A big week for shocks and revelations
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It was another week of surprises for the mortgage market and consumers last week. Just when you thought the great banking crisis had been wrung dry of revelations it turned out Bank of England governor Mervin King had been holding a joker up his sleeve all along.
Acting as lender of last resort, it turns out the Bank lent the Royal Bank of Scotland and HBOS £61.6bn in emergency funding last autumn - just as shareholders in Lloyds TSB were being asked to approve the takeover of HBOS. Talk about being sold a dead duck.
Of course, much has been said and written about this since King told all to a committee of MPs last week. Yes, there were some good reasons for us having the wool pulled over our eyes for such a long time but whatever the excuses, in the words of Liberal Democrat shadow chancellor Vince Cable it was a shocking cover-up. And it’s certainly one that raises serious questions about the future of the banking system.
But as shocking as it is that something so significant can be hidden from shareholders, taxpayers and parliament, would it have made much difference had the loan been out in the open?
The Bank says it was trying to prevent a meltdown of confidence in the financial system yet the markets appeared to have priced for such an outcome anyway - HBOS collapsed and RBS shares were trading at 10p after having been around £6.
There’s not much point in arguing after the event - it happened and we’ll have to live with the outcome anyway. After all, nothing should surprise us any more and don’t forget, Nanny knows best.
The ripples of the banking tsunami are still being felt in some areas, nowhere more so than in the stalled securitisation market which Prudential cited last week as one of the reasons it was quitting equity release. With the securitisation market not expected to return to full working order for another five years raising funds is becoming increasingly difficult.
That said, Prudential’s decision to quit the market left many scratching their heads as it’s such a big beast. Why quit a market that is expected to grow? Maybe it knows something we don’t.
The decision may have dented confidence in the sector but advisers walking the equity release beat will no doubt see this as an addition to a growing list that includes Coventry Building Society, Northern Rock, Saffron Building Society and Retirement Plus, all of which have quit the market, and carry on as normal.
The sector is still growing and no doubt all remaining firms will benefit from Prudential’s departure with an increase in business.
So will the sector still be here next year? Of course it will. There are still some formidable players left, not least the likes of Just Retirement, LV= and Aviva, all of which have categorically stated that they have no plans to leave.
Equity release has never been about short-term gain. To sensibly make money out of this sector firms - both providers and advisers - have to be in it for the long haul. Indeed, the facts speak for themselves. Our country has an ageing population and many consumers are ill-prepared for retirement, yet those same people are sitting on more than £907bn worth of equity in their homes.
This alone shows that equity release has a bright future. It is being increasingly used as part of the retirement planning process and without it many over the age of 65 would be doomed to spend the latter part of their lives in misery.
But there is a bigger cloud slowly starting to form over the sector in the shape of the Financial Services Authority’s Mortgage Market Review. The MMR’s proposals that would socially engineer many families away from home ownership and towards renting would make their retirement even less sure than it is now and create a notable gap in the long-term future demand for equity release. After all, you can’t release equity from something you don’t own.
Back to surprises though, and the widely expected consumer victory on the subject of unauthorised overdraft charges failed to materialise. Millions of customers who had been seeking billions of pounds’ worth of overdraft charge refunds were dealt a serious blow when the Supreme Court ruled in favour of banks.
Despite one of the biggest consumer campaigns since the Poll Tax riots the court overturned earlier rulings that allowed the Office of Fair Trading to investigate the fairness of charges for unauthorised overdrafts.
For some brokers operating in the claims management arena this will have come as a mighty shock. A small industry had sprung up around this area, with the floodgates having been widely expected to open.
Yet the Supreme Court voted unanimously, delivering a smack in the face to advisers, consumers and ambulance chasers. And while the OFT may still be able to challenge bank unfairness on other grounds there will be no more challenges on this front, with the Supreme Court also saying it will not allow an appeal to the European Court of Justice.
And with no guidance given on how the judicial authorities should deal with cases that have been frozen since 2007 thousands could be left in limbo fighting an endless battle.
But the challenge was worth it. Banks have been taken to task over the way they conduct business and as a result most of us will be better off, with clearer and better charges.
Abbey, Alliance & Leicester and Barclays all offer 0% authorised overdrafts for a year and other lenders have reformed their charges for the better too.
Despite the inevitable consumer outcry, in the current climate this was a victory for common sense. At stake was some £2.6bn of annual income to our broken banking system. The amount of litigation that a consumer victory would have generated could have spelt disaster and turned out to be the straw that broke the back of our economy. In this case, maybe the needs of the many really did outweigh the needs of the few and Nanny knew best after all.
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