Which came first, the cheating or the Egg?

February 4th, 2008

In an act that is raising eyebrows across the City, Egg, the internet only bank, has withdrawn credit card facilities from 160,000 customers it deems to pose an ‘unacceptably high risk.’

The internet bank is writing to 7% of its customers to give them 35 days’ notice of the withdrawal. Cardholders will be able to continue making minimum monthly repayments on their balances but will not be able to spend any more after the deadline.

In a statement, the bank said it was not demanding immediate repayment of balances or making any changes to customers’ terms and conditions or their interest rates.

The 35-day notice period starts on receipt of the letter, which also provides details of how to appeal against the decision

Egg was sold to US banking giant Citigroup in May 2007 by life insurer Prudential.

It prompted the review, which picked out customers considered to have ‘a higher than acceptable risk profile.’ It seems that the new owners have brought some of their paranoid fears across the Atlantic with them, perhaps unjustifiably.

The 161,000 customers whose cards are being withdrawn had had a deteriorating credit profile since they signed up, according to Egg spokeswoman Rachel Roe.

This could include those who have missed repayments or exceeded their credit limit.

But the description has angered some customers who have claimed that they received a letter informing them of the withdrawal, despite having an excellent credit history. They claimed that by making repayments strictly every month, Egg was not making a profit from them in interest and that this was the real reason for the move.

Other customers have claimed that despite regularly ‘maxing out’ their Egg card they have not received a letter, seeming to add weight to the profit hunting theories spreading among disgruntled customers, and a rapidly growing group of disgruntled ex-customers.

Some MP’s have begun calling for an investigation into exactly what Egg have done and the reasons behind the move. Unfortunately, the Office of Fair Trading (OFT) said that they cannot launch an official investigation until they receive an official complaint from a customer involved. As yet this has not happened.

I would advise, therefore, that a customer that has had their card services removed complains. We would then have a better idea of just what selection process was used, discover if this is nothing more than a cynical profit maximisation exercise, and if so, customers can act accordingly.

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A Rescue Package?

February 3rd, 2008

Following on from my last post, a top government advisor has suggested that there could be a solution to the growing problems in the mortgage market but the government may have to put up the cash. David Miles, chief economist at Morgan Stanley and a Treasury advisor on the mortgage market, says that UK banks will soon need to refinance £250bn worth of mortgage loans that have been financed in wholesale money markets.

The argument goes that if the market remains in its current state, the Bank of England, or the government itself, will need to lend £60bn to £80bn to the banks this year to prevent mortgage finance freezing up.

Without this help banks will be severely limited in their ability to issue new mortgages, and will have to charge higher rates in order to attract additional funding.

This, in turn, could lead to steeper declines in house prices, which would make the UK economic slowdown much deeper.

The good news is that the UK banking sector is not as exposed as banks in the US to the problems in the credit markets. Morgan Stanley estimates that 28% of mortgages issued in the UK were financed by banks securitising their mortgage book and selling them to other investors as opposed to around 70% to 80% in the US.

The Council of Mortgage Lenders acknowledges that “there is a potential shortfall” in the wholesale funding and says it has urged the authorities ‘to intervene more aggressively’ in money markets to restore normal market conditions.

There is an argument that the drying up of lending to UK banks is an example of ‘market failure’, where credit markets are over-reacting to fears of a meltdown in US sub-prime mortgages. There is a case, therefore, for government intervention, perhaps by creating an independent agency which could provide short-term funding to the banks while the credit markets are frozen. This proposal bears some resemblance to US agencies such as Fannie Mae and Freddie Mac which buy up mortgage debt from lenders and have helped expand the mortgage market.

But there would be risks to such a plan. Intervention on such a large scale could make it more difficult for the Bank of England to keep money market rates in line with its own targets and might be inflationary. Also, the government may be reluctant to authorise another huge bank bailout when it is still not clear how much of its £55bn liability for Northern Rock will ever be repaid.

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