Building Societies Abandon The Lending Code

A new version of the Lending Code has been released, simply omitting the name of the Building Societies Association which has ceased sponsoring the farcical idea that UK retail lenders should be allowed to regulate themselves.

Banks and credit card issuers still think it's a good idea though...

Banks Make A Mockery Of Their Self-regulatory #LendingCode

Readers may still be surprised to hear that Britain's retail banks remain self-regulated when it comes to their lending activities.

That means it's the job of their own Lending Standards Board to check that subscribers are complying with the self-regulatory Lending Code, not the Financial Conduct Authority (although there is a 'memorandum of understanding' between the two bodies written on the back of an envelope somewhere).

Of course, the Lending Standards Board tends to give its own members a clean bill of health...

Which is puzzling, because the LSB has just made the rather unfortunate discovery after reviewing complaints procedures that there is "mixed evidence to indicate that issues, once identified, [are] being reviewed specifically against the requirements of the Code."

In other words, the banks are blowing raspberries at the Code.

So, um, how could the LSB have given the banks a clean bill of health before now?

Does the FCA care? Or, in regulatory speak, "Quis custodiet ipsos custodes?"

It's been a farce from the very beginning.

Why Bankers Make Poor Managers

If UK banks ran our restaurants, we'd all be spending a lot more time in our smallest rooms.

In the latest example, the Financial Conduct Authority found that only 2 of the 164 RBS and NatWest mortgage sales reviewed actually met the required sales standard. Even the banks’ own tests confirmed the problem that borrowers were at grave risk of being sold the wrong type of mortgage. Yet it took the banks nearly a year to stop fiddling and begin taking proper steps to resolve the issues. Worst of all, this took place in 2011 and 2012 - long after the events of 2008 had alerted everyone to just how poorly these banks were managed generally; and after numerous specific failings had been detected in their retail operatons. The same banks had just been fined for failing to screen customers and handle complaints appropriately - and had even failed to enable customers to pay bills or access money. 

Of course, RBS and NatWest are not alone, and the banks' problems are not confined to their retail operations. Most of the major banks are embroiled in scandals arising from lack of operational controls of one kind or another.

Over at heavily-embattled HSBC, the Chairman and Chief Executive have been whingeing about the 'cost of compliance', as if it's a dead weight they're forced to bolt-on to the side of their sales process, rather than a set of largely common-sense business rules that should be embedded in their operations. 

They don't seem to realise what a sad indictment it is on the level of management skill in the financial services industry that successive regulators since 1986 have felt obliged to spell-out in minute detail how to operate a financial services business at every level and in every scenario. As a result, no human could possibly lift a printed version of the FCA's 'Handbook'. 

The same charge can be made for failings in longer term strategy. The government had to force the banks to invest in faster payment processing capabilities, for example, and it took an extensive series of court battles before banks were finally shamed into 'voluntarily' reducing overdraft charges. The most recent indictment on the levels of skill, enthusiasm, initiative, vision and energy at the top of the UK's banks is that the government will have to regulate to make them refer rejected business funding applications to alternative lenders. 

That's right, UK bank executives aren't even up to negotiating simple lead-referral arrangements.

Which begs the question: what do UK bank executives actually do all day?

Why, they fight regulation, of course, and all the operational rigour it seeks to impose.

2013: Levelling The Financial Playing Field

Six years of financial crisis have finally produced some of the legal changes that will expose the cosy world of regulated financial services to innovation and competition. But there is plenty more to do.

During 2013 we've seen consumer credit move to the FCA, the regulation of peer-to-peer lending, and the FCA's proposed rules for how the 'crowd' can lend and invest. And this week the Banking Reform Act implemented the recommendations of the Independent Commission on Banking and key recommendations of the Parliamentary Commission on Banking Standards.

Some may see these changes as a magnificent display in closing the stable door. But I prefer to see it as an opening of the floodgates. 

After all, the European Commission is consulting on its own approach to regulating online financial marketplaces; and the US states are competing with the Securities Exchange Commission on the regulation of crowd-investing.

So 2014 will see a lot of focus on enabling the growth of alternative financial services, at the same time as the banks become even more preoccupied with solving their own problems at their customers expense.

That bodes well for a market that grew 91% in 2013.

But, like I said, there's still a lot of work to do.

 

Banks To Repay Cash-ISAs When Teaser Rates Expire?

The government's ISA programme has become a victim of its own success. The Treasury estimates that "around 45%” of UK adults have one or more Individual Savings Accounts. The total amount held is estimated at £400bn, half of which is in either regulated bonds or shares while the other half is held in cash deposits that are being eaten by inflation. 

In 2010, Consumer Focus found that the £158bn which was then held in cash-ISAs was earning an average of only 0.41% interest after initial ‘teaser’ rates expire. They also found that 60 per cent of savers never withdraw money from their account. 

Since then, there has been a campaign to get banks to tell customers when teaser rates expire. But what has been the banks' response?

To cut the 'teaser' rates on cash ISAs (even though the government subsidises lower lending rates).

Meanwhile, the Treasury has also resisted calls to expand the range of assets included in ISAs, which would enable savers to diversify and boost innovation and competition in the retail finance markets, as explained here. 

The implicit message from the government is that consumers only have themselves to blame if they don't move their savings to get the best deal. But the government can't have it both ways. It can't introduce an artificial tax incentive and then ignore the systemic issues that incentive creates. The government should either take responsibility for the behaviour that is driven by its incentives, and re-design them accordingly. Or it should withdraw the incentives.

So, short of opening up the cash-ISA market to real competition, what more can be done to remind people to switch their ISA cash?

The last straw would be for all cash-ISAs to be term deposits which can only last for the duration of the 'teaser' rate. When that rate expires, the cash would have to be paid into the customer's nominated 'ISA holding account', from which it can be re-allocated as the customer sees fit. 

Maybe this will lead to 60% of ISA cash deposits earning no interest at all. But only then could the government really claim that consumers who don't seek out the best return only have themselves to blame.

Evidence From Non-bankers On Banking Standards

Here's what some of the non-banks have to say about banking standards (from 17:52).