The FSA began its review of the mortgage market in the UK in 2005 and has now published its latest report on 'Responsible lending'. It recommends that anyone applying for a mortgage in future must be able to prove their income which will mean that self-employed people will need to produce accounts if they want to buy a home.
The alarming thing for anyone who is interested in the property market is the proportion of mortgages that have been self-certified; 45% over the period from 2005 - 2010 peaking at over 50% in 2008 and still at 43% in the first quarter of this year. If the FSA's proposals have the effect of excluding over 40% of buyers from the property market then we may see another drop in house prices as predicted by RICS for more immediate reasons.
The potential effect on the property market seems to be of less concern to the FSA than the need to ensure that there really is some substance behind the assessments that mortgage lenders carry out on borrowers. The report states that the sources of evidence for the assessment should be in writing, from an independent source and should be for a period long enough to cover fluctuations in income "and we would certainly not expect indirect evidence, such as providing headed paper or business cards, to be taken as verification of income". It may be possible that an annotated series of bank statements would meet these criteria but many borrowers will find that the only persuasive evidence will be properly prepared accounts, especially as the FSA report specifically excludes 'declarations of affordability' even if they are signed by an accountant. By inference the FSA is recommending that HMRC extends the pilot scheme which it ran last year that allowed lenders to check the details of a mortgage application against HMRC's own information. Anxious to close all loopholes the FSA also insists that 'fast-track' mortgage applications should have income verification.
The FSA believes that "it is possible for everyone to provide evidence of their income". There may be an element of judgement in that statement whereby 'everyone' actually means 'everyone who should be trusted with a mortgage' but it is true that everybody can learn to keep proper books of account if they do a simple course in bookkeeping like those available from the Accounting and Bookkeeping College.
Showing posts with label FSA. Show all posts
Showing posts with label FSA. Show all posts
Tuesday, 13 July 2010
Tuesday, 29 June 2010
Mortgage advisers to be personally accountable
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.
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, 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.
Tuesday, 18 May 2010
Equitable Accounting
The new UK government, unkindly called the Lib-Con coalition, has started work already. Amongst its first measures, aside from reducing the salaries of ministers by 5%, has been the announcement that the members of Equitable Life are to receive compensation as recommended by the Parliamentary Ombudsman. Equitable Life, before its takeover by Halifax Building Society (subsequently HBOS and then the Lloyds Banking Group) had its headquarters in Aylesbury as does the Accounting and Bookkeeping College.
The members of Equitable Life were certainly misled. Each year the directors declared dividends for the with-profits members that were outstanding by the standards of the pensions industry. Very few alarm bells rang until Equitable Life lost a court case brought by a group of investors who believed they were entitled to guaranteed annuity payments. When Equitable Life had sold these annuity contracts its actuaries had seriously miscalculated how expensive the obligations would be. Suddenly it was clear that there wasn't unlimited cash in the pot and the members would have to go short. So little cash, in fact, that Equitable Life was effectively bust.
Throughout this story there was precious little evidence of supervision by the financial authorities. Initially some aggrieved members were looking to the auditors, Ernst & Young, for not sounding the alarm. Auditors had taken the blame for previous corporate fiascos like Enron and seemed like a promising source of funds for the aggrieved. Ernst & Young, however, had a cast iron defence: the convention in the financial services industry, which they were bound to follow, was that the auditors should only examine the assets of the business because auditors are not actuaries and they would not be able to form a worthwhile opinion on the liabilities which, in this case, would be the amount due to be paid out in pensions. Ernst & Young had duly tested Equitable Life's assets and found the figures in the accounts to be true and fair. The directors' error had been in understating the liabilities.
As ever, this one-sided form of accounting could not tell the whole truth or, in this case, anything like the truth. An absence of regulation can only be the responsibility of the regulatory authorities, if any, so the members of Equitable Life resorted to parliament and the Financial Services Authority. The Parliamentary Ombudsman has correctly ruled in their favour. The country will carry the cost, or at least some of it, of this failure.
The members of Equitable Life were certainly misled. Each year the directors declared dividends for the with-profits members that were outstanding by the standards of the pensions industry. Very few alarm bells rang until Equitable Life lost a court case brought by a group of investors who believed they were entitled to guaranteed annuity payments. When Equitable Life had sold these annuity contracts its actuaries had seriously miscalculated how expensive the obligations would be. Suddenly it was clear that there wasn't unlimited cash in the pot and the members would have to go short. So little cash, in fact, that Equitable Life was effectively bust.
Throughout this story there was precious little evidence of supervision by the financial authorities. Initially some aggrieved members were looking to the auditors, Ernst & Young, for not sounding the alarm. Auditors had taken the blame for previous corporate fiascos like Enron and seemed like a promising source of funds for the aggrieved. Ernst & Young, however, had a cast iron defence: the convention in the financial services industry, which they were bound to follow, was that the auditors should only examine the assets of the business because auditors are not actuaries and they would not be able to form a worthwhile opinion on the liabilities which, in this case, would be the amount due to be paid out in pensions. Ernst & Young had duly tested Equitable Life's assets and found the figures in the accounts to be true and fair. The directors' error had been in understating the liabilities.
As ever, this one-sided form of accounting could not tell the whole truth or, in this case, anything like the truth. An absence of regulation can only be the responsibility of the regulatory authorities, if any, so the members of Equitable Life resorted to parliament and the Financial Services Authority. The Parliamentary Ombudsman has correctly ruled in their favour. The country will carry the cost, or at least some of it, of this failure.
Wednesday, 14 April 2010
Justice in the world of accountancy
We wrote with indignation some time ago about Sean FitzPatrick's wilful mismanagement of Anglo Irish Bank in 'The buck starts here'. Today we come to another similar case closer to home with the announcement from the FSA of punitive fines for two former directors of Northern Rock, David Baker and Richard Barclay.
Perhaps the former directors of Northern Rock ought to be relieved that they were not working in the Republic of Ireland where Sean Fitzpatrick is facing more serious proceedings than an investigation by the FSA. After all, the effect of what they did in distorting the accounts was much the same in both cases. Even so there are key differences that probably justify the different treatments.
First and foremost, there seems to be no suggestion that Baker and Barclay made any financial gain personally from their actions. They seem to have been more interested in covering up the dire state of Northern Rock's finances so as to keep the show on the road. Fitzpatrick, on the other hand, seems to have treated Anglo Irish Bank as his own treasure chest.
The second crucial difference is in the nature of the deception. Fitzpatrick admits to changing the accounts of the bank so that loans from other banks appeared as if they were deposits from customers: a complete misrepresentation of the historical facts. At Northern Rock, though, the directors failed to include a proper estimate of impaired loans. There is no doubt that they did know better and that is why they are culpable now but there isn't quite the sense of deliberate deception that is evident at Anglo Irish Bank.
We are pleased that Baker and Barclay have received more than a slap on the wrist as we suspect that in years gone by their misbehaviour would have effectively escaped notice. If this case helps to ensure that accountants in the UK prepare accounts that are honest and truthful, so much the better.
Perhaps the former directors of Northern Rock ought to be relieved that they were not working in the Republic of Ireland where Sean Fitzpatrick is facing more serious proceedings than an investigation by the FSA. After all, the effect of what they did in distorting the accounts was much the same in both cases. Even so there are key differences that probably justify the different treatments.
First and foremost, there seems to be no suggestion that Baker and Barclay made any financial gain personally from their actions. They seem to have been more interested in covering up the dire state of Northern Rock's finances so as to keep the show on the road. Fitzpatrick, on the other hand, seems to have treated Anglo Irish Bank as his own treasure chest.
The second crucial difference is in the nature of the deception. Fitzpatrick admits to changing the accounts of the bank so that loans from other banks appeared as if they were deposits from customers: a complete misrepresentation of the historical facts. At Northern Rock, though, the directors failed to include a proper estimate of impaired loans. There is no doubt that they did know better and that is why they are culpable now but there isn't quite the sense of deliberate deception that is evident at Anglo Irish Bank.
We are pleased that Baker and Barclay have received more than a slap on the wrist as we suspect that in years gone by their misbehaviour would have effectively escaped notice. If this case helps to ensure that accountants in the UK prepare accounts that are honest and truthful, so much the better.
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