Increased competition is good for the consumer

April 28th, 2008

A few months ago I wrote about plans of the EU to integrate the mortgage markets throughout the Union and thereby allow a measure of cross-border lending which has been unavailable so far. This, it was hoping, would increase competition and allow customers to take advantage of currency fluctuations to save money on their home loans.

However, the Council of Mortgage Lenders (CML) has today issued a press release calling on the EU to halt plans for the integration, saying that conditions have changed so much in the months since the White Paper was prepared and published in December last year that it would make no sense to proceed.

Instead, the CML urges the Commission to focus its efforts for the time being on work to support financial stability. New mortgage market proposals should only be developed following a detailed analysis of the economic and mortgage market changes that are emerging.

A spokesman said, ‘European mortgage markets have changed so dramatically in recent months that the only sensible step at this stage is to drop the proposals and start again from a basis of analysing likely future market conditions.’

‘Proposals to further the integration of markets are unlikely to produce net benefits in the present climate. We believe that the Commission itself recognises this, and will not bring forward proposals in the immediate future. They have also launched a broad programme of work on financial stability, which is a sensible and timely development.’

There seems to be at least a grain of truth in this. After all, Northern Rock and the Credit Crunch have left us with quite a deep financial crisis that is terrorising homeowners and shaking the Government.

However, the statement by the CML is utter rubbish. The CML represents banks and building societies, in other the very people likely to lose from the proposed integration. More competition means that they will have to work harder to earn their profits.

Similarly, the integration plans would mean that if the domestic interest rates here in the UK were too high for borrowers they could chose to borrow in the Euro zone or even in other non-Euro zone members of the EU.

The plea from the CML that the EU’s plans be shelved are in fact nothing more than a cynical ploy. The credit crunch has become a catch all excuse for companies to blame when something doesn’t go their way. This is even worse in this situation because the credit crunch may have been less likely had the changes been implemented sooner. More competition means better deals for the customers and lower profits for the companies and that is what the CML is trying to stop.

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We have won the battle, but not yet the war

April 25th, 2008

A day many people have been anxiously waiting for arrived with relatively little fanfare yesterday. A judge in the high court ruled that the Office of Fair Trading (OFT) can rule on whether bank charges are unfair.

Thousands of cases currently on hold in the county courts will remain frozen until 22 May, by which time the banks must decide whether they are going to appeal against the ruling.

Since the beginning of 2006, hundreds of thousands of customers have reclaimed hundreds of millions of pounds from their banks, arguing the charges were too high and unfair. The banks have consistently argued that their charges were fair and reasonable. Campaigners have welcomed the judge’s ruling as a victory for consumers.

The OFT first agreed last July, with seven banks and the Nationwide building society, to stage the test case to decide if it had the power under consumer contract regulations to regulate overdraft charges.

At stake is not only the ability of aggrieved customers to reclaim their charges but also the ability of the banks to generate an estimated £3.5bn a year in income from levying them.

If the banks eventually suffer a complete defeat on the issue, then it has been widely predicted that they will try to recoup their losses by abandoning the long standing policy of so-called “free banking” for customers in credit. Instead, monthly or annual charges could be introduced as standard for running an ordinary current account.

However, things are not cut and dry. The banks will now begin a lengthy series of appeals. The judge decided against the OFT on two points. He said most of the banks’ terms and conditions were plain and intelligible. And he added that the charges could not be challenged under common law

There are extreme doubts about whether banks would follow through with their threat to start charging for current account services. With increasing competition from online banking providers such a move would see a mass exodus of customers from the big banking companies and towards the cheaper, smaller banks that often offer better prices and services.

What is clear from yesterday’s announcement, however, is that those people waiting to hear about their individual cases should not expect an immediate payout.

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The Rescue Package Doubles to £100bn

April 23rd, 2008

Britain’s biggest banks believe the Bank of England’s emergency lending scheme will eventually have to pay out at least £100bn, or double the £50bn aid package initially proposed if it is to have a significant effect.

The Bank of England confirmed that it would exchange banks’ illiquid securities backed by mortgages and credit cards for ultra-safe Government bonds that lenders can use to raise cash.

Barclays, Lloyds TSB, Royal Bank of Scotland, HBOS and Abbey all said they would use the facility. Analysts said they expected all banks to swap their assets to take advantage of the longer-term funds on offer.

Industry sources said the swaps could reach £100bn or more because the gross mortgage market alone is worth £370bn. The asset swaps will be for one year and can be rolled over for a further two years. To protect the taxpayer, lenders will have to give up assets worth more than the Government bonds they are swapped for, and the risks of losses on the loans will stay with the banks. If the value of the assets falls, banks would have to provide more assets or return some Treasury bills.

The scheme is a one-off operation. Banks will have six months, starting yesterday, to take up the swap offer. In October 2011, the assets will be swapped back and the scheme will close.

The Bank will not report on whether the facility has been used until the scheme is closed, reducing the chances of individual banks being singled out and stigmatised. Barclays caused concern last year when it emerged that it twice used the Bank’s overnight facility, a move that would have gone unnoticed before the credit crunch.

Bank shares fell yesterday, partly amid concern about the “haircuts” that lenders would take in swapping assets at a discount and also because of concern about further rights issues.

The Chief European and UK economist at Global Insight, said: “For the scheme to have the maximum beneficial impact, several other developments really need to happen in tandem. These include greater transparency from banks on their losses and exposures to the sub-prime crisis, steps by the banks to improve their balance sheets … and a commitment by banks to quickly reflect any fall in market interest rates in their products and loan rates to customers.”

Lenders warned that there would be no quick relief for bank customers because it would take time for the benefits of the new liquidity to feed through the system. In the meantime, the cost of borrowing could continue to rise, they said. The three-month sterling interbank rate fell marginally to 5.885 – still way above the Bank’s 5 per cent base rate.

The warning was underlined by Abbey, which said yesterday that it was pulling out of the buy-to-let mortgage market and raising the cost of some of its fixed-rate loans.

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