FSA Warns Lenders Against New-Style PPI Policies

Financial services firms have been warned not to devise harmful new versions of discredited payment protection insurance (PPI) policies.

The warning comes from the Financial Services Authority (FSA) and Office of Fair Trading (OFT).

They say they will use their powers to stop firms selling new types of loan insurance that might damage customers.

The current clampdown on past mis-selling will cost banks and other firms billions of pounds in lost income.

Big banks in the UK were the main sellers of PPI policies, to people who took out mortgages, credit cards or other loans.

As a result of a comprehensive defeat in the High Court earlier this year, the banks have now been forced to set aside at least £6bn to pay compensation to hundreds of thousands of customers to whom they mis-sold the policies.

In the wake of this, the authorities are worried that financial services firms will simply invent new types of “insurance”, which could equally expose customers to being bamboozled into buying a policy they do not need and which might not cover them in any case.

Margaret Cole, FSA managing director, said: “This is the first time that the FSA has issued guidance on the design of a specific product.”

“The two organisations [FSA and OFT] will continue to monitor developments in the market, and will take appropriate action under their respective powers where firms’ products or practices risk causing detriment to consumers,” she added.

Tough stance

The mis sold PPI claims scandal, which followed similar episodes involving personal pensions and mortgage endowment policies, has at long last forced the financial authorities to adopt a tougher attitude.

Instead of waiting for problems to develop and then clearing up the mess afterwards, they will now intervene to try to stop these problems developing in the first place.

The FSA is due to be dismembered, with responsibility for consumer protection being passed to a new Financial Conduct Authority (FCA).

The current head of the FSA, Lord Turner, recently said it was vital the FCA had the power to ban financial policies before they were sold.

“In financial services, the potential for the customer to be ripped off is simply far greater than in other sectors of the economy – and the consequences potentially more significant,” he said.

In a consultation on their proposed new guidance, the FSA and OFT say they are worried that:

firms are not properly identifying which groups of people might genuinely benefit from their “protection” insurance.
the policies may not meet the customers’ real needs.
the payout from a successful claim may not be good enough for a customer.
the policies may be too complex or opaque for customers to compare.

“This is a key time as the market shifts away from PPI and firms begin to develop new products or product features – such as short-term income protection or debt freeze or debt waiver as elements of a credit agreement or mortgage,” the FSA said.

The OFT warned that it would take action, using its powers to regulate providers of credit under the Consumer Credit Act, to stop improper or unfair selling practices.

SOURCE: BBC News

Reasons For Ring Fencing Banks

Ring fencing is a term to describe the situation where a firm makes part of its business a separate entity to the rest of its business. The purpose or ring-fencing an aspect of your business is so that losses in one area can’t affect another.

Ring Fencing Banks

The recent Independent Commission on Banking (ICB) wants UK commercial banks to ringfence their retail division from their riskier investment banking divisions.

This involves making the retail and investment arms of a bank separate legal entities.

Reason for Ring Fencing Banks

When banks lost money on buying sub-prime loans and credit default swaps, this placed retail deposits at risk. Losses on other aspects of business put ordinary deposits at risk. The government wants to guarantee all retail deposits to retain confidence in the banking system, but this meant they were intervening in banks to pay for risky investment losses. By ring fencing retail parts of banks, the government hope:

It will be less likely they have to bail out banks. Retail operation of banks less risky than investment branches which dabbled with a wide variety of financial derivatives.
If they do, it will cost less.
Currently, there is motive of moral hazard for banks. If they take risks (e.g investing in sub-prime loans) but fail they can rely on bailout from the taxpayer. This new system would allow investment banking divisions to fail, therefore they have incentives to avoid taking risks.

Potential Problems of Ring Fencing Banks

Some argue that ring-fencing banks could increase the cost of borrowing for firms. This is because they can’t use other profitable areas to finance lending. However, this is disputed by others

Example of Ring Fencing

Portland General Electric was acquired by Enron in 1997. However as part of the deal, the company was ring-fenced by the state of Oregon. When Enron declared bankruptcy amidst shady accounting, the state electric company’s assets were protected from Enron’s creditors. If it hadn’t been ringfenced the Portland electric company could have also been wound up to pay off Enron’s creditors.

Source: Economics Help

BBA Warns Ring-Fencing Banks Could Choke Britain’s Economy

The British Bankers’ Association (BBA) warns against pursuing ring-fencing amid the eurozone debt crises. It says the reforms could choke Britain’s economy and hamper the flow of credit to companies. The Lobby group suggested to concentrate instead, on boosting business lending and investment banking.

BBA’s chief executive, Angela Knight said: “If more regulation remains at the top of the list then this will only have the effect of risking the recovery.”

The Confederation of British Industry (CBI) reiterated Ms. Knight, and added that it would be reckless to press ahead with plans to separate the investment from the retail banking arm.

The business lobby group’s director, John Cridland, stated in the Financial Times, “Taking action at this moment – this moment of growth peril, which weakens the ability of banks in Britain to provide the finance that businesses need to grow – is just to me barking mad”

Mr. Cridland added, “We don’t want to force some of our remaining world class British companies to shift away from a focus on the UK because the rules have been set unilaterally in the UK. There’s an own goal here about to be scored if we get this wrong… I get a sense that there’s a little bit of ‘we’ll do this because of political reasons…”

The Independent Commission on Banking (ICB) is expected to support ring-fencing, as it is scheduled to release its recommendations on the twelfth of September. However, the decision to implement banking reforms will be entirely up to the Chancellor, George Osborne.

Chancellor Confident UK Banks Are Srong Enough to Survive Economic Turmoil

Chancellor George Osborne has said British banks are now strong enough to withstand what he called, “the most dangerous time for the global economy since 2008” as fears from the American and Eurozone debt crisis caused massive uncertainty in the global stock markets.

Osborne is confident the banking system is tough enough to survive the worst turmoil in the financial markets since the demise of global financial services firm, Lehman brothers, in 2008.

Mr. Osborne states, “British banks are sufficiently well capitalized and are holding enough liquidity to be able to cope with the current market turbulence.”

He also said European leaders should think of a solution to the crippling debt crisis that has already affected many European countries.

In addition, he states, “Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems…Existing eurozone institutions need to do whatever necessary to maintain stability.”

He commended the European Central Bank for looking into the bond market in order to guard Italy and Spain from falling next to the debt crisis.

The chancellor requested “greater fiscal integration” and believed euro bonds and other guarantees should be taken into a more serious consideration and “must be matched by much more effective economic governance in the eurozone to ensure fiscal responsibility is hard wired into the system.”

The chancellor wants to protect its nation’s national interests. It will be dangerous for Britain if the euro will break up…which is why he urges need for a greater fiscal integration among European countries.

He also fears that unnecessary levels of debt around the world would make Britain’s economic recovery much “harder and longer.”

Financial Advisers Allegedly Switching Pensions to Boost Commissions

Financial Advisers are allegedly switching pensioners from one plan to another in order to gain commission, a report by Consumer Focus reveals.

According to the study, consumers are being told to shift to different pension products with considerably high risk or charges. These fees rip thousands of pounds off a pensioner’s fund.

Consumer Focus calls this trend of charging ongoing fees “trail commission,” which financial advisers seem to be taking advantage before stringent rules on financial advice will be implemented next year.

In addition to the details, consumers don’t have a clear understanding of the purpose of the remuneration whether it was for ongoing service or deferred commission. Worse of all, half of consumers who are paying for the life of the product – some even decades (and paying trail commissions in that span of time) never had any real service from an IFA. The consumer watchdog reports that consumers are not happy with the additional fees it charges on their pension pot.

Consumer Focus calls for the city watchdog to “get a grip on this market and tackle consumer detriment as soon as possible.”

Independent Financial Advisers receive between £200 million and £800 million in commission annually from pension providers, a quarter of that commission included trail commission.

The IFA industry commented on the other hand, that the claim that was based on 31 cases that came with “no attempt to assess the value of the advice given” which all did not validate the conclusion. It pointed its finger instead to banks who “are by far the worst offenders disguising charges and commissions” and “use poorly performing internal funds” to gain profit.

Commission Based Renumeration Under Reform

The Treasury Select Committee (TSC) and the Financial Services Authority (FSA) are reforming rules on financial advisers and their commission-based remuneration, ahead of their 2013 deadline in a attempt to tackle root cause of the mis selling of financial products.

One such change, would be stricter qualifications for an IFA like having a certificate in Higher Education. The FSA’s Retail Distribution Review (RDR) whose aim is to “fix persistent problems in the retail investment industry by implementing higher industry standards”, will start banning commission for IFAs – the root cause of bad advice and improper selling – and replacing it with a “Consumer Agreed Remuneration” instead.

New regulator Financial Conduct Authority (FCA) stated that the reforms needed to be implemented as soon as possible, since its improper selling scandals, practiced in recent years, along with an absence of consumer trust, had crucially damaged the investment industry’s name.

The Treasury Select Committee (TSC) chairman reiterates the regulator, saying that its predecessor, the FSA, “is right to reform the financial advice market… Given the past problems of mis-selling we welcome the banning of commission and the introduction of a clear market price for advice.”

Meanwhile financial firms like Cooperative Financial Services (CFS) and HSBC have axed several of their IFAS in response to the stern changes on commission-based advice.

HSBC, who holds the strongest capital during last week’s stress test, had cut 700 jobs in

preparation for a fall in financial advice demand and Cooperative Financial Services (CFS) a subsidiary of the Co-operative group, trimmed 670 of its door-to-door sales team.

British Banks Pass Stress Test

The Financial Services Authority (FSA) is happy British banks have passed the stress test held last week.

HSBC holds the strongest among the group, while Royal Bank of Scotland (RBS) passed a little over the passing score, just a 0.4 above percentage point. RBS came near to being put in the danger list.

Their Spanish and Greek contemporaries were not so lucky; 8 out of 90 European banks including five Spanish, two Greek, and an Austrian firm, failed to meet the European Banking Authority (EBA)’s criteria for withstanding an economic downturn from falling short of €2.5bn of shareholder reserves.

European Union stress tests were performed to discriminate those financial institutions who can stand in the middle of an economic meltdown through their capital reserves (which amounts to at least 5% of their assets) from those who can not.

5% was the minimum score that makes banks pass and those that fell under that mark were put under the watch list where UK bank RBS thankfully escaped.

The city watchdog was pleased to see the fruits of their labor; Britain was the first to initiate a capital raise back in 2008, putting fresh capital worth billions of pounds into Lloyds and RBS.

“The results support out own stress tests and we are pleased that the major UK banks have capital above the minimum with a 25% reduction in ratios. Only Greece, with a 40% fall, was worse affected under the scenarios.”

Meanwhile, weakest scorer RBS criticized the examination for “not being fully consistent with internal results and may not reflect business changes for groups in transition” like the bailed-out bank.

Banks Should be Held Accountable for Selling Flawed Financial Products

Former deputy chair Dame Deirdre Hutton spoke at the city regulator’s meeting on the Financial Conduct Authority insisting the banks that first created these “flawed” products should be held responsible, believing that issues on liability always lie between the consumers and the financial adviser who sells these products. Stating “If an IFA is given a duff product to sell then I think the manufacturers bear some liability.”

She raised her comments after the subject of consumer responsibility was brought up and continued that she “would like to see customers taking responsibility” but points to how much an obstacle it would be on putting the liability on the consumer who does not want any responsibility.

However, the matter was rejected by the FSA’s panel vice-chair Kay Blair, saying that consumers should at least own some responsibility for choosing the products and acquiring them.

She continued, “The financial services industry is very keen to heap additional and often hidden risk on to consumers through hidden charges and now it wants to heap additional responsibilities on them.”

Blair states that “living in an age” of “very complex and sophisticated financial services industry can run rings around consumers”… dismissing any added blame being put on consumers.

I think consumers need to be better educated on how financial products are structured and are aware that the banks, like any other business, will sell you anything (whether you need it or not) in order to make money. The banks have taken advantage of the consumers trust for long enough… and without punishment, however, consumers do need to take some responsibility, especially if they continue to be pressured into taking products they don’t understand – research, understand, compare similar products and most importantly don’t be afraid to say “NO”.

New Economics Foundation Criticizes Reforms on Ring Fencing Banks as Not Enough

Research organization, New Economics Foundation, has criticized the reforms on ring fencing banks as “not enough” to cure the problem of Britain’s financial services industry which operations and its impact on the economy and its players (small businesses, taxpayers and consumers) is not thoroughly addressed.

[youtube http://www.youtube.com/watch?v=CDM2S-fzNVU]

At the recent Good Banking Summit, it labeled the proposal of separating the firms’ reserves and loan operations from their risky investment banking as simply “too narrow” of an approach in trying to revise the financial industry’s operations.

It said the proposed reforms do not give solution to the problem which was “too big to fail,” and that it was the taxpayers who often pay a costly price for their failure, to point the bailed out Royal Bank of Scotland (RBS).

Not only that, the think tank also criticizes the lack of reforms on the banks’ “culture of excessive remuneration” and tells wage process should be framed after John Lewis’ remuneration framework – even distribution and collective endeavor-based.

In addition, Britain’s over dependence on its overweight or ballooned financial industry (which makes more money than its government) continually exposes the country “to financial frailty and economic collapse”

RBS Chiefs Waste £8000 of Taxpayer Funds in Lavish Spanish Restaurant

Part tax-payer owned Royal Bank of Scotland‘s chiefs have been spotted eating at an extravagant ?200 per- person restaurant at Costa Brava, Spain, spending ?8000 of taxpayer funds on a 30-course meal… another example of unashamedly extravagant spending in by the bankers in times of austerity and economic uncertainty for the rest the us.

Apparently insensitive to how much the taxpayer is being squeezed on their budgets, the lavish spending received protests from taxpayer group, TaxPayer’s Alliance, which stated that it was simply preposterous that the bank, who is on taxpayer support, would even continue exorbitant spending where “they have lost their rights to treats like this when they got taxpayers to bail them out”, the group’s chief executive Matthew Elliott says following up with “They should be working to get out of public ownership, if they want the freedom to dine where they like”

News of the feast surfaced following the bailed-out bank’s whopping ?260,000 hospitality spending for its senior staff and clients at Wimbledon.

RBS defends that they were only trying to win more clients and new contracts for the bank so it was their “duty to entertain powerful business people” even if it had to “unwittingly” spend a lavish portion of their supporter’s money.

It should be a point to look at, too, that the famous El Bulli Restaurant at Costa Brava, Spain only books limited persons to dine in with their restaurant – in fact, one out of the 50 visiting diners, which would total to 500 – would have been refused – making those big fat cats (and their guests) among the fortunate few.

Financial Reform

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