Even though Abbey today announced that it is shaving 0.1 per cent off its two year tracker and flexible mortgages from 30 April, this is a drop in the ocean compared to the scale of the problems facing mortgage lenders - on both residential and commercial mortgages.

Last week I heard a property lawyer, who works for some of the major high street lenders and property companies, say: ”You ain’t seen nothing yet. Property companies  and residental mortgage lenders are in serious trouble.  It’s not just mortgage arrears, but fraud and tenants defaulting on rents. ”

One high street lender had taken a £880m hit due to mortgage fraud, he said, which if true, is likely to grow.  It is only when repossessed properties are sold at auction that the full scale of over-valued property (due to developers, solicitors and valuers working  in collusion), becomes apparent. 

“It’s all going to get a lot worse. This is just the end of the beginning, not the beginning of the end,” he said.

However, a spokeswoman for Abbey vigourously rejected the suggestion that any one lender had lost £880m due to mortgage fraud, saying that the Association of Police Officers estimated that the figure for the entire industry was around £600m.  Even that figure had been disputed by the British Bankers Association, she said. 

In the meantime, the Council of Mortgage Lenders will be pleading with the Chancellor of the Exchequer, Alistair Darling, today for more help for homeowners in mortgage arrears and facing repossession.

Currently state benefits don’t kick in until nine months’ of arrears have built up and only on the interest element of mortgages of up to £100,000.

After yesterday’s £50bn bail out of the banks and Labour MPs clamouring for the reinstatement of the 10 per cent tax band, the chances of the Government increasing state benefits for distressed homeowners right now are absolutely zero.

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Financial services providers still failing to treat customers fairly

April 18, 2008 | posted by Pam Atherton in Insurance, Pensions | comments (0)

Recent research by the Office of Fair Trading shows that poor products and services cost the public £6.6bn last year, or roughly the gross domestic product of Bolivia.

The study shows that three quarters of the damage relates to problems costing consumers £1,000 or more, with the financial services industry the worst offender. Bad experiences with financial  services companies resulted in almost half the total loss.

This will come as no surprise to anyone who has had to deal with a UK insurance company or other fiancial services provider, whose service tends to be either awful, or very awful,even though financial institutions are required by the Financial Services Authority to show that they are treating customers fairly.

The OFT says it is keen for people to make more use of official channels of complaints about companies, after the survey showed that only a small minority of those surveyed had made a report through Trading standards or the OFT’s own Comsumer Direct Service.

In the case of financial services complaints, these would normally be referred to the Financial Ombudsman Service which received 627,814 initial enquiries in 2007, of which around one in six (94,392) became complaints and were formally assessed and resolved through mediation. 7 per cent of cases went to the Ombudsman for a binding decision.

Overall, roughly one third of complaints was upheld in favour of the consumer, a third involved the company having to make an apology or being criticised for some aspect of its service and in the remaining 33 per cent of cases, the FOS found that the company had acted correctly.

This means that in around two thirds of cases, the financial provider was found to be wanting to some degree, which is a worryingly high level, given that the industry has been told to pull its socks up and introduce management systems to ensure that customers are treated fairly.

However, FOS figures also show that 71 per cent of complaints involve banks and insurers, while only 12 per cent concern advisers.

In mystery shopping exercices, the FSA has found that many providers are still not taking TCF seriously, and there are almost daily reports of poor administration, particularly by insurers.

 The latest involved Windsor Life which left thousands of cusomters without their pensions because its admin systems could not cope with a glut of business following its parent company’s takeover of GE Life (now called Tomorrow) last year.

Having inherited 400,000 new customers, it has received around 2,500 complaints to date, many of which involve delays in paying annuities to retirees who have recently retired. Because annuity rates change from week to week, a delay in finalising the paperwork can mean that the fund drops in value or the annuity rate has moved against the customer by the time payments commence.

With more and more people investing in defined contribution pensions which will require them to purchase an annuity through an insurer, this does not bode well for future generations of pensioners.

It’s time insurers got their act together. The number of annuitants is set to rise exponentially as the baby boomer generation comes up to retirement and millions of retirees will need to buy annuities.

Perhaps this is an area that the FOS should focus on in future - that’s when it’s finished with the thousands of  PPI and mortgage endowment complaints, which continue to pre-occupy the bulk of its caseworkers at present.

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Will the Bank of England’s lending programme ease the mortgage logjam?

April 17, 2008 | posted by Pam Atherton in Banking, Mortgages | comments (0)

News that the Bank of England is to make it easier for banks to lend to each other by accepting mortgage-backed assets in return for Government bonds, leaves many questions unanswered.

Will taxpayers have to foot the bill if these mortgage-backed assets turn out to be as toxic as those sold on by American banks and will the move have the desired effect anyway?

With a famine of around £50-£70bn in the mortgage market, anything which seeks to ease the logjam whereby banks are wary of lending to each other has to be welcomed.

But whether it will bring down the stubbornly high LIBOR interbank lending rate, currently stuck at around 6 per cent, remains to be seen.

It is LIBOR, (dubbed ‘the hoodie’ of the mortgage market by John Charcol technical manager, Katie Tucker),  which must come down before lower mortgage rates can be passed onto hard pressed homeowners.

In the meantime, last week’s 0.25 per cent cut in base rate has exerted little downward pressure on mortgage rates.

Bank of Scotland has increased its rates by between 0.3 and 0.5 per cent, pushing its 90 per cent loan to value 2 year fixed rates up  from 6.29 per cent to 6.79 per cent. 

Halifax has increased its two year rates by a huge 0.5 percent, to avoid a glut of maturities in 2010.  Lenders continue to ration their funds by risk, with Abbey reducing its maximum loan to value to 75 per cent for loans between £500,001 and £1m.

Mortgage deals continue to be withdrawn at only a few hours notice leaving housebuyers and re-mortgagers high and dry.

Once we’ve seen the details of the Bank of England’s new lending programme, there may be more grounds for optimism. But in the meantime, I’m not holding my breath.
   

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Are building societies under threat from credit crunch?

April 16, 2008 | posted by Pam Atherton in Banking, Mortgages, Savings | comments (1)

We live in extraordinary times.

One minute building societies are touted as offering some of the most competitive rates
for both borrowing and lending, and then yesterday, the chief executive
of the Abbey, Antonio Horsa-Osorio, told the Prime Minister at a power breakfast
of senior bankers in Downing Street, that the current mortgage crisis threatened the
survival of many small building societies.

The chief executives of some of the UK’s biggest banks said at the same meeting
that they would take 100 per cent of the mortage market, squeezing some of the smaller building societies out of the lending business altogether.
How can this be, I ask myself? Neil Johnson, PR and policy manager at the Building Societies
Association, said he was bemused by the bankers’ comments. Building societies are largely funded by their retail customers’ deposits and have experienced strong savings inflows in the last few months.

Small building societies rely on the wholesale markets for only 9 per cent of their
mortgage funding, a lower percentage than for larger building societies, and even less than the
high street banks.

So what is going on? Ray Boulger, senior consultant at mortgage brokers John Charcol
thinks that the answer lies in today’s fierce competition for retail deposits where the banks
can afford to offer dizzy rates of interest on savings accounts, thereby potentially threatening the savings inflows to the building societies.

There does seem to be some evidence of this already. Of Defaqto’s top 10 online savings accounts today, there is only one building society - the Coventry - albeit with three different top paying accounts.

The others are all banks - Abbey, Alliance & Leicester, Kaupthing, ICICI, Bradford & Bingley and Citi. All top 10 players are paying in excess of 6 per cent, or more than one per cent above  Bank of England base rate of 5 per cent.

The building society movement has shrunk rapidly over the last decade, following the
the slew of demutalisations in the 1990s and mergers  in recent years, with only 59 left today, out of 2,286 in 1900.

By and large, building societies have had a long and venerable history of borrowing and lending in the UK, with many of the smaller societies valued by their customers for their personal and local service.

It would be a shame if smaller building societies were now to become a new, and most unlikely,
victim of the credit crunch.

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