The rule of chaos and disorder

September 29th, 2008

Today was another day of chaos and confusion on the global markets that will have ramifications for a long time to come.

Here in the UK, the building society Bradford and Bingley (B&B) has been nationalised, in the US, Congress has voted down the much vaunted financial rescue package, and banking stocks are tumbling around the world.

Under the nationalisation of B&B, the government will take control of the bank’s £50bn mortgages and loans, while B&B’s £20bn savings arm and branches will be bought by Abbey and its Spanish parent group Santander.

B&B currently employs about 3,000 staff. Speculation had intensified in recent weeks that B&B was approaching a funding crisis, leading to a growing number of customers withdrawing their funds.

B&B had fallen into financial difficulty as a result of the credit crunch removing the option of raising funds through the global wholesale money markets. The company’s focus on the buy-to-let market intensified its problems as that market has seen a large rise in bad debts as
UK house prices have fallen.

In London, shares in HBOS closed down 18% while Lloyds TSB slipped 13.5% and Royal Bank of
Scotland lost 13%. The losses contributed to the FTSE 100 index’s biggest one-day fall since January, down 5.3% to 4,818 points.

Global shares also fell sharply, France’s key index lost 5%, Germany’s main market dropped 4% while US shares also lost ground.

Meanwhile, this evening the lower house of the US Congress has voted down a $700bn (£380bn) plan aimed at bailing out Wall Street. As news of the vote came through, traders on the floor of the New York Stock Exchange apparently stood around dumbfounded.

Analysts say that without a bail-out the banks will be left to handle all their own bad mortgage debt as best they can and more of them will be in danger of going bust.

While the market is in turmoil the financial institutions will be nervously watching each other to see which will be the next to either collapse or sink into Government ownership.

Posted in Personal Loans | No Comments »

Barclaycard fined for pestering customers with phone calls

September 26th, 2008

Barclaycard has been fined £50,000 for consistently pestering customers with silent phone calls. The regulator Ofcom levied the maximum possible fine after a lengthy investigation into a high number of complaints.

Silent phone calls occur when call centres with automated systems dial more numbers than staff can deal with. When customers answer the telephone and no agent is available to talk to them, it results in silence on the line.

Ofcom investigated Barclaycard from October 2006 to May 2007 and found that people receiving calls had no idea where they were coming from.

Rules on silent calls laid down in 2006 stipulated that abandoned calls must carry a short message identifying where they came from and must account for no more than 3% of all live calls made in the space of 24 hours.

Ofcom did not say what Barclaycard’s silent call rate was, but said the number of silent, abandoned calls made by Barclaycard was substantially more than the 16,000 calls for which Abbey National was fined in a previous case.

The regulator also found that some of Barclaycard’s call centres had no procedures in place to prevent people receiving repeated abandoned calls over a short period of time.
Barclaycard issued a statement saying, ‘we recognise that all calls, irrespective of the purpose, should be made in the right way and we accept that our processes, in place at the time of the review by Ofcom, were inadequate. As a result, we offer a full apology for any inconvenience and distress to our customers that these calls caused.’

There is no doubt that silent calls, especially if repeated several times in a short period can be a real nuisance and so this fine is, in my view, entirely justified.

I’m worried however, that the maximum fine of £50,000 is not going to be enough. To a large company such as Barclaycard that fine will be peanuts and while it will make them consider their procedures, it is certainly not high enough to guarantee that this will not happen again.

Barclaycard probably feel that they have avoided any real punishment for this breach of communications regulations, despite their PR people making contrite noises.

Has the time now come to raise the maximum amount companies can be fined and perhaps make it a percentage of their profits? That would certainly make them think twice about flouting the rules.

Posted in Personal Loans | No Comments »

Offset Mortgages: The risks are revealed

September 22nd, 2008

A loophole in the Government’s compensation system put in place to protect savers if their bank goes into liquidation means that some people may lose all their savings if they have both loans and deposits with the same company.

The Financial Services Compensation Scheme (FSCS) would normally refund depositors up to £35,000 if their bank or building society fails, but it says that if a saver also has a mortgage with that company, the customer’s savings could be taken and used to pay off the loan.

Put another way, in the event of a bank going into default the FSCS would consider the overall net claim. If the claimant’s borrowing exceeded their savings, there would be no overall claim against the bank and the claimant would not be entitled to any compensation.

This means that if a customer had a mortgage of £300,000 and savings of £100,000 with the same bank, a ‘set-off’ would be applied by the insolvency practitioner dealing with the bank failure. In this example the individual would end up owing the bank £200,000, so there would be no positive balance and no claim for compensation.

If the customer has more savings than debt with the bank, he or she could claim for compensation up to the £35,000 FSCS limit.

The situation is more complicated if the mortgage bank is part of a larger banking group and the customer has further savings in other parts of that group. Browne says it would then depend on the terms and conditions of the offsetting bank as to whether the insolvency practitioner could use those savings to reduce the mortgage

Building societies set different terms and conditions for their offset mortgages, so a customer’s savings might or might not be automatically offset against his outstanding mortgage if the building society failed. In the latter case the saver would still have to claim any money back through the FSCS.

In the past, it was traditional for people who wanted to borrow a mortgage to save with an institution before asking to borrow a loan from it too. This practice has become less common over the last 20 years, with the introduction of specialist lenders who raised their money through the money markets rather than by taking in savers’ deposits, and savings banks such as IceSave which offer high rates of interest on deposits but do not lend mortgages.

But offset mortgages, which combine mortgage loans, savings accounts and in some cases current accounts to reduce the overall amount of interest paid, would almost certainly be affected.

These loans allow borrowers to set savings against debt, effectively reducing the size of their mortgage without tying up savings on a permanent basis, and the ability to access their savings if needed is an important aspect of offset loans for many borrowers.

Offset mortgages were only introduced to the UK 10 years ago. However, the year-on-year popularity of offset mortgages has been much stronger than conventional loans, rising by 49 per cent between April 2006 and March 2007. In 2006 (the most recent figures available from the Council of Mortgage Lenders), offset mortgages accounted for loans totalling £23.9bn, or 7 per cent of all new home lending.

Posted in Personal Loans | No Comments »

« Older Entries