Christmas Special

Here's a little thought to distract you from the frustration of seemingly insufferable transport delays over the holiday season: might all this grief be a signal to either buy transport companies' shares or short them?

If it's true (as you may bitterly begin to suspect) that transport companies are ultimately profiting from captive UK customers (and the government) by raising fares despite ongoing public subsidy, under-investing in service improvement or snow-clearing and/or saving money by reducing services during difficult weather conditions, then might it not be worthwhile to buy their shares? I mean, if they're engaging in all theses tactics to be more profitable, then why not climb aboard?

Or perhaps you would prefer to bet that, if transport companies are unfairly taking advantage, then sooner or later they'll get rumbled and their stock prices will fall. In which case it may be worth shorting their shares.

In either case, any gains you might make would at least off-set fare increases and other costs. And the consolation that you are personally profiting from disruption might ease your personal discomfort.

Of course, your suspicions may prove to be unfounded or, even if true, may not be material to corporate results or otherwise sound in the market. In which case your investment won't pay off and you're misery may increase. But, hey, at least you'll be able to console yourself that you didn't just sit there simmering helplessly ;-).

Anyhow, safe travels and have a happy Christmas and New Year.


Image from ImpactLab.

German 'Fraudclosure' Issues

Hat-tip to Glen Davis, insolvency and financial services barrister par excellence, for pointing out Dr Philiipp Esser's piece on "Mortgage Foreclosure Turbulence" in Germany.

It seems the US securitisation market is not the only one in which the purchasers of mortgage debt have enforcement problems. German portfolios are similarly vulnerable.

According to Philipp, the Federal Court of Justice of Germany (Bundesgerichtshof, BGH) has ruled (in XI ZR 200/09) that the Risk Limitation Act 2008 requires the loan purchaser to become a party to the original security agreement between the borrower and the original lender before it can lawfully exercise any immediate right of foreclosure in that security agreement. Merely taking an assignment of the agreement from the original lender is not enough. Unlawfully foreclosing will also render the loan purchaser directly liable for any damage suffered by the borrower.

Philipp suggests that "in most transfers of real estate loans for purposes of refinancing the acquirer has not joined the [original] security agreement."

Robo-signers beware!

Policy Fail? Simple Products And The UK Treasury

The UK's regulated financial services providers have failed to co-operate with various government initiatives to encourage the offering of simple financial products, according to a recent report by Professor James Devlin for the UK Treasury. He found that:

"The combination of a relatively low fee cap [1 to 1.5%], free movement in and out of products without penalty and the relatively low level of funds invested by many users together represented a formidable barrier to enthusiasm from the industry for previous “simple products” (Devlin, p.4)

The lack of simple regulated financial products affects virtually the entire UK population. The primary target may be those people earning low to medium incomes, and those with little financial services experience/expertise/interest and/or limited savings (Devlin, p.10). But people earning higher incomes (over £30k) include themselves in the target market because they would most welcome "standards which show when a financial service offers customers a reasonable deal" (Devlin, p.14). The Treasury also notes in the accompanying consultation on simple financial products, that 48% of UK households have less than a month's salary in savings, and 27% have none at all (para 2.13).

When launching the Retail Distribution Review of financial advice in 2006, the FSA claimed that "insufficient consumer trust and confidence in the products and services supplied by the market lie at the root of what we are seeking to address." And while Professor Devlin cites recent research to the effect that trust in financial service providers is "not significantly below" supermarkets, mobile phone providers and the NHS (Devlin, p.16), that's not saying very much. Investments, pensions and securities are the least trusted consumer services across the EU. Only 34% of consumers think they deliver what's promised, 26% of us are as likely to trust investment providers as used car salesmen, yet 76% of us don't bother to switch providers. What would be the point?

Faced with regulated financial services providers' continuing refusal to supply suitable investment, pension and savings products at reasonable prices, you'd think the government would directly question the structure of all the providers and their products. After all, similar proposals for 'vanilla products' are afoot in the US (and meeting strong resistance from providers, of course (Devlin, p.31)). Instead, however, the UK government has meekly decided to avoid simple investments altogether and focus solely on simplifying "deposit savings accounts" and income protection insurance:

"Although the Government believes that the principles of simple products are widely applicable, it also believes that, initially, simple products should focus on products that do not carry risk to capital, i.e. that are not investment products. Risk would add an extra level of complexity to the product design, as the design would have to weigh up how much risk individuals are willing to bear, both in terms of capital risk and risk to gains."

Hello?

This astonishingly narrow focus fails on at least four counts. First, and most obviously, it shies away from the key challenge facing the consumer: the lack of simple investment products. Second, it means the government won't enable us to diversify at a reasonable cost. Third, it encourages us all to put our money in the banks for little or no interest, leaving us exposed to inflation that continues to hover well above base rates. Fourth, given the banks' reluctance to lend their deposits due to capital constraints, these proposals inhibit the efficient allocation of our surplus cash to creditworthy people and businesses.

While initiatives to improve financial advice are helpful, good advice does not equate to simple products. The glacial Retail Distribution Review, launched in 2006, will only alter compensation for financial advisers from the end of 2012. Full advice will be fee-based and beyond most people. While advisers are "considering" developing a simplified advice model that might provide a "limited sales route", they're worried that if the investments do not perform customers may claim they thought they were given full advice which proved to be wrong (Devlin, p.26). I wonder why?!

In response to the sound of dragging feet, the government recently commissioned the Consumer Financial Education Body to develop a "free and impartial national advice service":

"It will not give regulated advice, but it will provide people with information and advice on all major areas of money and personal finance. A key component of the national financial advice service will be a financial healthcheck, that will provide people with a holistic review of their finances, highlight areas to prioritise, and give people a personalised action plan to take forward. The service will move as close to the regulatory boundary as possible to ensure that people have a seamless journey between the national financial advice service and regulated advice, should they need it. To this end, CFEB is exploring the possibility of providing generic product recommendations, for example 'you should consider purchasing home contents insurance'." (HMT, para 4.3; see also Devlin, p.29))

You mean home contents insurance is an investment? In what, burglaries?

That little gem aside, the "Moneymadeclear" web site may help improve the knowledge of someone who already has a basic understanding of the various types of financial service. But it won't help anyone to actually decide on a suitable product, or render products 'simple'. Which is surely the point.

A little sunlight may penetrate via the "key investor information document" introduced at EU level to enable easier comparison of the key terms of multiple products. Professor Devlin also suggests that strong warnings on products that do not meet "simple product" criteria (Devlin, p.5) and a traffic light system to declare the risk associated with products (Devlin, p.27) would help people choose suitable products. He has urged the government to retain rule RU64 that obliges a financial advisor to explain why any alternative product being recommended is at least as suitable as a simple product. He found that this rule led product providers to reduce fees for more complex products to make them at least as suitable (Devlin, p.22).

For now, however, we're stuck with expensive, complex regulated financial products.

Like... the Kickout bond! ;-)

Regulators Ignore Innovations In Lending

Well, surprise, surprise. The latest Bank of England Quarterly Bulletin confirms that banks aren't lending as much as people need, and this is a brake on growth.

Politicians obfuscate by blaming banks for not lending, while insisting banks must conserve capital. Lord Myners has even U-turned into believing it's a good idea to split up the banks in order to create more banks, believing this will mean more competition.

But it's tough to see why more high street banks will mean more competition to provide unsecured loans to people and small businesses, given they're all bound by the same capital rules. We had lots of banks, and they had to consolidate to solve their capital problems. Metro Bank is said to be expanding rapidly, raising more cash to buy old bank branches others have been forced to sell for competition law reasons. But I don't see any truly disruptive difference between them and the other high street operators.

There's also a bigger problem here, as suggested by the finding in the latest British Social Attitudes Survey that only 19% of us think the banks are run well, down from 90% in 1983 and 60% in 1994.

Surely these circumstances demand a new regulatory framework for efficiently directing deposits to where they are needed most. Yet the existing framework prevents regulators from spending any time on this problem. Zopa's request for peer-to-peer lending to be included within the regulatory framework has not produced any joy, even though such platforms enable lending that doesn't tie up a bank's balance sheet and unlent funds remain in the banking system as commercial deposits. Loan volumes at Zopa have exceeded £100 million - 1% of the personal loan market - at a default rate of only 0.7%. Ironically, these numbers do not represent the sort of risk to consumers or the financial system that is claimed to command regulatory attention (which is itself debatable, given the lack of timely attention to the problems in the securitisation market).

In other words, if you have a highly capital-efficient financial innovation that represents a great deal for consumers, expect policy-makers and regulators to ignore you.

You're better off developing Kick-out bonds.

Image from Good Design.

Aged 30 To 34?

Yesterday the National Centre for Social Research published its British Social Attitudes report. More on that later. But I did notice the finding that:

"Those aged between 18-29 years old are more likely to feel discriminated against than any other age group, and are viewed more negatively than older people."

Meanwhile, the Chartered Institute of Personnel and Development also reported that two thirds of new jobs go to under 35's.

So I guess if your aged 30-34, you're golden.