Category: media

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Potential equity release mis-selling?

We were also quoted in the Telegraph yesterday on potential equity release misselling.

Kevin Dowd, professor of finance and economics at Durham University, said misselling is “always a risk” with commission-driven sales and the equity release sector “has a less than stellar record in this area”.

Dean Buckner, policy director of UK Shareholders Association, formerly of the Bank of England, said ideally struggling homeowners would downsize to a smaller property and invest for a better income, adding: “Instead, they are being encouraged to take out equity release at currently high rates.”

Mr Buckner said homeowners were at risk of being sold loans that were not appropriate to them. He said: “There is a temptation for financial advisers not to dwell on these aspects, and providers should think carefully about how this could be viewed as mis-selling by future regulators.”

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Wood’s Solvency UK comments welcomed by industry

Insurance ERM this morning on Sam Woods’ comments to the UK Treasury Committee last Monday.

“Dean Buckner, policy director of the UK Shareholders’ Association, welcomed Woods’ admission the new regime would put policyholders at more risk.

He has repeatedly argued how the use of the matching adjustment grants life insurers upfront capital against future investment returns, which may not emerge, and therefore puts firms at risk of running out of capital.

“Our members are increasingly fearful of investment in life insurance companies, given the tendency to decreasing levels of capital, and increasing levels of risk. We thank Sam Woods for speaking out. However, we are disappointed that the government appears to be ignoring these valid concerns,” Buckner said.”

At the same time, the Bank has published the results of its insurance ‘stress test’. Scare quotes, because

In the spread widening stress, the MA increases to offset most of the corresponding fall in asset values within the MA portfolio; and balance sheet deterioration through increased credit risk is not observed until assets start to downgrade. While this result is to be expected under the regime, it does illustrate that the MA does not automatically take account of market signals relating to elevated credit risk at the point where they start to come through

The exam that no firm can fail.

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Easily the worst media explanation of LDI yet

See BBC News at Ten, 12 October 2022, for easily the worst media explanation of LDI yet. The fun starts 7:10.

Presenter “So let’s turn to our business editor, Simon Jack, who’s the expert on all these things.

Jack:

8:00 “Investors want more interest to justify the extra risk”. Not really. A gilt is risk free because the nominal payment (coupon and principal) is risk free. What investors are demanding is compensation for the extra inflation implied by the market.

8:05 “The cost of borrowing shot up”. Gilts are an asset, not a liability, and don’t involve borrowing. Of course, arbitrage implies the cost of long-dated borrowing will go up commensurately, so perhaps we could forgive him.

8:20 “Some pension managers have used them as security to get ready cash now”. Argh. Pension schemes have bought them using borrowed money, using them as security for the borrowing. No cash, apart from the haircut (‘margin’).

8:25 “To be able to pay out on those pension promises” Argh again. The scheme assets, typically risk bonds or equities, enable the payout. And again, there is no cash apart from the margin (and margin doesn’t have to be cash, necessarily).

Jack’s Wikipedia entry says “Before entering journalism, Jack worked for a decade as a corporate and investment banker in London, New York City and Bermuda. He has said that he neither liked the work, nor showed much ability at it.” Fair enough.

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City watchdog on alert

The Sunday Times featured our UKSA letter to the FCA yesterday.

Just days before the deadline for 1.2 million policy members of the mutual insurer to vote on the controversial deal, concerns were raised with Charles Randell, chairman of the Financial Conduct Authority.

The UK Shareholders’ Association wrote to Randell to query a description of the “with-profits” fund that, in effect, owns the insurer and is backed by policyholders as being “ring-fenced”.

The lobby group fears that the fund could be used to prop up the business if the Bain-owned business ran into financial difficulty.

Our letter coincided with a letter in similar vein sent by solicitors Leigh Day on behalf of some LV members, urging the FCA to withdraw its non-objection to the acquisition by Bain Capital and postpone the vote until it addresses a series of issues. The Mail reports:

They [the members] claim the process has been defined by a ‘material lack of procedural fairness’ and accuse bosses of providing ‘incomplete and/or contradictory information’ about the £530million takeover by Bain Capital. …’This is a deeply unsatisfactory situation which the FCA has allowed to take place and is unfair to the members of LV,’ the letter states.

The Leigh Day letter outlines a number of concerns, including the question whether the with-profits fund is really ‘ringfenced’.

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Transfer window

Just noticed an article in the latest Eye about the PAC-Rothesay transfer. The Court Hearing is slated for 8 November.

Includes this:

Concerned Prudential policyholders say this puts them at greater risk, not least because they have a higher age profile (believed to be largely 75 -plus). Without applying the matching adjustment, an analysis in InsuranceERM magazine exposed recently, Rothesay is one of only two out of 14 life insurers in the UK that would be insolvent. So if anything goes wrong in the relatively short term, or the rosy view of Rothesay’s portfolio proves over-optimistic, they’re in trouble.

The policyholders also say the independent expert, Nick Dumbreck of risk management advisory firm Milliman LLC, hasn’t listened to their concerns adequately, including on the critical point of matching adjustment.

Milliman advises on a number of pension transfers, and the current dispute is effectively a test case for the business of selling portfolios regardless of the wishes of policyholders. If the Pru and Rothesay lose, it could kibosh the practice.

 

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War on cash

Our man Dowd has an article in the Telegraph today.

A cashless society gives the government the power to see your every transaction, and if the government can see your every transaction, then it can control your every transaction.

If it disapproves of what you buy, it can prevent you buying or penalise you. It can use that power for other ends too, at its discretion. If you say the wrong thing online, or disobey an order, it can use that power against you and compel you into compliance. A cashless society is creepy.

Strip away the techno pretence and what you have is an unholy alliance of corporates who want to rip you off and elitists who want to control you.

Not forgetting the restaurants who don’t give the ‘service charge’ to the staff.

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Shareholders’ association slams UK’s IFRS 17 discount rate paper

Interesting article here on the horrible UKEB paper that I mentioned earlier this week. I am quoted extensively.  Behind a paywall, but the main points are

  • the paper conflicts entirely with the points raised in the UKEB’s priorities list, published last week, and fails to reflect concerns raised by Sharon Bowles among others.
  • The paper says that absolute precision (in the ‘measuring’ the illiquidity spread to be used in discount rates) is not necessary, whereas the UKEB’s priority list says that discount rates often have a material impact on accounts.
  • The paper concedes that estimating the illiquidity spread is a matter of judgment, but that is OK because “such judgements and estimates are integral to insurance business and insurers have extensive relevant experience”. The article quotes Hoogervorst (ex chair IASB) highlighting discount rates as one of the inconsistencies IFRS 17 was aiming to correct.

The paper was beyond even the usual joke expected of accounting standards bureaucrats.

 

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Who should pay the UK’s housing repair bill?

“After the Grenfell fire: who should pay the UK’s housing repair bill?”, Jonathan Ford, Financial Times, 30 March 2021.

The cost to make buildings safe can only yet be guessed at, but research by a parliamentary select committee suggested that it might run to more than £15bn. Under pressure from its own backbench MPs, the government has tried to appease angry homeowners. Last month, Robert Jenrick, the housing secretary, announced £3.6bn of extra cash for its Buildings Safety Fund to strip flammable cladding from buildings more than 18 metres high, taking the total to £5.1bn. Those in lower buildings could be offered long-term loans to make repairs with monthly payments capped at £50. Part of the extra money will come from a tax on the building industry designed to bring in £2bn over 10 years. A levy on high buildings has also been proposed.

Yet campaigners have decried these plans as unfair for leaving much of the burden on owners. “If you bought a car and all its wheels fell off, would you really expect to have to pay to put the problem right?” says Dean Buckner of the Leasehold Knowledge Partnership, a body that campaigns for flat residents. “It’s those who caused the problem — and that’s in great part the industry — who should be made to pay.”

[…]

The Leasehold Knowledge Partnership has now devised its own solution. It would replace the loan scheme with a levy on developers, landlords and manufacturers to raise a fund sufficient to bankroll the cost of remediation, including non-cladding defects, beyond the proposed government grants. It would include a 1-2 per cent levy on all new-build properties over the next 10 years. “Firms need a clear message that if they are part of an industry that created this problem, then they need to take ownership of it,” says Dean Buckner of the LKP.

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Could cladding scandal trigger new bank crisis?

Blimey,  reports the Daily Mail.

The building safety scandal could lead to the next banking crisis if leaseholders are forced to pay for repairs, MPs were warned yesterday.  Former Bank of England economist Dean Buckner said widespread mortgage defaults could spark a Northern Rock-style run on the banks. His dire warning came after campaigners told the Commons Housing Select Committee that ministers needed to ask them for a spreadsheet of building safety data because they ‘had no handle’ on the scandal themselves.

The Housecom hearing is on Parliament TV here.