Alliance & Leicester fined £7 million

by MoneyDoctor Friday 10 October, 2008

first_aid_kit_256 As if some banks and building societies don’t have enough to worry about, now one of them has copped a record fine!

The FSA has fined Alliance & Leicester (A&L) £7 million for serious failings in its telephone sales of payment protection insurance (PPI).

Between January 2005 to December 2007 A&L sold PPI policies to 210,000 of you seeking a personal loan at an average price of £1,265, but there was a general failure by their advisers to provide you with detailed costs of the PPI.

  • PPI an optional extra

The FSA said A&L did not make it sufficiently clear that PPI was optional and it trained its staff to put pressure on many of you when you queried why PPI was included in your quotation or you challenged advisers’ recommendations.

The insurance, which is sold alongside credit cards and loans, is designed to cover repayments if you lose your job or are unable to work due to sickness or an accident. However, it has been criticised for being expensive and unsuitable for many of you who are sold them. 

  • What will A&L do?

As well as paying the fine, A&L has agreed to run a comprehensive customer contact programme, overseen by third party accountants.

It will write to all of you who took out policies by telephone in conjunction with an unsecured loan between the dates mentioned above telling you to review your policy against product information sent to you. It will also review any relevant rejected complaints and claims and has committed to pay redress where appropriate.

This remedial action has been taken into account by the FSA and has reduced the level of penalty which would otherwise have been imposed on the firm.

Margaret Cole, director of enforcement at the FSA, said:

“The failings at A&L are the most serious we have found. This is reflected in the record PPI fine. It is very disappointing that after three years of regulation we are still finding serious problems in PPI sales.

“This case shows that we will continue to step up the action we take when firms do not sell PPI properly. Customers should be able to rely on impartial advice based on their individual needs and demands.

It is particularly unacceptable for a firm to train its advisers to put pressure on customers when recommending insurance cover which they have not asked for and may not need. Firms cannot rely on paperwork sent out later as an excuse for unclear or misleading statements given on the telephone.”

Categories for this post: Insurance | Loans

The £50 billion British bank bail out!

by MoneyDoctor Thursday 09 October, 2008

fifty_pound_note5 copy First the Government bailed out Northern Rock, then it was Bradford and Bingley.

Now, with nearly every other bank looking as nervous as a turkey on Christmas Eve, the Government has announced a £50 billion rescue package. However it could end up costing us taxpayers up to £500 billion!

The key points of the plan are:

  • Banks will have to increase their capital by at least £25 billion and can borrow from the government to do so.
  • An additional £25 billion in extra capital will be available in exchange for preference shares.
  • £200 billion will be available in short-term loans from the Bank of England, up from £100 billion.
  • Up to £250 billion in loan guarantees will be available at commercial rates to encourage the banks to lend to each other.
  • To take part in the scheme, banks will have to sign up to an FSA agreement on executive pay and dividends.

Which banks are included?

It seems likely that five of the eight institutions listed in the announcement will participate in the equity raising; Royal Bank of Scotland, Barclays, HBOS, Lloyds TSB and Nationwide - while HSBC, Standard Chartered and Abbey will be more likely to take advantage of the money market operations. Other banks and building societies would be able to apply for inclusion in the plan.

In return for all our taxpayers money, the government insists it has extracted a price from the banks; no more big bonuses, no dividends to shareholders and a pledge to keep lending money to small businesses and would-be homeowners. But, whether this is adhered to, remains to be seen.  

How on earth did we get here?

In a nutshell, banks got careless and loaned too much money to people who just couldn't pay it back. If a lender makes too many bad loans, they go bust. But because these lenders are so vital to the economy, the government has decided we can't let them go bust; hence the bailout. 

How do banks borrow money?

They borrow it from you and me (through savings deposits), or from commercial lenders (through the wholesale money markets), or through issuing bonds. So say the bank has £1 in shareholder equity. It then borrows £9 on top of this. It then writes £10-worth of loans based on this.

There are two serious flaws to this. Firstly, you have to make sure the people you lend to will repay you and secondly, if everyone you've borrowed from wants their money back at the same time, you're in trouble, because you've loaned most of it out. So you have to keep an eye on when your payments are falling due.

Most bank lending is done over the long-term (like a 25-year mortgage) and banks charge more for this, as it's taking a bigger risk. Most bank borrowing, however, is done short-term, via instant access deposit accounts and 30 or 90-day loans from the money markets. This borrowing is cheap, because it's only short-term.

What went wrong?

All this is fine as when a short-term loan comes to an end, the bank just rolls it over, which the lender is usually happy to do.

Notice the word ‘usually’…

When the US sub-prime mortgages started going wrong, it was clear that the loans that banks had been writing were worthless. Would you be keen to fund a bank giving out bad loans? If it doesn't get its money back, maybe you won't either. More to the point, many of the people doing the lending are banks themselves. So they realise they're going to need that 'spare' money, and hang on to it.

So the money markets dry up as institutions hoard their cash and that is what the central banks have been trying to deal with. This is the liquidity problem, which is what scuppered Northern Rock. It relied too much on wholesale markets, couldn't repay its debts when they fell due and couldn't be rolled over, so it went to the wall.

Northern Rock; more of your money down the drain

What does all of this mean?

It means we've acknowledged that UK banks are broke. But by offering extra capital and vast liquidity to the banks, this may unblock the money markets, reduce inter-bank interest rates, and encourage banks to lend to each other again.

In this scenario, credit for businesses and individuals should become cheaper and more widely available. For now, this should stop the immediate panic about the security of British banks, but how will things be in a year’s time? What about 5 year’s time?

The Government can play a very long game, holding these assets for years, or even decades, until they recover in value.

For instance, Sweden bailed out its banks in this way in 1992, and made a profit for Swedish taxpayers. So, while this plan may be a short-term lemon, it could prove to be a long-term cherry.

How much will it cost all of us?

With about 25 million UK households, the £50 billion rescue plan works out at £2,000 per household added to our national debt.

What it also means that the part  nationalisation gives us all a stake in these lenders; hence we mustn’t allow them to take our money and then lend it back to us at high rates of interest! 

Though they may be recapitalised, banks can't return to rampant lending. None of this will be over until the property crash ends, because as long as property markets continue to tumble, the asset side of banks' balance sheets remains under question.

PS: One piece of good news: the government has guaranteed all £4.5 billion of savings in failed Icelandic bank Icesave (and plans to sue the Icelandic government for withdrawing its savings safety-net).

What do you think of the Government’s decision?

Should they be bailing out the organisations who should have known better or are they not left with much choice?

Why not let us know what you think in the comments below?

Need specialist advice?

Categories for this post: Banking | Debt | Investment

Emergency interest rate cut!

by MoneyDoctor Wednesday 08 October, 2008

blog_ticker The Bank of England cut the interest rate by 0.5% to 4.50% even though inflation remains above target. The decision was due tomorrow.

At the exact same time, the Federal Reserve, European Central Bank and Swiss, Canadian, Swedish and Chinese central banks all announced similar cuts.

In this shock move, central bankers around the world took emergency action to end the market meltdown and hope the co-ordinated interest rate cuts will ease the credit crunch and lift the global economy.

It’s some encouraging news but the question is, will it work?

Categories for this post: Banking | Credit Cards | Debt | Investment | Loans | Mortgages

Have you been frozen out by Icelandic banks?

by MoneyDoctor Wednesday 08 October, 2008

puffin with dinner If you have put some of your savings in Icelandic banks, then yesterday’s news would have left you feeling rather cold.

The 300,000 of you with savings deposited in Icesave, the Icelandic internet bank, have found that you are blocked from withdrawing any money from your account.

The move follows the decision by the Icelandic Government to take control of Landsbanki, Icesave’s parent company, which has been engulfed in the worldwide financial chaos. It collapsed on Tuesday morning and is now being run by the Icelandic Financial Services Authority, the Fjármálaeftirlitið (FME).

The Icesave website was frozen from early Tuesday morning, leaving many of you angry about the situation and lack of information. A source close to Landsbanki warned that it was unlikely the website would return to normal.

Alistair Darling, the Chancellor, has said he is making a commitment to the 300,000 of you affected by the Icesave situation.

The Chancellor’s guarantee means that you will not lose out even if you have more than £50,000 in an Icesave account. Last week, the Government increased its guarantee to savers from £35,000 to £50,000.

Mr Darling refused to extend explicitly his commitment above the £50,000 to any other institution which runs into trouble.

Compare the best savings accounts.

Below we try to examine some key questions about the Icesave situation.

  • Can I withdraw my money now?

No. Icesave's website says it is "not currently processing any deposits or any withdrawal requests".

  • What has triggered this?

The move follows the decision by the Icelandic Government to take control of Landsbanki, Icesave’s parent company after it was put into receivership yesterday.

  • When can I withdraw my money?

Nobody knows. A spokeswoman for Icesave said: “We are waiting to find out what is happening from the Icelandic Government.”

  • Is Icesave bust?

No. The Icelandic Government is battling to save Landsbanki and other major banks. As long as it has not been declared bankrupt, you cannot make a claim on any guarantee scheme.

  • What happens to my money if Icesave does collapse?

Wait and see. If Landsbanki is officially declared in default, the FSCS steps in. In theory, you will have to apply to Iceland's scheme for the first €20,887 (£16,000) of any claim, and then to the UK scheme for any sum over that amount, up to a maximum of £50,000.

  • But will the Icelandic scheme be able to pay out? 

A very good question. The Icelandic scheme has only £88 million to cover £13 billion of savings deposits. The Icelandic Government is supposed to cover any shortfall, but can it really guarantee deposits that total twice its GDP? Probably not.

If they can’t they might reimburse you with puffins instead…

  • What if the Icelandic Government can’t pay?

Icesave says that Sweden, Norway and Denmark are committed to backing Iceland in an emergency, but only as a last resort.

  • Will the treasury bail us out? 

Highly unlikely. The Treasury said Icesave was Icelandic, so the prime responsibility lay with Iceland. The Treasury had no plans to go beyond fulfilling its obligations under the deposit guarantee scheme.

  • I have savings with Kaupthing Edge. Should I worry?

Then you are in a better position thanks to Kaupthing’s link with Singer & Friedlander. It qualifies in full for the UK’s £50,000 scheme.

  • I managed to withdraw my money from Icesave yesterday, but it says it takes four days to transfer. Will it come through?

Who knows? With the transfer process taking several days and things grinding to a halt yesterday, there is a sizeable chance that your  money will be stuck in the system.

  • Is there a helpline I can call?

No. Icesave said that you should keep checking the website for information.

(9.10.08 Latest Update: The UK government has stepped in to guarantee 100% of your money in Icesave after it emerged that the Icelandic government was refusing to meet its obligations to UK savers and Icesave was placed in default.

The default declaration triggers action from the FSCS, which will write to you outlining what they need to do to reclaim your money. It is not clear how long it will take for pay outs to be paid, but the FSCS warned that it could take up to four months)

Want somewhere safer to keep your cash? Compare the best savings accounts.

Categories for this post: Banking | Investment

90 year old woman shoots herself to avoid eviction

by MoneyDoctor Wednesday 08 October, 2008

pharmacy_256 With the property market woes, ever increasing cost of living and various financial institutions going under, these are clearly troubled times aren’t they?

If you need any more evidence of this, then look no further than this story, which we felt compelled to share with you all, as it reflects the desperate state of the US property market...and we could see similar things happening here. 

In Akron in Ohio, a 90 year old woman shot herself in the chest as sheriff’s deputies attempted to evict her from the home where she’s lived for almost 40 years. 

Addie Polk, became the sole owner of her home when her husband died in 1995. Two years later, she took out a mortgage loan, which she refinanced several times. When she defaulted on the loan, her lender, Countrywide Home Loans, filed for foreclosure.  The US mortgage firm Fannie Mae bought the house at a sheriff’s auction, and sought to have her evicted.

When sheriff's deputies came to escort the pensioner from her home where she had lived for nearly 40 years last Wednesday, they heard shots from the first floor.

A neighbour found her lying on her side on her bed, a gun beside her, after shooting herself in the chest. She is now recovering in hospital.

Robert Dillon, the neighbour who discovered her after she shot herself, said: "She said it was a crazy thing to do, now that she's had time to think about it."

Local police said Mrs Polk had ignored multiple notices and letters, as well as a foreclosure action filed in court.

Home foreclosure rates are at record levels in the US, in many cases because buyers with adjustable interest rates could not keep up with sharp increases in monthly payments.

There has been a spate of foreclosure-related suicides, including a retired couple in Oregon and a 53-year-old woman in Massachusetts. The latter faxed her mortgage company: "By the time you foreclose on my house, I'll be dead”.

In the wake of Mrs. Polk’s apparent attempted suicide, Fannie Mae has agreed to forgive the mortgage, dismiss its foreclosure action, and allow Mrs. Polk to return home when she recovers from her injuries. 

"Just given the circumstances, we think it's appropriate. It certainly made our radar screen," a spokesman said.

That’s good news for Mrs. Polk.  But what about the other millions of homeowners who fell prey to predatory mortgage lenders in the USA and are now struggling to meet mortgage payments they can’t afford? 

The vast majority of those people won’t attempt suicide and their individual stories won’t make the news, but that doesn’t mean they aren’t every bit as desperate as Mrs. Polk was.

Her story helps put a human face on the victims of the predatory lending practices that created the whole subprime mortgage mess, and which has had a huge effect on our economy.  It should be required reading for all of those clever, greedy mortgage lenders who thought they had found an ideal way to make a quick buck.

One thing is clear; when businesses act unethically, ordinary people suffer for it.

The question is, with the way things are going, will we see these sort of sad events happening here?

Categories for this post: More Money Stuff


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