The fact that banks are too big to fail has created a problem that is too big to ignore, said Governor of the Bank of England Mervyn King last night in Edinburgh. He called the scale of the UK bank bailout “breathtaking” at nearly one trillion pounds or close to two thirds of the annual output of the entire UK economy. “To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform,” he said. “It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk,” said King. King, said: “Why were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?” He added: “Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them. And they were right.” He said the way back will be two-pronged and meant first, rebalancing the economy and secondly, serious structural reform of the way banks are run and regulated. Failure to do this, he said, would leave the way open for another worse banking crisis than the one we have seen. King explored the reform paths open, including asking banks to retain higher levels of capital to buffer themselves against risk, but said the question of how much is sufficient remains unanswered. Asking banks to separate their riskier trading arm from retail banking arms, the side offering personal and commercial banking to consumers and business, was another option being explored across the globe. King said: “There are those who claim such proposals are impractical. It is hard to see why. He continued: “What does seem impractical, however, are the current arrangements.” Increased scrutiny of the banks through regulation was another option being explored, he said. He said banks must not try to earn their way out of current government support by resuming the very activities that got them into trouble in the first place. King said: “Out of what must have appeared to many of you to be a clear blue sky of economic stability, arose a financial firestorm that wreaked substantial damage to the real economy and we have not yet seen its full consequences. The case for market discipline is no less compelling for banking than for other industries.” He concluded: “The past two years have shown how dangerous it is to let bankers play with fire. This is not a question of blame – as Sir Walter Scott rightly said, the majority in the industry are “good men and women. It is a matter of the incentives they face. To protect our genuinely successful financial centres, reform of banking is essential.” The British Banker’s Association (BBA) chief executive, Angela Knight said: “The Governor has long held this view. We believe the key issue is not one of breaking up banks but of financing the economy.” “UK banks are supportive of reform and have already acted to address the issues which the recent global financial problems exposed. The economic recovery, jobs and paying back the tax payers are best served by the tripartite authorities working together. We are committed to getting on with effective reform: many of the key regulatory changes have in fact already been implemented. The industry is at the table for change and is changing. We are committed to ensuring that this crisis never happens again.”

November should mark a brighter dawn for all of us with a bank account. That it will probably do little to curb the banks’ bad behaviour will be yet another black mark on the stained copybook of the Financial Services Authority (FSA). The first of the month is when the chief City watchdog will take over the policing of retail banking. The Banking Code, the cosy system of self-regulation that has allowed poor service and bad practice to flourish, will be consigned to the dustbin. Few will mourn its passing, as tighter regulation is long overdue. But what is the point of replacing a broken system with a replacement that looks fundamentally flawed?

When the FSA announced that it was taking over banking regulation, it promised greater transparency for consumers. A noble goal, but one that, on November 1, it will singularly fail to achieve. There are few things to commend the Banking Code but, in its favour, it is clear and easy to understand. At 37 pages of large print, you can just about absorb it in a single sitting. Under the new regime, the code will be replaced with three separate directives. I can’t be the only one to think that one into three sounds like a recipe for befuddlement. The FSA will oversee two of the strands — the Banking: Conduct of Business Sourcebook and the Payment Services Directive. These broadly cover how banks deal with customers with cash deposits. Overdrafts, loans and credit cards will continue to be policed by the Banking Code Standards Board in its new guise of the Lending Standards Board. If you are keen to acquaint yourself with the rules, prepare for more than 100 pages of the finest legalese. The FSA has promised to publish reader-friendly guides before the November deadline, but this week was unable to confirm when. Why do we need three sets of rules in any case? This cobbled-together compromise results from a decades-old division between the regulation of banking and credit that should have been binned long ago. It is a shame, because the new rules contain some good ideas.

In fraud cases banks will have to prove that the customer was at fault. Currently the onus is on customers to prove that they did nothing wrong. Another positive move will require banks to give most customers two months’ notice of any interest rate changes. The FSA will also be able to fine banks and building societies that fail to treat customers fairly — although that has not proved a deterrent to bad behaviour in the past. It may stop the big institutional abuses, but many more cases will continue to slip through the net. All in all, this looks like a missed opportunity to swing regulation decisively in the customer’s favour.

How do I have time… well, at least I can type up my blog whilst listening to some CPD:

http://www.positivegroundradio.com/mt/index.php

Have a listen, it isn’t quite as funny as the Janet and John tapes of Terry Wogan, children in need fame, we edited out our giggling…

This will help – get CPD via audio whilst doing something else! You will be able to cook, clean and iron and get CPD at the same time: Money Talks is a web radio show interviewing finanical services experts in different areas about topical issues. Click here and listen to the show: http://www.positivegroundradio.com/mt/index.php

Following the Retail Distribution Implementation Program report issued by the FSA 25^th June 2009 it is clear that by 2012 the landscape for financial advice will be totally different. Advisers must look at all types of investment not just traditional offerings and because they will be charging the same fees regardless of whether they are taken from the investment or paid up front they will have the freedom to do this. Once ‘Adviser Charging’ takes hold clients can be offered absolutely anything. There is nothing in the rule book to say that they have to recommend regulated products. This opens the door to more imaginative offerings and advisers would do well to expand their range of options. There are now packaged hard asset investments where fees can be offset including many that offer an ethical dimension. AIFA recently commented that green and ethical investments are likely to become popular. Certainly investors are often looking for an altruistic angle when deciding what to do with their money. New green and socially beneficial investments are available now and are likely to become an important new option, advisers would do well to seek these out and understand them well. These could be a useful tool in attracting investors to independent advisers.

I have just been on the new PB brokers website and this opinion poll was the first thing I saw

FSA performance: Axa’s Phillipe Maso described the FSA’s performance as outstanding at the recent Biba conference. Is he: Absolutely correct About right Deluded

Anyone else think it’s hysterical or am I losing it?

A few years ago I brought a ‘test’ case to the Financial Ombudsman Service concerning some very unfair treatment of a private motor client by a leading insurer.  The following things were definitely NOT TCF (Treating Customers Fairly): they we capitalising on his being unable to place his business elsewhere without a different penalty, they moved the goal posts, they were ostensibly charging and extra 30% for a lower risk. The answer was that ‘the FSA did not get involved in the commercial decisions of insurers’ and it was up to insurers how they set their rates! The reason I bring this up now, is following reports that the FSA are telling PPI (Payment Protection Insurance) providers that they must not increase rates in the light of the increased risks in the current economic climate!

In a letter sent to market leaders and trade associations this week, the FSA said current moves to raise premiums were not in the best interests of customers and warned rises must be proportionate. An FSA spokesman said: “As the likelihood of unemployment-related claims increases, some insurers are responding by increasing premiums or reducing cover for existing policyholders. While it is natural for the industry to respond to fluctuations in risk, the recent changes in premium/cover raise concerns with unfair contract terms, disclosure and the FSA’s treating customers fairly principles”. “This is an area where insurers can expect the FSA to intervene to address poor consumer outcomes. The FSA is in contact with relevant firms and trade associations, and is seeking to reach agreement across the industry that will ensure MPPI customers are treated fairly.”

At a recent gathering I brought tidings of the proposed new national landlord register and the regulation of sale and rent back deals to a group of property investors. To say these things were not well received is understatement! Talking to those in the room who were at the coal face of letting it was apparent that the three-quarters majority of landlords who are individual investors are not evil exploiters, they are offended by the implication of the law makers that they need to be regulated and they all felt that the result would be unfavourable for consumers in the main. What can be seen is that large firms will be getting authorised, perhaps including many lenders, the offerings and service levels will become more expensive as they will have to satisfy the shareholders of these institutions rather than the relatively modest aims of the private investor. Those that operate in the shadows below the law will no doubt continue to do so, but the overwhelming majority of decent people who have the confidence to put up their money will use their funds elsewhere, leaving vulnerable consumers a much reduced choice about where to turn for help.

More information on property investment is available through the Property Investors Network, Link Below: Property InvestorsNetwork

Tomorrow should see the RDR (Retail Distribution Review) morph into the RDIP (Retail Distribution Implementation Program). Adviser charging formerly know as customer agreed remuneration, will be a central issue and the one that most consumers will notice. This means that there will effectively be NO COMMISSION. The nearest thing to the old model wil be deferred fees where commission is offset. The ‘FREE’ advice offering will be dead and buried. Apparently the FSA are still re-writing it, this is for consultation and the final rules will be set out early in 2010 with full implementation by 2012.

So what are consumers going to make of it all? Will they finally understand the difference between a bank sales adviser and an independent financial adviser and will they be blinkered and take the option with no up front costs even if long term it means a lower standard of living in retirement? It’s human nature to save money in the here and now, this is going to be a tough PR cookie for advisers and it will also end the attractive passive income from past sales.

Thinking caps need putting on!