The Financial Services Authority (FSA) has come up with a number of proposals for major reforms of the UK mortgage market.

Their just published mortgage market review discussion paper is an attempt to make a better market for consumers and one that is more sustainable for the participants.

And the active involvement of the FSA in the mortgage markets reflects a changed approach for the regulator, one that is based on a more intrusive and interventionist style of control.

The key features of the review are as follows:

• introduction of affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
• ‘self-cert’ mortgages to be banned, meaning that a verification of income is required;
• removal of products that contain certain ‘toxic combinations’ of characteristics which put borrowers at risk;
• abolition of arrears charges when a borrower is already repaying and making sure that firms do not profit from people in arrears;
• mandatory that all mortgage advisers be personally accountable to FSA;
• wish to see FSA’s brief to cover buy-to-let and all lending secured on a home.

Jon Pain, FSA managing director of supervision, said:

“The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress. We recognise that we need to bring about a step change in regulation and we need to act now to address the issues we have identified.

“The paper sets out the main findings of the FSA’s comprehensive analysis of the mortgage market. It clearly shows a rapid explosion in mortgage products; the emergence of high risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end.

“The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”

The review has also identified that the irresponsible lending practices seen in the market until recently will be curtailed by the FSA’s existing work on capital and liquidity.

The FSA make the point in their announcement that the proposals are aimed at tackling the current perceived problems with the mortgage market. And the regulator stresses that it has not ruled out further change if the initial proposals do not have sufficient effect, including caps on loan-to-value, loan-to-income or debt-to-income.
The FSA paper will be out for discussion until 30 January, 2010, during which time it will actively seek views from the mortgage industry, consumers and consumer groups. A further statement, outlining intended courses of action, will be issued in March 2010.

Guest Article by Neil Camp

In terms of their personal finances, it’s a dangerous time for many people at the moment. The recession, job fears, record personal debt levels and uncertainties about the future, all lead to a degree of vulnerability.

And that vulnerability, claims consumer watchdogs, has led to many people being exploited by financial companies, especially through the medium of television advertising.

And they are pointing out that there is a discrepancy in approach, when the Government is considering warning people about certain financial products (almost along the lines of health warnings on cigarette packets), yet not control financial advertising on TV.

TV is of course a popular advertising medium and most people are influenced by what they see in between their favourite programmes. But whereas buying a television, or food product will usually not have long term implications, buying a financial product can have long term issues.

Current advertising standards are strict when it comes to consumer goods. You cannot advertise tobacco products and alcohol cannot be associated with personal success, or attractiveness.

And the consumer watchdogs think that financial product companies get away with murder, associating their products with all kind of overt and subliminal lifestyle messages.

Adverts promoting debt recovery schemes and property equity release plans tend to gloss over many of the issues involved, and concentrate on happy, smiling people who have all their problems removed by the product on offer.

But it’s not a one-sided argument of course.

Others maintain that financial product advertising is a good thing, as it allows people to understand that there are a large number of companies out there who offer superb products that can actually change people’s lives for the better. And it’s unlikely that without TV advertising on prime-time, day-time and satellite channels, that most people would ever be exposed to the wide range of financial products available.

And those on the pro-side of the argument believe that the financial products industry cannot sensibly be compared with the tobacco and drinks industries.

Furthermore, most financial companies offering the consumer products are already closely monitored by the Financial Services Authority. This is a body which regulates companies that offer financial products. Thus, no person should use a company which offers a financial scheme, plan, or device that has not been approved by the Financial Services Authority. And this body is currently reviewing how financial products are promoted and sold to the public.

What’s more, the Advertising Standards Authority vets TV adverts, so if a company was deemed to be selling something illegal, or misleading, then this body would step in and have to the power to make the company change their message, or pull the advertisement altogether.

So, whatever view people hold, it really comes down to the viewer making sure that what they commit to in terms of financial products, they are sure they have made the right decision. And this means that people should not act hastily, take external advice if possible and compare similar products on offer. Remember the old saying, act in haste, repent at leisure.

Guest Article by Neil Camp

The media thinking Tesco and Virgin are on the hunt for embattled public bank Northern Rock. Virgin has tried before of course and Tesco’s name has been cropping up of late as an interested buyer, adding to its move into retail banking proper.

The stories are growing in credence after leaks surfaced that the Government intend to way goodbye to the Northern Rock before the general election sometime before May 2010. Ministers want it back in public ownership before they go to the country and fight for their political lives.

But the two top brands might not have it all their own way, with many of the larger private equity funds said to be running their own slide rules over the Rock.

Tesco and Virgin remain tight lipped, preferring to stay mum over whether the Rock would make a good fit for their respective businesses.

Last year the Rock made a neat £1.5 million loss of provisioning for £1.15 billion of bad debts.

There has also been talk of the Financial Services Association (FSA) looking the other way when it comes to Northern Rock’s capital requirements. Claims have been made that the Rock is in breach of its capital requirements due to a loss of £500 million in the last six months.

This breach technically means it should not write new mortgages, or continue to manage existing mortgages.

And this is not the first time the FSA has obligingly turned a blind eye to the Rock’s precarious position. Last year they allowed the public bank to use tier two capital (a less secure form of financial reserve) to meet the regulatory requirements.

Now it appears that the Rock has admitted that it’s capital base has been: “…reduced to a level below its minimum regulatory capital requirement.” But went onto say that “…the FSA has confirmed that it does not currently intend to restrict the activities of the company while the plan is implemented to address its capital position.”

The plan referred to involves converting £3 billion of the taxpayer’s £14 billion loan into equity. A common debt for equity tactic that struggling companies use to stay afloat. To make such a move, the Rock will need to get state aid clearance from the European Commission.

But the Rock has a further trick up its sleeve in order to fully shake off the past.

Effectively two banks will be created. The first, a good bank, will enjoy the £10 billion of good loans, the branch network and deposits. A bad bank will get whats left: all the bad loans and similar detritus.

And it’s the good Rock bank of course that the likes of Tesco and Virgin are thinking of buying. The bad Rock bank looks likely to have very few fans of course.

Guest Article by Neil Camp

For those worried about their building society surviving the bad times, the media is reporting that those in trouble might be given access to the asset-protection scheme which is backed by the government.

Although good news, this move actually signals the Treasury’s deep concern over the state of the building society sector. This is mainly down to the government regulator, the Financial Services Authority (FSA), forcing all financial institutions to get ready for an eventual 50% fall in house prices and an even worse commercial property downturn of 60%.

Those societies deemed unable to cope with such a nightmare scenario might be propped up by the asset-protection scheme, one that is currently being used to offer support for the Lloyds Banking Group and RBS.

The West Bromwich Building Society, already featured in this blog, is one of the institutions on the FSA watch list. It is thought that it is being asked to show it could weather a £100 million loss on its commercial property book. Such losses could mean a fifth of its capital could disappear; something that is worrying the FSA.

And with holes in their capital bases, building societies, along with other financial institutions, could be forced to look out for fresh money to shore-up their balance sheets. Unfortunately, going to the markets might not be an option, with the government having rocked confidence with a decision that saw the coupon payments of a number of Bradford & Bingley debt instruments being cancelled.

So with the money markets in no mood to risk money in an increasingly fluid situation, the government’s help might be needed.

Guest Article by Neil Camp

Confidence in the already nervous financial sector has taken a further knock with the news that the West Bromwich building society was about to be rescued by a large rival.

Reports that the Financial Services Authority (FSA) has been putting together a deal which involves the Yorkshire and Coventry building societies, has angered the West Bromwich which says that it well capitalised and is not aware of any takeover talks taking place.

A spokesperson for the West Bromwich said: "In common with other financial institutions, the West Brom has been working closely with the FSA in relation to its funding and capital position, including the current stress-testing exercise being conducted on a number of the larger building societies.

“The society has not received any indications from the FSA in relation to the results of this exercise, which commenced only recently. Furthermore, the West Brom has no knowledge of the FSA holding merger discussions relating to the society."

West Bromwich is said to have received special attention because of its keenness on not only the now unpopular buy-to-let domestic property market, but also the equally distraught commercial market.

But the building society has since explained that it got out of commercial lending over a year ago and also does not lend to the buy-to-let market, or the non prime domestic market.

The building society’s last annual report shows that it owns mortgage securities, considered as sub-prime, worth a total of £240 million.

West Bromwich would not be the first society with such a portfolio to be sorted out by the authorities. The Dunfermline was part-nationalised and the Britannia merged with the Co-Op.

City analysts believe that the building society sector is due for further consolidation as the global downturn takes its toll. The Nationwide has already swallowed up both the Derbyshire and the Cheshire. The sector still boasts 52 societies with 30 million customers.

Guest Article by Neil Camp

One thing is for certain, when the current financial crisis starts to ease, the recriminations will start and one organisation which is firmly in the firing line is The Financial Services Authority (FSA).

Now, the FSA were already on the naughty step because they didn’t spot the banks lemming-like leap to financial Armageddon. And in particular, where were they when the country’s big financial institutions were passing between them an array of nasty toxic assets? Most of these were American mortgages which had no chance of ever being paid off, but were classified as enjoying triple A credit status by the leading credit agencies who must have dined out on many a lunch from the grateful bankers.

Now, the FSA is being accused by British MPs as being impotent when it came to the collapse of the Icelandic banks and the loss of their people’s savings. Mind you, the Parliamentarians didn’t spare the blushes of the U.K. local authorities, who said they didn’t deserve compensation for the loss of their 900 millions in a system that many financial observers knew to be creaking and over-exposed.

A committee of MPs claimed that the FSA were told of the problems of the Icelandic bank Kaupthing way back in 2005, but failed to act upon the knowledge.

But the MPs didn’t single out the FSA in isolation. They also threw scorn on the U.K. Government, as well as the local authorities who all appeared to look the other way when it came to warnings about the Icelandic banking system, which saw Kaupthing, as well as Landsbanki and Glitnir, in terminal trouble.

The MPs on the committee said that the U.K. charities, who were exposed to the tune of £120 million, should be bailed out, but that the councils deserved no compensation for the millions they had lost.

The main accusation is that the FSA was told of Kaupthing’s problems in 2005 by the then Chief Executive of investment bank Singer & Friedlander, which had itself been acquired by the Icelandic financial giant that year. Mr Shearer highlighted his new parent’s “strange” accounts management. But the FSA concluded at the time that is was not its place to interfere with a bank that came under the auspices of the Icelandic financial regulator.

Fair enough some might argue, but the MPs are not so forgiving, saying that the FSA effectively chose to look the other way when it came to being told of the problems and as such, committed a serious dereliction of duty. The Committee Chairman, Labour MP John McFall, was especially critical of his own party’s handling of Anglo-Icelandic relations, saying that the Treasury’s decision to use the Anti-Terrorism, Crime and Securities Act to freeze the assets of Landsbanki, was particularly ham-fisted.
The effect was a quick souring of diplomatic relations between the two countries.

In fact, the Icelandic authorities were quick to blame the U.K. for actually causing Kaupthing to fail because it had caused widespread panic. The Committee of MPs disagreed, saying that in no way could the U.K. Government take the blame for such an outcome.

The MPs also exonerated the FSA over the situation of British citizens holding accounts in overseas territories which were not protected by either the British, or Icelandic authorities. Those people with deposits with Landsbanki in Guernsey and Kaupthing in the Isle of Man lost everything, but had no claim for compensation, even though many lost all their life savings. But the FSA was right in it’s stance that it could do nothing about this group claimed the MPs.

The Committee prepared a report which concluded that the FSA should pay closer attention to cross-border regulation; how it should deal with regulators in other countries; and, the matter of U.K. bank accounts and their suitability for expatriates.

Guest Article by Neil Camp

If you’ve got a good credit record, need a modest amount of cash for a valid reason, yet find that Banks are shutting doors in your face, then you could consider borrowing from someone like Zopa.

But although Zopa is a social lending exchange, it is not a bank, and many compare it more to eBay, than HSBC.

It works by matching cash-rich individuals looking for good returns for their money, with people wanting money for genuine reasons. And although it might have altruistic leanings, this is not for people at their last resort. Only people with good records are allowed to play, so, in a way, it can only claim some social awareness brownie points.

And if you’re wondering where Zopa comes from; the initials come from Zone Of Possible Agreement, which refers to what exists between two parties in an agreement.

Launched in 2005, Zopa boasts that it offers both borrowers and lenders the best rates, because it does not have the overheads and regulatory regime of the mainstream banks. With a Zopa agreement, it is the market that sets the rate, not the authorities.

But that’s not to say that Zopa is unregulated. It comes under the auspices of the Office of Fair Trading and is a member of the Finance and Leasing Association, and the anti-fraud CIFAS. But, from the lenders point of view, it is not regulated by the FSA, which means that any money lent to borrowers through the scheme is not protected.

So what makes the ideal Zopa customer?

You must have a recognisable identity, a visible credit history, an income that demonstrates you can afford the loan and a good track record of repaying debt.

Don’t bother if you have lots of credit cards that haven’t been paid for some time, high levels of unsecured debts, a poor debt history, or CCJs. Prepare for a detailed credit scoring before you can sniff out the money.

You can borrow up to £15,000 and the interest rate which is decided by your status, divided into five categories: A*, A, B, C and Young (for borrowers aged between 20 and 25). The riskier you are deemed by Zopa lenders, the more you will have to pay for your money.

But the rates for a Zopa, at the time of writing, are competitively placed in the market. For example, if you were to borrow £5,000 over three years and you were A* status, then the rate you would be charged is 8.1%. This compares favourable with MINT at 13,9%, Smile at 12.9%, First Direct Loan at 11.9% and Abbey at 8.9%.
 

Guest Article by Neil Camp