Mar 16 – All the unknowns

As it now looks like a base rate rise is pushed even further out, lenders will have some tough decisions to make as we progress through this year and into 2017.  Sir Jon Cunliffe, Deputy Governor of the Bank of England has made a couple of speeches recently which go a long way to explaining current thinking within the Old Lady. He has set out his view that the world economy is still a long way from repair, with many of the problems that precipitated the last crisis not yet resolved.  The issues created by continuing huge trade and borrowing imbalances between major countries have yet to be fixed and are already fuelling the next crisis.

Domestically, the credit interest rates still being offered by Banks and Building Societies to savers appears at odds with borrowing rates.  The rates that have to be offered to attract savings remains high, despite savers feeling they are being badly served.  The cost of these savings balances cannot be recovered through secured borrowings with sufficient margin to cover the organisations management expenses and cost of capital.  When any form of expected profit margin is added plus the need in many firms for some shareholder return, then it is inexplicable.

So what should we make of all this.  The segregation of the retail aspects of the “too big to fail” banks via ring- fencing should assist regulators in seeing where true risk resides. Boards of banks now faced with the Senior Persons regime will become more focused on really understanding what is happening under the bonnet.  This can only lead to further pressure to reduce savings rates combined with a need to continue to lend but with markets as aggressively competitive, then borrowing rates are likely to remain near rock bottom.

It is the new Senior Persons regime that is likely to stay close to the headlines over the next couple of years.  With the FCA bringing themselves into the regime with their own clear allocation of accountabilities, we will soon have the consultation on how this will be extended into the intermediary sector.  The consultation on this will arrive in 2016, with the likelihood that firms will be given 2017 to get ready for implementation in early 2018.  This should deliver a level playing field between lenders and brokers, giving lenders more comfort that firms can evidence compliance with the regulatory regime and avoid the need for costly oversight which some may have been considering if this was not applied.

From what has been seen in the lenders transition, it forces clear documentation of roles and responsibilities, allocating these to the most senior people in the firm.  This gives the regulator clear sight of who is accountable for ensuring that the firm is exhibiting all the correct behaviours.  Never has doing the right thing by your customers been as important.  The principles of being clear, fair and not misleading as well as acting in the customers best interests has to be at the heart of all activity.  This has taken the treating customers fairly to a new level and with the FCA escalating its agenda as a competition regulator, we can only expect more detailed scrutiny of all of financial services markets in the years to come.

As we have seen with the recent publications from the FCA on Assessing Suitability in the Investment Market and on the treatment of closed book customers in the life insurance sector there are lessons that the mortgage industry can learn from our brothers and sisters in related sectors.  We should not be complacent at a time when the market is robust, but making sure we are working towards a stronger market.