Category: regulation

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UK sets out plans for failing insurers

The HM Treasury Consultation document is here,  setting out the government’s proposal to introduce a dedicated insurer resolution regime in the UK.

It would be so tempting to reply asking why such a regime would be necessary, given that insurer capital is determined by Solvency II to a 1 in 200 year event of insolvency, and that all insurers have a capital buffer well in excess of the required amount, making insolvency something like a 1 in 10,000 year event. The government doesn’t plan for asteroids hitting Westminster, why plan for insurers going bust? Could never happen.

(Irony)

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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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Inflation Returns with a Vengeance

To those who have been watching the broad money supply for the last couple of years or so, it was blindingly obvious that inflation would take off after a decent ‘long and variable’ lag. Well, UK CPI inflation is now 7% and even the Bank of England now admits it could soon hit 10%.

The return of inflation has come as a surprise to many analysts. These include, most notably, especially even the Mystic Moggs at the Bank.

In August 2020, the Bank stated (see p. ii) that

In the MPC’s central [inflation] projection, conditioned on prevailing market yields, CPI inflation is expected to be around 2% in two years’ time. 

 A year later, the Bank stated

3.4: … The MPC expects CPI inflation to rise temporarily to around 4% in the near term, before falling back towards 2%. … Inflation starts to decline in 2022, and returns to the 2% target in late 2023(Chart 3.2).

Those are some specular forecasting failures, even by the Bank’s standards.

To be fair, the Bank is not alone. The Fed has made much the same set of mistakes: first they said there would be no inflation, then they said it would be temporary, then they were looking for it in all the wrong places, and now the dovest of Fed doves are turning into inflation hawks.  See this piece by Steve Hanke and me in the latest National Review: “The Fed Looks for Inflation in All the Wrong Places.”

[DB adds: Andrew Bailey is appearing on Parliament TV this afternoon, so don’t forget to tune in]

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Die Scheisse Trifft den Lüfter

There is an interesting piece by David Walker in Insurance Asset Risk on May 5th about German life insurers: ‘German regulator “intensively supervising” 20 life firms.’

The phrase “intensively supervising” got our attention. To elaborate:

Mark Branson, president of BaFin, has revealed about 20 German life insurers are currently under “intensive supervision”, all suffering “legacy issues from earlier guarantee promises”. About 30 pension funds are also being watched closely.

Looks like a lot of German life insurers and pension funds have been using Equitable Life as a how-to manual.

One also has to wonder why BaFin took so long to wake up to this issue – it can’t be that they were too busy harassing FT journalists investigating the Wirecard scandal, because that blew up over a year ago.

 

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A failing, bloated, defensive organisation

 

The All Party Parliamentary Group (APPG) on Personal Banking and Fairer Financial Services (members) has just published some testimonies about the FCA as part of its call for evidence about the FCA.

This testimony from an anonymous FCA employee is particularly striking (though to me, as a previous FSA staffer, not surprising.

Overall, a negative and depressing time in working at the FCA. The FCA has developed a toxic culture and spends huge resources, time and effort on self-protection, of itself, at the expense of supporting consumers. The FCA appears to operate in a malicious and vindictive way and is not willing to accept any kind of constructive criticism from staff. The FCA is a wasting money and staff effort on self-protection which is quite sickening when set against the context of its failures in recent years to regulate firms properly. Based on the evidence I have seen, the FCA is simply not doing its job and has become a failing, bloated, defensive organisation – with most of its efforts and resources going on self-promotion and trying to counter the many criticisms of it.

Quite. The whole unstated purpose of a regulator is to protect itself. When I worked there, you had to suffer all these ridiculous initiatives about ‘learn and change’, ‘vision and values’, ‘making a real difference’ and (at the Bank) ’20 20 vision’, which come across as noble and visionary but really translate to “keep the gravy train running, and don’t get caught for mistakes, even if that means doing nothing much of the time”.

There needs to be strong scrutiny of this absurd organisation, but who has the patience (and the competence) to do it?

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Could an Archegos Event Happen in the UK?

In the wake of the Archegos fiasco, Malcolm Hurlston and Mark Northway, the chairs of the UK Shareholder Association and Sharesoc respectively, wrote to the Governor of the Bank of England on April 14th to express concerns that this case raises for shareholders. We reproduce the core of their letter:

The situation which has unfolded at Archegos Capital Management recently raises serious concerns not only for private investors, many of whom own bank shares, but for any member of the public with a bank account and particularly those with savings in excess of the FSCS £85,000 threshold. We have learnt that Credit Suisse, one of six banks acting as counterparties to Archegos, may have lost $4.7 billion from the collapse.

Continue reading “Could an Archegos Event Happen in the UK?”

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In Praise of the PRA’s Principles

Dean and I have had a fair bit of behind the scenes back and forth on equity release valuation, and especially on the PRA’s Equity Release Valuation Principles, which continue to be as misunderstood as ever. As someone once said, it can be extremely difficult to persuade people of something that they do not wish to be true, and especially so where their living depends on their not understanding it.

Here is the link to our new Discussion Paper on the subject.