The FSA has announced changes to the way it regulates mortgage lenders including a move to make mortgage advisers personally accountable for the advice they give as part of the FSA’s commitment to intensive and intrusive supervision to ensure firms treat their customers fairly.
The FSA is particularly concerned about the practice of 'sale and rent back'. Property owners who are struggling with their mortgage can remain in their home by selling in this way but there is evidence that some companies are taking advantage of people in financial distress to acquire their homes and evict them shortly afterwards. The FSA is imposing superficial changes on the way that these offers are marketed but by imposing security of tenure for five years for customers entering into 'sale and rent back' deals it should succeed in deterring the more unscrupulous firms from seeking to capitalise on financial misery.
Similarly the FSA is trying to address the potential trap of mortgage arrears. Again there are a number of procedural changes for the mortgage lenders including mandatory recording of phone calls and the requirement for mortgage advisers to be 'fit and proper persons' but it is an accounting change that will make all the difference: "payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges". It goes without saying that borrowers who are in arrears are having difficulty in meeting their monthly payment. The current accounting treatment that allocates payments firstly to arrears gives distressed borrowers a big extra burden, often insurmountable, in trying to bring their mortgage back under control. The change means that they will no longer face this additional handicap. Going further, the FSA is now insisting that lenders cannot impose a momnthly arrears charge at all when an agreement is in place with the customer to repay the outstanding amount. This will also make a real difference to borrowers struggling to cope.
Last year, 2009, was the worst for reposessions since 1995 so the FSA is tightening up numerous untidy practices in the mortgage lending business. It is the accounting change to mortgage arrears, though, and the security of tenure for 'sale and rent back' customers that will make the real difference.
Tuesday, 29 June 2010
Friday, 25 June 2010
Accounting for the games: the Olympic ideal
Visit the website for the 2012 Olympics in London and you won't be surprised to see a great deal of advertising for the sponsors of the games, and precious little sign of Olympic ideals, but continue further to the page where you will be able to buy tickets and you may be shocked to find that you can only pay by debit or credit card if you have a Visa account.
Apparently this arrangement is not exclusive because anyone who, for instance, only has a Mastercard account can buy a prepaid Visa card. No doubt Visa already has very precise statistics showing what proportion of the money on prepaid cards is never actually used and Visa could use this additional profit to provide some extra sponsorship for the games but it hardly seems fair on the hapless spectator. The flimsy excuse, then, that other forms of payment are available, even if they are both more expensive and less convenient, allows the Olympics to pretend that this is not against the fundamental principle of avoiding any kind of discrimination.
We understand that the Office of Fair Trading is looking at the legality of this move to exclude competition from other card issuers but there can be very little hope that they will be allowed to upset the apple cart. Expectations of the European Commission may be higher, though, since they intervened to force the World Cup in Germany 2006 to accept cards other than just Mastercard despite a similar exclusivity deal.
However, there is an Olympic principle that seems to be in even greater jeopardy: To oppose any political or commercial abuse of sport and athletes. This statement is now the last reference to the amateur principles that used to be the foundations of the Olympic movement. The idea of competing for the sake of sport rather than for gain was a worthy one even if the IOC could not sustain it against the intense pressures of commercial sponsorship of athletes. This unnecessary and blatantly anti-competitive step whereby Visa becomes the only card accepted at the 2012 Olympics makes it obvious that the whole event is no longer the world's greatest sporting event: it has become the world's biggest travelling circus.
Apparently this arrangement is not exclusive because anyone who, for instance, only has a Mastercard account can buy a prepaid Visa card. No doubt Visa already has very precise statistics showing what proportion of the money on prepaid cards is never actually used and Visa could use this additional profit to provide some extra sponsorship for the games but it hardly seems fair on the hapless spectator. The flimsy excuse, then, that other forms of payment are available, even if they are both more expensive and less convenient, allows the Olympics to pretend that this is not against the fundamental principle of avoiding any kind of discrimination.
We understand that the Office of Fair Trading is looking at the legality of this move to exclude competition from other card issuers but there can be very little hope that they will be allowed to upset the apple cart. Expectations of the European Commission may be higher, though, since they intervened to force the World Cup in Germany 2006 to accept cards other than just Mastercard despite a similar exclusivity deal.
However, there is an Olympic principle that seems to be in even greater jeopardy: To oppose any political or commercial abuse of sport and athletes. This statement is now the last reference to the amateur principles that used to be the foundations of the Olympic movement. The idea of competing for the sake of sport rather than for gain was a worthy one even if the IOC could not sustain it against the intense pressures of commercial sponsorship of athletes. This unnecessary and blatantly anti-competitive step whereby Visa becomes the only card accepted at the 2012 Olympics makes it obvious that the whole event is no longer the world's greatest sporting event: it has become the world's biggest travelling circus.
Tuesday, 22 June 2010
Accounting for banks: a new broom
George Osborne, the new Conservative Chancellor of the Exchequer, has moved very rapidly to reform financial regulation in the UK.
There can be little doubt that the old system has failed. As he prepares to deliver his emergency budget George Osborne must be very aware of the vast sums of money the previous government sank into Northern Rock, HBoS and RBS. The chancellor is set to embark on emergency measures to ensure that he is able to borrow the money that his government needs without spiralling into a debt crisis so he must be determined to avoid additional borrowing just to prop up failed banks.
It is to be hoped, though, that Mr Osborne is not being too hasty. There are lessons to be learned not just from looking at the history of our own rather ineffectual FSA but from other countries as well. The new government's plan is to replace the FSA with a Prudential Regulation Authority as part of the Bank of England along with a Financial Policy Committee. This will give the UK exactly the same arrangement as Ireland where the Central Bank and Financial Services Authority failed even more disastrously than the British regulators. Even the CBFSAI's own report cannot hide from the fact that it was, in effect, useless.
Nevertheless there is some reason to be hopeful. A fresh start was needed by the FSA, after all. Since Gordon Brown gave the Bank of England's Monetary Policy Committee control over interest rates it has shown good sense and some independence from political control. We might hope that the FPC and PRA follow that precedent. The climate in which the Bank of England does its business, though, is still set by the Chancellor. We will see later on today whether he is willing to put the lid belatedly on Britain's property price inflation that is its own particular contribution to worldwide financial instability.
There can be little doubt that the old system has failed. As he prepares to deliver his emergency budget George Osborne must be very aware of the vast sums of money the previous government sank into Northern Rock, HBoS and RBS. The chancellor is set to embark on emergency measures to ensure that he is able to borrow the money that his government needs without spiralling into a debt crisis so he must be determined to avoid additional borrowing just to prop up failed banks.
It is to be hoped, though, that Mr Osborne is not being too hasty. There are lessons to be learned not just from looking at the history of our own rather ineffectual FSA but from other countries as well. The new government's plan is to replace the FSA with a Prudential Regulation Authority as part of the Bank of England along with a Financial Policy Committee. This will give the UK exactly the same arrangement as Ireland where the Central Bank and Financial Services Authority failed even more disastrously than the British regulators. Even the CBFSAI's own report cannot hide from the fact that it was, in effect, useless.
Nevertheless there is some reason to be hopeful. A fresh start was needed by the FSA, after all. Since Gordon Brown gave the Bank of England's Monetary Policy Committee control over interest rates it has shown good sense and some independence from political control. We might hope that the FPC and PRA follow that precedent. The climate in which the Bank of England does its business, though, is still set by the Chancellor. We will see later on today whether he is willing to put the lid belatedly on Britain's property price inflation that is its own particular contribution to worldwide financial instability.
Wednesday, 16 June 2010
The Irish banks are called to account
The Central Bank & Financial Services Authority of Ireland has published its report on the banking crisis that has almost overwhelmed the Irish economy. Their account does not make happy reading. Of course the CBFSA is itself implicated in the story of the mismanagement of the Irish economy so this cannot be seen as an entirely independent report but it still makes interesting reading.
One central conclusion of the report is that the macro-economic predictions of the Central Bank and, therefore, the government were hopelessly and utterly wrong before, during and even after the credit crunch began in 2007. What now appears to have been a speculative bubble economy based almost entirely on construction still managed to convince Irish economists of its fundamental soundness even when it was clear that cash funding from the banks was about to dry up. It would be reassuring to imagine that Irish economists were especially incompetent but the CBFSAI, anxious to deny this charge, can point to a 'higher' authority, the Financial Sector Assessment Program of the IMF. As late as 2006 an update for the the FSAP on Irish financial stability could be described as 'relatively glowing'. Apparently the OECD was equally up beat. Ireland had no need to employ its own economists as it could rely on international ones to be equally inept.
Mind you, Ireland did need its own regulators to directly oversee the lending activities and financial prudence of its banks. The account of their work is just as dismal as that of the economists. The report criticizes their methods, which were anything but 'hands-on', and accuses them of getting too close to the banks that they were supposed to be monitoring. Apparently the pay was too low to attract able, experienced staff who could earn far more working for the banks themselves. The regulator struggled on with 'no more than two [staff] per major firm'. Perhaps the shortage of human resources wouldn't have been so bad if their efforts had been probing and incisive but the report is forced to admit that there was not sufficient "intrusiveness and assertiveness" and that 'these might have partly constituted what is described in the literature as "regulatory capture"'.
There is good news, though, in the report's conclusion that 'there is no
evidence or hint of corrupt regulatory forbearance'. There is plenty of evidence of malpractice in at least one of Ireland's major banks and it is a relief to learn that the Central Bank was not guilty of the same but small comfort since the result could hardly have been any worse. Instead, a theme emerges that the regulators, like everyone around them, either could not believe that the Irish economy had no clothes or were not willing to 'spoil the party'.
So finally the blame rests, perhaps rightly, with the Irish bankers, politicians, property speculators and everyone else who believed that they could get rich quick.
One central conclusion of the report is that the macro-economic predictions of the Central Bank and, therefore, the government were hopelessly and utterly wrong before, during and even after the credit crunch began in 2007. What now appears to have been a speculative bubble economy based almost entirely on construction still managed to convince Irish economists of its fundamental soundness even when it was clear that cash funding from the banks was about to dry up. It would be reassuring to imagine that Irish economists were especially incompetent but the CBFSAI, anxious to deny this charge, can point to a 'higher' authority, the Financial Sector Assessment Program of the IMF. As late as 2006 an update for the the FSAP on Irish financial stability could be described as 'relatively glowing'. Apparently the OECD was equally up beat. Ireland had no need to employ its own economists as it could rely on international ones to be equally inept.
Mind you, Ireland did need its own regulators to directly oversee the lending activities and financial prudence of its banks. The account of their work is just as dismal as that of the economists. The report criticizes their methods, which were anything but 'hands-on', and accuses them of getting too close to the banks that they were supposed to be monitoring. Apparently the pay was too low to attract able, experienced staff who could earn far more working for the banks themselves. The regulator struggled on with 'no more than two [staff] per major firm'. Perhaps the shortage of human resources wouldn't have been so bad if their efforts had been probing and incisive but the report is forced to admit that there was not sufficient "intrusiveness and assertiveness" and that 'these might have partly constituted what is described in the literature as "regulatory capture"'.
There is good news, though, in the report's conclusion that 'there is no
evidence or hint of corrupt regulatory forbearance'. There is plenty of evidence of malpractice in at least one of Ireland's major banks and it is a relief to learn that the Central Bank was not guilty of the same but small comfort since the result could hardly have been any worse. Instead, a theme emerges that the regulators, like everyone around them, either could not believe that the Irish economy had no clothes or were not willing to 'spoil the party'.
So finally the blame rests, perhaps rightly, with the Irish bankers, politicians, property speculators and everyone else who believed that they could get rich quick.
Thursday, 10 June 2010
Equitable accountants
Last week the Accountants' Joint Disciplinary Appeal Tribunal released its verdict on the role of Ernst & Young as auditors of Equitable Life. The charges were of 'professional incompetence' in carrying out the audit of Equitable Life's accounts for 1998, 1999 and 2000 and of 'a lack of objectivity and independence'. These proceedings were on appeal from the Joint Disciplinary Tribunal decision of October 2008. The Tribunal had found Ernst & Young 'guilty' on both charges but this judgement was not published pending the appeal.
It is to be hoped that the verdict of the Appeal Tribunal is final. Equitable Life's collapse can be dated to 2000 when the House of Lords issued its devastating judgement against the life assurance company and ten years is a very long time for this to be hanging over all concerned. Both the original Tribunal and the Appeal Tribunal have had to consider evidence not just about the highly complex nature of accounting for mutuals but also what should be best practice for the extremely specialist job of their auditors. To give some idea of the difficulty of resolving this matter one has to bear in mind that the demise of Equitable Life followed three entirely different court decisions in the same case and that none of those decisions followed the unequivocal legal advice that Equitable Life's directors had received. The Joint Disciplinary Scheme has worked thoroughly, painstakingly and, crucially, with enormous professional expertise to reach its verdict and it is very hard to see how justice could be better served by any other process.
With the benefit of hindsight the evidence is damning; Ernst & Young issued successive clear audit reports on accounts that effectively ignored the whole problem of guaranteed annuities even after the Court of Appeal had ruled, at least partially, against Equitable Life. At best the audit staff appear complacent and one might almost describe them as useless. However, in amongst the vast sea of evidence from reports, memoranda, audit working papers, emails and witness statements there was virtually no tangible material that suggested that Ernst & Young was ever guilty of a lack of objectivity and audit independence. So the original tribunal upheld this 'charge' against the auditors on the basis that the failings in the audit process were so severe that they must have come about because the auditors were too close to the company and its directors.
That one of the large firms of accountants, with all its systems and procedures, could still be guilty of a lack of objectivity and independence regarding a major audit client was an appalling indictment. Not as shameful, perhaps, as the revelations about a shredding orgy at Arthur Andersen when Enron imploded but still highly, perhaps fatally, damaging for Ernst & Young. However, the more favourable decision on appeal has removed the element of guilt by implication leaving us with an account, albeit long and highly technical, of an audit that was feeble and inept but not corrupt. Many accountants, including the Accounting and Bookkeeping College, will share the relief of Ernst & Young and especially Paul McNamara, the audit partner, that justice has finally been done.
It is to be hoped that the verdict of the Appeal Tribunal is final. Equitable Life's collapse can be dated to 2000 when the House of Lords issued its devastating judgement against the life assurance company and ten years is a very long time for this to be hanging over all concerned. Both the original Tribunal and the Appeal Tribunal have had to consider evidence not just about the highly complex nature of accounting for mutuals but also what should be best practice for the extremely specialist job of their auditors. To give some idea of the difficulty of resolving this matter one has to bear in mind that the demise of Equitable Life followed three entirely different court decisions in the same case and that none of those decisions followed the unequivocal legal advice that Equitable Life's directors had received. The Joint Disciplinary Scheme has worked thoroughly, painstakingly and, crucially, with enormous professional expertise to reach its verdict and it is very hard to see how justice could be better served by any other process.
With the benefit of hindsight the evidence is damning; Ernst & Young issued successive clear audit reports on accounts that effectively ignored the whole problem of guaranteed annuities even after the Court of Appeal had ruled, at least partially, against Equitable Life. At best the audit staff appear complacent and one might almost describe them as useless. However, in amongst the vast sea of evidence from reports, memoranda, audit working papers, emails and witness statements there was virtually no tangible material that suggested that Ernst & Young was ever guilty of a lack of objectivity and audit independence. So the original tribunal upheld this 'charge' against the auditors on the basis that the failings in the audit process were so severe that they must have come about because the auditors were too close to the company and its directors.
That one of the large firms of accountants, with all its systems and procedures, could still be guilty of a lack of objectivity and independence regarding a major audit client was an appalling indictment. Not as shameful, perhaps, as the revelations about a shredding orgy at Arthur Andersen when Enron imploded but still highly, perhaps fatally, damaging for Ernst & Young. However, the more favourable decision on appeal has removed the element of guilt by implication leaving us with an account, albeit long and highly technical, of an audit that was feeble and inept but not corrupt. Many accountants, including the Accounting and Bookkeeping College, will share the relief of Ernst & Young and especially Paul McNamara, the audit partner, that justice has finally been done.
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