Today marks the first anniversary of Eumaeus, coinciding with the publication of Asleep at the Wheel and the broadcast of The Equity Release Trap (partial transcript here).
As is customary on such occasions, we ruminate on developments over the past year and look forward to the next.
Looking back
We have written quite a lot about Equity Release Mortgages since we began. This was not the original idea. The purpose of Eumaeus, as set out here, was to keep an eye on the guardians of the financial system, and our main concerns were the guardians of banks, not insurers. Kevin’s specialism is banking capital, free banking, and everything to do with banks. I spent most of my career working in banks or supervising them (and now avoiding them).
Insurance was almost an accident.
Nor is our specific concern the equity release market, although one recent letter chided us for being a ‘one horse pony’ on the subject, and on one firm in particular. Our general concern is not that the embedded equity release guarantee is being undervalued, for it is the job of the relevant authorities, and the relevant legal checks and controls, to ensure that. Our concern is that the relevant authorities seem powerless to ensure adequate valuation standards despite their obligations to do so.
Back in August 2018, we had hoped that once the undervaluation problem had been made public, the problem would be resolved by the usual means.
That did not happen.
To be sure, the PRA published CP 13/18 on 2 July, which to some extent preempted ‘Asleep at the Wheel’ a month later.1 In December that year they published CP 31/18 which went even further in the direction of prudence, but at a snail’s pace.
However (i) neither of us thinks that the PRA’s current guidelines are sufficiently prudent and (ii) as we have frequently commented, the PRA guidelines concern the regulatory balance sheet, not the statutory one. The whole weird distinction between two different balance sheets, when in reality there can only be one, is an important piece of unfinished business that we shall crack on with in our second year.
Our other work has been with organisations such as the Financial Reporting Council (FRC), the International Accounting Standards Board (IASB) and the Financial Conduct Authority.
They have all been spectacularly useless.
You would think the FRC would be concerned that firms might be massively overvaluing their balance sheets, and that auditors are signing off their financial statements, but apparently not. I first notified them in August 2017 while employed at the PRA, but despite considerable correspondence, interspersed by long periods of radio silence, nothing has happened. I met them in November last year, fully expecting the usual ‘nothing to do with us’, but they did concede that the valuation issue would be ‘a potential embarrassment for the FRC’ if they did not act soon – but they have still not acted, and have been in radio silence since February this year.
We also contacted IASB about the application of accounting standards to embedded guarantees. Our first letter (October 2018) is here, there has been further correspondence which we shall comment on shortly. The IASB position, as far as one can read any sense into it, is that it is perfectly reasonable for a guarantee to have one value on the statutory balance sheet, another value on the regulatory one. Comprende? Thought not.
There has been correspondence with the FCA, none of it meaningful.
We should not omit the Institute and Faculty of Actuaries, who commissioned a strange report on equity release published in February. This link brings up our comments on that affair, which was more of an own goal than anything to do with our front line.
Our response was to produce the Eumaeus Guide, which is essentially our take on how it should be done, and which was met by a deafening silence by the powers that be.
There is a lot more in the pipeline including on subjects such as Black-Scholes and the dreaded Matching Adjustment, and we will continue to tease [out] the woeful inadequacies of the so-called governance systems that are supposedly in charge of this mess.
As ever, we thank our readers for their invaluable feedback and suggestions (and the odd telling off).
- I suspect the publication date was not an accident. PRA knew about the programme as early as May 2018, given that they were interviewed by the BBC around then, and I notified the PRA (with Kevin’s permission) about the article in April. Whether this knowledge influenced the PRA to publish in July is a matter for speculation.