The FSA gets tough. About two years too late

December 28th, 2008

While it has been a lean Christmas for many, we can take comfort in the fact that for many City executives it has been even leaner.

This is in part because on top of the ever worsening financial crisis, the Financial Services Authority (FSA) handed down fines of £22m in 2008 as it clamped down on cases of mortgage fraud and loan insurance mis-selling.

The FSA issued a record 48 fines for breaches that also included pressure selling, pension transfers and market abuse. The largest of these was a £7m penalty against Alliance and Leicester for mis-selling payment protection insurance (PPI).

38 people were banned from working in the financial services industry.

The total value of fines was four times greater that the £5.3m ($7.7m) handed down by the FSA in 2007 and the highest since 2004. 103 firms were also not allowed to continue regulated activities.

This marks a shift to a stricter approach by the watchdog against those breaking the rules as the economic downturn starts to bite, although many believe that this has come too late to prevent the worst of the crisis.

The hefty fine handed down to Alliance and Leicester in October led to PPI mis-selling being the category with the biggest total fine pot in 2008 – £10m.

From January 2005 to the end of 2007 A&L trained its staff to put pressure on customers who queried the inclusion of optional PPI in a loan quote. The bank, which has been taken over by Banco Santander, apologised and promised to pay people back.

Fourteen individuals were fined for breaches of the rules in the financial services sector.

The largest of these penalties was £129,000 levied against mortgage broker Sadia Nasir in July. The director at London Mortgage and Financial Services, whose firm traded as House of Finance, submitted seven mortgage applications containing false information about her employment and earnings which were supported by falsified documents. In four cases she entered her own bank account details on clients’ mortgage applications.

The most common form of mortgage fraud is inflating the income of the applicant. Sometimes this is with the customer’s consent, sometimes not. The advantage to the customer is a bigger mortgage for a bigger property. The broker wins a larger commission. It became more prevalent during the later years of the housing market boom.

The latest action against mortgage brokers was announced earlier in the week.

Sole trader brokers Andrew David Bowden, trading as Scott Jarrett Bowden and Partners based in Surrey, and Shaun Lawrence, based at Brinsley in Nottinghamshire, were both banned.

Among other issues, both failed to keep a record of all customers’ files and failed to keep documents secure.

“The FSA will not tolerate firms which fail to understand and comply with our rules,” said the FSA’s head of retail enforcement. If only they had displayed this fortitude two years ago at the height of the boom they may have been able to solve serious problems, now it is just a sideshow as the crisis causes havoc throughout the financial markets.

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The first of many?

December 22nd, 2008

There has been an interesting development in the fight against unfair bank charges and fees. A small, independent bank has done away with the penalties altogether, prompting hopes that others will follow suit.

The Unity Trust bank has become the first to do away with charges and interest on temporary overdrafts. The bank operates by phone and the internet, and serves trade unions, charities and voluntary bodies, but not individual customers. It says it will no longer impose interest and fees, but might still close accounts of persistent offenders.

Mainstream banks are currently defending their overdraft charges in a long-running High Court test case that has been covered extensively on this blog. The banks claim that the charges are essential to ensure that current account banking remains free in the UK, a claim disputed by many (including me).

The Unity Trust bank released a statement saying, “at this time of severe contraction in the banking industry, we wanted to reiterate to our customers that we are in a very sound financial position. We… promise that we will not levy penalty charges or high levels of interest for temporary overdrafts which don’t have prior agreement, providing they keep in touch with us and let us know if they think they might exceed the financial limits of their account.”

The Unity Trust bank was set up in 1984 and is owned by a variety of trade unions and the Co-operative Bank. Before the changes come into effect, if a customer goes into the red without permission it charges interest at 15% per annum and imposes discretionary charges, similar to those levied by High Street banks on personal customers. That will change from the start of 2009.

So far this year, both Barclays and HBOS have made their overdraft charges easier to understand, in response to the continuing investigations by the Office of Fair Trading (OFT) into the way banks run personal current accounts.

No High Street bank has yet decided to do away with fees for going into the red.

If the banks lose their test case they claim they will be forced to bring back a system of charging regular account or transaction fees instead, regardless of whether customers are in the red or not.

I believe that the amount of competition in the banking market, especially from internet banks, coupled with the very high profits banks make from UK customers, makes these charges unlikely. The banks are using them as a threat, but any that introduced them would see a customer stampede to competing banks with no charges.

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The Pound is in freefall and no one has noticed

December 14th, 2008

The decline of the Pound is the great unreported news story of the current times. It has fallen so far now that in previous times it would have been called a devaluation. The Pound reached a new daily record low of 1.1236 Euros on Thursday. That is the lowest level since the euro was launched in 1999.

The pound gained one cent against the US dollar, reaching $1.4967, as against 1.4827 on Wednesday. Sterling was pushed lower after figures from the Confederation of British Industry confirmed a sharp downward trend in manufacturing.

The UK currency is expected to remain under broad selling pressure amid a grim outlook for the British economy.

More important even than the outlook for the economy is that investors have been losing faith in the UK since it now seems to be moving rapidly towards recession.

Contrary to repeated claims by Brown and his cronies, the trouble in the credit markets has hit the UK harder than other countries, especially as the financial sector accounts for a bigger part of the UK economy.

And with consumers having borrowed heavily in the good times, and the government now facing a huge budget deficit, currency traders were in no doubt that the UK economy was in trouble and the time to start selling sterling had arrived.

Another reason is that the Bank of England has cut interest rates in the UK from 5% to 2% in the space of just three months. Rate cuts generally encourage investors to switch to other currencies which have a higher rate of return.

There is some good news; some analysts have expressed doubts that the rise of the euro against the pound is a sustainable trend, particularly if European economies also continue to weaken.

Interest rates have been cut both in the UK and in the eurozone, but they remain higher in the 15-member euro currency area.

But after the Bank of England has made two sharp cuts in rates, bringing them down to 2%, many analysts expect more in the pipeline. Further cuts will lead to further weakening of Sterling.

A weaker pound is better for the UK exporters but is bad news for British holidaymakers who plan to go abroad during the Christmas season, and also makes imported goods more expensive. All those expensive electronic toys are going to be much more expensive this Christmas than last.

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