Targets are unnecessary if you have right people
I was quite astonished to read the scale of the some of the bonuses that had been paid out to financial services staff in the report on Mortgage Strategy Online last week about the FSA’s overhaul of sales incentive schemes following a year-long investigation into how such incentives drive misselling.
It found 20 out of the 22 firms assessed had features within their incentive schemes that increased the risk of misselling. Of those 20 firms, 11 were not properly addressing the increased risk of misselling. The FSA says one firm has been referred to enforcement as a result of its investigation.
Examples of the poor practice uncovered include one sales team where bonuses were multiplied up to eight times for cross-selling protection products.
Another firm ran a “super bonus” competition, where the first 21 people to make the required number of sales earned up to £10,000.
I worked for NatWest until 2004 and know from colleagues that branch based salaries are not in these sort of leagues.
Nevertheless, I can remember the pressure to sell flexible mortgages at one stage, never a fixed-rate option and always done on an interest-only basis.
I remember discussing with colleagues that we thought years down the line it could be another misselling scandal.
Fortunately, I always stuck to my mantra of treating the customer as I would want to be treated and eventually that led to me going independent.
Now eight great years down the line I am retiring and, much as I will miss the clients, I am grateful that my efforts will no longer go to profit for these big organisations.
When 20 years ago NatWest announced performance-related bonuses, I said to my boss it would be a disaster for banking. With the right people recruited into a small properly led team, targets are unnecessary.
People’s futures are kicked about like a commission football
Last week, the FSA said it wanted to crack on financial services sale incentive schemes – but if it has only just noticed this practice from the banks, what planet has it been on?
20 years ago, while working for a large and well-known pension provider, the big sales incentive was to transfer members away from final-salary pensions schemes to the company’s private pension scheme.
These types of incentives have continued to this day.
It is scandalous that the financial future of so many is allowed to be kicked about like a commission football. All too often, it’s about sales figures and not about what is right for the client. PPI – need I say anymore?
People in power should have ideas to solve problems
Prominent backbench Conservative MP David Davis last week called for a bonfire of regulations to boost growth and lift Britain out of recession.
He called for slashing regulation, a radical overhaul of banking and a pledge of no new tax rises.
I agree with most of what David Davis says but would prefer to hear such comment from the people who have the power.
For almost 25 years, the people with the power, the Prime Ministers and chancellors have demonstrated that their main ambition is to get elected and remain elected. For that they have had to avert their attention from mismanaged banks and end up where we are today.
Here are a few ideas for the idea starved politicians.
1) Offer tax payment incentives. Pay on time or early and get a discount.
2) Dismantle the working tax credits and child tax credits system designed by former Labour Prime Minister Gordon Brown completely and introduce higher allowances and higher tax codes to encourage people to actually work.
3) Divert some funding to a unit, independent of the HMRC and other similar bodies, to look into benefit fraud and take positive action.
4) Appoint an independent body to identify suitable land for residential, commercial and affordable housing projects then fast track the planning system.
Politicians please let me know if you want a few more ideas to have a think about!
Lenders should raise multipliers to keep prices up
There were some interesting comments left on Mortgage Strategy Online in the wake of the Government’s announcement about plans to shake up and reinvigorate the housing market.
One comment argued that with interest rates expected to remain low for some time there is a strong argument for lenders to increase their multipliers to say 4 x salary and link this with a long term fixed rate.
They said: “We are in the current situation because of inflated salaries on self cert and unless people can borrow more than three times income the market will drift for a number of years.”
It is interesting to consider why lenders have not done as another anonymous poster has suggested and allow higher salary multiples at a longer fixed rate.
This would help if one wanted to keep the current prices up until inflation worked to reduce the debt. I suspect this is the plan of the powers that be.
However, they will not do this until they have rebuilt their balance sheets.
Being able to claw in higher payments with near zero base rates is allowing lenders to recapitalize. Once this process of recapitalizing is finished, then they will be able to lend more. At that point, they might put more effort in finding ways to lend more to people at these current high price levels.
The problem currently is that wages are falling or flat in real terms, so while houses are also falling in real terms, it doesn’t help new buyers.
Name and address supplied
Indemnities an old-fashioned solution to kick-start market
There was lots of talk last week about how best to boost the housing market.
If the Government truly want to do something to kick start the housing market why don’t they offer a good old fashioned indemnity scheme.
The lenders could charge the indemnity fee which is remitted to the State and a fund that could be built up to cover claims.
There is an issue as to whether such a scheme could be abused by lenders but this could be covered off by a commercially written indemnity agreement that would leave some liability with the lender if they made reckless loans.
Like it or not, old style indemnities actually made money for insurers before the last crash of the early 1990s.
There can be lots of argument regarding the losses made due to that crash but we are not seeing the massive losses on property that where inherent during that period.
It is a risk, as all indemnities are, but it would be a way of offering higher LTV loans to allow first-time buyers to compete with buy-to-let landlords for the properties at the lower end of the market. If we get first-time buyers into the market they will then release others to move up market and so on.
A far healthier, and proven, way of moving the market rather than short term schemes designed to benefit developers.
The problem with inexperienced persons such as Cameron and Osborne (and that goes for the other lot as well) is that they have never worked in the real world and are far too young to remember the good things that history has taught us.
Indemnities are not bad if they are managed properly and could be a good way to get things moving without massive expenditure.
Grey Haired Underwriter
Sellers and agents are trying to sell overvalued homes
The housing market is stagnant because sellers, estate agents and builders are all trying to sell overvalued properties.
Instead of encouraging the price to fall to affordable levels, they want people to take on more debt via concealed means.
Those saying banks are not lending are talking out of their rear. Banks are lending, but will only lend based on the individual’s affordability, what we would consider as responsible.
Find me one person with good credit history that can’t get a mortgage and i will find you a Unicorn.
The property is valued at what people can afford, not what estate agents/sellers and builders want to sell at to make a very nice profit.
Raise multipliers and link them to a long-term fixed rate
There was talk by some commentators on Mortgage Strategy Online last week about the government encouraging house prices to fall as a possible solution to the current market malaise.
But uou cannot encourage prices to fall – the majority of people are not in a position to sell their property for less than they paid for it and the amount of the mortgage.
As to affordability lending at around three times salary has been used for affordability when interest rates were 15 per cent and also now when they are at less than 5 per cent.
When there was self cert people inflated their salaries and this in part pushed up property prices – those prices are not going to come down significantly – they are more likely to stay flat.
To improve affordability you need to increase lending multipliers and this needs to be linked to the security of a long term fixed rate.
A mortgage indemnity guarantee scheme for high percentage borrowing may help but I suspect people will object to the premiums – in some respect the higher interest rates on higher LTV is the equivalent of a MIG premium.
At some stage we will see inflation as a result of the quantitative easing, and in the meantime we need to help more people to be able to afford to buy a home, particularly first-time buyers – current lending criteria does not do this.
The Government last week announced a £280m extension of its shared equity scheme FirstBuy as part of a raft of new housing and planning measures.
But the proposition has to enable first time purchasers release second time purchasers from their homes to kick start the whole process. The current scheme only gives builders a short term boost but not the rest of the economy and certainly doesn’t give the feel good factor that is required for any recovery.
In Ireland, first-time buyers also still get tax relief on their first purchase and this could also stimulate and keep mortgage payments low. By releasing second time buyers, the HMRC would collect more stamp duty from more purchases and everyone would win.