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We thought it was organised by Age UK

A good story here in the Telegraph about the cosy relationship between Age UK and Hub financial (owned by Just Group). Behind a paywall, but in summary, a couple took out an equity release mortgage with Just (then Just Retirement) in 2012. They were told the service was ‘the Age UK equity release service provided by Just Retirement Solutions’, and the advisor’s identification would show as ‘Age UK’. In reality, the advisor was wholly employed by JRS and had nothing to do with Age UK. The customers took out a £300k loan (which would now be worth nearly £470k).

The couple now want to change the loan to one with a cheaper rate, which will cost them £30k. Yet the advisor supposedly told them (in 2012) that gilt rates would move in their favour (i.e. go up) over the next few years, so they would face no early repayment charges.

Of course it would seem natural in 2012 to think that rates, then at a long term low of around 3%, would go up. Just as natural as thinking, in 2019, that house prices will continue to rise at 3-4% a year for ever, the assumption which is the basis of the entire equity release market.

 

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More (Project) Fear Mongering from the Guv’nor

Kevin Dowd 25 June 2019

Governor Carney is up to his old tricks again. To quote Friday’s Financial Times:

Mark Carney, the Bank of England governor, has dismissed Boris Johnson’s claim that Britain’s exporters would avoid facing EU tariffs after a no-deal Brexit.

In an interview with the BBC’s Today programme on Friday, Mr Carney said tariffs would be applied “automatically” if there was no agreement with the bloc because the EU would need to follow World Trade Organization rules. These require that all members apply the same tariffs to all of their trading partners with whom they do not have a free trade agreement

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Capital punishment

The AGM presentation by Just Group (13 June 2019) fell into the usual trap of confusing capital with capital requirement. Chris Gibson Smith:

As you will be well aware, new regulatory guidance released by the PRA in December – Policy Statement 31/18 (“PS31/18”) – imposed increased capital requirements for lifetime mortgage writers, particularly in relation to business written since January 2016.

[…]The strength of our customer offering has enabled us to adapt new business pricing to the increased capital requirements

David Richardson:

It is very clear that the capital requirements for this business have increased

Etc.

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Yet more from the postbag – Leland toft model, covered bonds

A busy day at the Post Office. K9.dogs is still intrigued by our earlier suggestion that the illiquidity premium is only c.5bps. Could we have a blog on that? Indeed, but that will have to wait until next week. Illiquidity premia require patience (unless you are an insurance company).

Max LikeyHood (sic) at maximumlikeyhood@gmail.com asks if we can make our implementation of the Bank’s structural model available. Yes, in the interests of transparency, public disclosure etc, here it is. The usual disclaimers apply – at your own risk, no representation is made etc. There is an additional bonus in that we have included the Basel IRB model at the bottom. Any questions, please ask in the usual way.

And keep up with the weird email addresses!

 

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From the postbag – Merton model

Source: Bank of England

The Retriever has found another juicy bone. He (or she?) writes in raising a number of points about credit spreads, questioning my suggestion (following John Vickers’ assertion) that credit spreads rose in 2018 ‘Largely, if not wholly, because corporate credit risk has gone up’.

Retriever raises a number of interesting points. For the moment (and in a subsequent post) I will focus on the challenge presented to our case by the Bank of England’s structural credit model. As Retriever points out, Chart E of this 2016 inflation report (page 13 of the PDF, and copied above) suggests that the Bank of England thinks that the illiquidity premium is something like 50% of the corporate bond spread.

Presumably you must think that either 1) the Merton model is inappropriate here; 2) that the BoE has parameterised the Merton model incorrectly; or 3) that this “residual” bit of the spread is accounted for something other than credit and liquidity.

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