Since 30 September last year, buy-to-let lenders have had a greater responsibility to carry out deeper affordability assessments in the case of mortgage applications by portfolio landlords. The new lending measures, set down by the Prudential Regulatory Authority (PRA), define a portfolio landlord as any landlord with four or more mortgaged buy-to-let rental properties. The main thrust of the change is that lenders must consider the landlord’s exposure across the entire portfolio of properties, not just the sole property on which a mortgage is currently being sought.
Under the new rules, buy-to-let lenders are obliged to apply “stress-testing” affordability assessments. In practical terms, this means that many lenders will look for an interest cover ratio (the level of rental income in proportion to the corresponding mortgage repayments) of around 145% for standard buy-to-let properties. For more complex borrowing cases – for example where the property is a house in multiple occupation (HMO), mortgage applicants can expect an interest cover ratio more along the lines of 170% to be applied.
Applying more robust affordability calculations is just one aspect of the more wide-reaching affordability assessment, however. Portfolio landlords will be expected to provide full details of all properties in their portfolio and their mortgage exposure – regardless of whether the mortgages are held with the same or a different lender – so that ongoing affordability can be assessed across the entire portfolio. Landlords will also normally be expected to provide a business plan and, in some cases, may be asked to provide additional business details, such as a cash flow forecast or a statement of assets and liabilities. Other checks can include rental income validation by postcode and, where personal income is used, an assessment of living costs and expenditure.
Needless to say, the introduction of the tough new rules by the PRA wasn’t exactly met with joy by landlords. While the move ostensibly seeks to ensure responsible lending to buy-to-let mortgage applicants, it’s easy to interpret it as an attack on portfolio landlords and a deliberate move to curb buy-to-let property ownership. Many predicted that it would have a detrimental effect on the buy-to-let investment market, with the likely consequence of preventing landlords – especially those with greater mortgage exposure – from expanding their portfolios, and perhaps even driving some to dump portfolios entirely and seek other forms of investment.
Have those predictions been borne out in the months since the affordability assessment changes came in to effect? The short answer: it certainly seems so. The longer answer is that the implementation of this specific regulatory shift by the PRA is just one of a raft of changes over the past couple of years that are proving to have a quite unprecedented effect on the buy-to-let investment landscape in the UK.
Recent figures from the Intermediary Mortgage Lenders Association reveal that net investment in buy-to-let property in the UK has slumped by an unprecedented 80% in the past two years – from £25 billion in 2015 to just £5 billion in 2017. For context, this is a sharper drop in buy-to-let investment than was seen in the in the aftermath of the 2008 financial crisis and credit crunch. It’s no coincidence that the slump comes alongside a new landlord tax regime that was first announced in the March 2015 Budget, and which is being introduced on a phased basis from April 2017 to April 2020.
Under previous tax rules, buy-to-let landlords could effectively claim tax relief for their mortgage interest, reducing tax liability at the prevailing rate – that is, 20% for basic rate taxpayers, 40% for higher rate taxpayers, or 45% for additional rate taxpayers. By April 2020, landlords will only be able to claim tax relief for mortgage interest at the basic 20% tax rate. This means that landlords who fall within the higher or additional rate tax brackets could potentially see their tax liabilities increase by thousands of pounds.
As if that weren’t enough, the Budget delivered in July 2015 also imposed additional stamp duty liabilities on the purchase of a second or subsequent property. The 3% stamp duty surcharge, which took effect from April 2016, means that buy-to-let landlords are seeing thousands added to the cost of buying a new property, whether that’s their first buy-to-let purchase or expanding an existing portfolio.
Overall, the ongoing changes to tax regulation, the introduction of a stamp duty surcharge, and tighter affordability assessments for both single-property and portfolio landlords, have combined to create an environment in which buying and owning buy-to-let property has become more expensive, while simultaneously it has become more difficult for some landlords – especially those with higher loan-to-value ratios across their property portfolio – to secure mortgage lending. Perhaps unsurprisingly, this has contributed to a buy-to-let market where increasing numbers of landlords are selling properties from their portfolios and not replacing them, are choosing not to expand their portfolios, or are actively paying down mortgages to reduce their exposure.
It’s difficult to predict where the buy-to-let market goes from here; however, professional landlords have been and will continue to be agile and responsive to a changing buy-to-let landscape. While many have divested individual properties or entire portfolios, some are looking at alternative ways of investing in property other than direct buy-to-let ownership – for example via peer-to-peer property lending, or equity crowdfunding. Others have shifted from being residential landlords to investing in commercial property, while others still have chosen to focus on HMOs, where the total yield can potentially be higher than for an individual house or flat.
One final option that many landlords are now taking advantage of is to run their buy-to-let business as a limited company rather than on an individual sole-trader basis. While there can be other costs associated with this – especially if existing properties are transferred from individual to company ownership – it can obviate the ongoing landlord tax relief changes, and allows retained profits to instead be taxed at the lower corporation tax rate, which is reducing to just 17% in 2020.
From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers
The Association for Corporate Treasurers (ACT), in partnership with Deutsche
Bank, has today announced the release of “The Group Treasurer: An ACT guide to the first 100 days”, which provides valuable insights on the role of the treasury function – serving as an in-depth guide to those moving into senior treasury roles for the first time, as well as a valuable refresher on the latest developments for treasury professionals.
Treasury departments are often staffed by people who move across from other finance disciplines and, for them, navigating their first 100 days – with a host of new, often alien, concepts and the need to quickly get up to speed –can be a challenge.
The Guide serves as a complete compendium of the crucial, need-to-know information – starting with the basics, including the role of treasury, how departments are set up and what you need to know about treasury policy, before moving on to a series of deep dives into the critical features of life in treasury, including all you need to know about cash and liquidity management, the innovative technologies that are driving change, as well whether an in-house bank is right for you. Scattered throughout the Guide are useful insights from treasury professionals across a wide range of industries and geographies – providing best practice advice for gaining maximum benefit from your time in treasury.
“We have looked to create a guide that goes back to basics – and the ACT seemed the perfect partner for this” says Ole Matthiessen, Global Head of Cash Management, Deutsche Bank. “While the ACT can provide treasury professionals with training and qualifications necessary for a successful career, Deutsche Bank, in its role as a trusted advisor, can provide up-to-date insight on the options available for treasurers in the market.”
The Guide is also a reaction to the sweeping changes seen in treasury over the last few years. With new processes and technologies moving centre stage, the Guide seeks to provide treasury professionals with a concise “refresh” of the latest developments – especially for perennial challenges, such as the availability of liquidity.
Release 1 | 2 “I hope readers will find the Guide a useful tool” says Caroline Stockmann, Chief Executive, ACT. “And remember: the ACT is here to support you, whether you are a member or not, as our Mission is to embed the highest standards of professionalism and integrity in the treasury world, and act as its leading advocate.”
Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds
Tangerine Bank Ranks Highest in Overall Credit Card Customer Satisfaction for Second Consecutive Year
With 73% of credit card customers in Canada saying COVID-19 has negatively affected them financially and 24% who say they are unable to make monthly credit card payments, overall satisfaction with their primary credit card issuer remains relatively flat year over year at 764 (on a 1,000-point scale), according to the J.D. Power 2020 Canada Credit Card Satisfaction Study,SM released today.
“While credit card issuers in Canada are faring somewhat better than their U.S. counterparts in averting the negative effects of COVID-19 on customer satisfaction, they are not out of the woods,” says John Cabell, director of banking and payments intelligence at J.D. Power. “Credit card companies are falling behind in key areas related to the customer experience, especially in factors linked to financial sensitivity and customer support channels, which are crucial during the pandemic.”
According to the study, despite a one-point increase in overall satisfaction from 2019, credit card issuers have experienced a year-over-year decline in key performance indicators (KPIs) related to interactions with credit card customers, such as showing concern for customer needs; appreciating customer business; problem-free experiences; card activation; and reward redemption. As a result, satisfaction is down 12 points in assisted online experience and down 11 points for call centres.
More than half (55%) of cardholders acknowledge COVID-19 has changed their card usage habits, mainly by spending less. Understanding customers’ needs and addressing their changing priorities can help card issuers to mitigate future decline in satisfaction and elevate loyalty. The study shows that offering free or discounted services in response to COVID-19 are the actions driving a more positive impression of the issuer (39% and 35%, respectively), followed by gestures such as employee support (33%); waiving fees (32%); and community support (32%).
“The pandemic presents an opportunity for issuers to align their card services and benefits with customers’ evolving needs,” Cabell said. “Issuers can increase the perceived value of the card and strengthen loyalty. Offering discounted airline tickets or free airport lounge access is probably not as lucrative these days for cardholders as, for example, it would be to extend the duration of annual fees.”
Following are additional key findings of the 2020 study:
- Satisfaction declines with household income: With 29% of cardholders earning less during the pandemic, many are looking for relief from their credit card company and are more critical of card issuers. In fact, credit card satisfaction among customers whose household income has declined due to the pandemic is lower than among those whose income remained unchanged. The largest gaps in satisfaction are in rewards (-12 points); benefits and services (-11); communication (-8); and customer interaction (-8).
- Call centre woes: The pandemic has put a greater strain on call centres, which has negatively affected satisfaction. Caller wait times jumped to more than 12 minutes during the pandemic compared with less than 8 minutes prior to the pandemic. Also, caller satisfaction with the level of courtesy exhibited by call centre representatives declined significantly, which calls out the need for card issuers to restore best practices among their reps and identify better ways to manage customer support.
- Cardholders are digitally savvy: Nearly two-thirds (64%) of cardholders solely rely on digital channels to manage their primary credit card activities, and those cardholders are more likely to say it is easy to understand information about their account and do business with their issuer than do cardholders who do not rely solely on digital channels. In fact, one of the bright spots in the study is improvements in customer satisfaction with mobile and online interaction of 8 points and 7 points, respectively, from 2019.
Tangerine Bank ranks highest in overall customer satisfaction with a score of 825, which is 61 points higher than the industry average of 764. American Express (801) ranks second and Canadian Tire (793) ranks third.
The Canada Credit Card Satisfaction Study measures satisfaction of cardholders’ primary credit card issuer. The study measures performance in six factors critical to the customer experience (in alphabetical order): benefits and services; communication; credit card terms; customer interaction; key moments; and rewards. The study includes responses from 6,728 cardholders who used a major credit card in the past three months and was fielded in May-June 2020.
The impact of the Accounts Payable risk landscape
By David Thorley, Director of Customer Development, FISCAL Technologies
The current economic climate has never been so uncertain. Not since the 2008 financial crash has there been a period where organisations are mindful about how the markets will play out and the effect this will have on economies around the globe. As a result, organisations have become increasingly conscious about the way they spend money, but they have also become more aware about how they save money.
The Accounts Payable (AP) department aims to reduce the amount of money lost in an organisation, making sure all payments are completed on time and are done so correctly, but this is unfortunately not always the case. For example, half of large organisations have duplicated or misdirected a payment to suppliers. This roughly accounts for £3 million being directed to the wrong supplier and resulting in a long and lengthy process in getting this money reclaimed. On top of this, 33% of organisations experience internal fraud every year, with an average loss of half a million.
Therefore, it is clear that in almost every financial department things slip under the radar, but what are some of the risks in the AP department and how can they impact a company?
Lost opportunities reducing income
The capacity for AP resources to work on higher value activities is reduced due to error and query resolution, this can range from anything from chasing up suppliers to looking for a misplaced document. As a result, those within the department are limited to what they can do due to these mundane, repetitive tasks.
Ultimately, lengthy pre or post audit activity reduces the ability of the business to transact, limiting growth and reducing competitiveness, all of which can be avoided if the correct tools are in place.
In some geographies and industries, errors and adverse findings in statutory audits can lead to financial penalties. These penalties can be anywhere from a few thousand pound to tens of millions. Just last year a leading consultancy was fined almost £20m for poor auditing. Payment Policy infringements can reduce an organisation’s ability to bid for certain types of contracts; critical infrastructures for example, which can have a significant impact on the way an organisation operates.
Payment errors and fraud directly affects the bottom line, which can result in a major impact in the financial reporting. Often financial reporting is skewed resulting in liquidity and profits being reduced. In public sector organisations, these lost funds reduce the capital available for frontline services, which can not only impact the quality of service provided but could also affect the reputation.
Increased processing costs
Invoice exceptions prevent supplier invoices being processed automatically. AP staff spend an inordinate amount of time checking, correcting and managing invoice exceptions, which significantly increases processing costs and time. Given the current climate, this time and money could be put to better use, helping a company grow and expand.
Organisations making overpayments – paying duplicate or incorrect invoices – and fraud are a common problem. Together, these account for between 0.5% and 1.5% of the number of invoices processed, with the cost running into millions in many cases.
As a result, whenever an audit is conducted, the AP team spends time finding and providing information and documents. The more issues that are found, the more time audits take to identify and recover lost cash.
AP teams will frequently need to check supplier records during their normal transaction processing. Large, unmanaged MSF hold numerous duplicates and no-longer-required records that create more payment errors and hours spent investigating and resolving queries.
Whether a private or non-profit organisation, fraud, errors, compliance breaches or poor financial results all heighten the risk of reputational damage for the organisation generally and the finance director in particular. The reputational damage caused by a high profile incident of fraud can be significant, affecting the business’ credibility and even the share price.
The shockwave from fraud can be more damaging than the financial loss. After a fraud is discovered, considerable time will be taken up investigating every new potential risk of fraud. Whatever the outcome of the investigation, this is an unwelcome distraction for the managers concerned. But, more importantly, the effect on morale and belief in the leadership’s capabilities throughout the organisation – not just the finance team – will be harmed.
Managing these risks
AP assures the protection of cash within an organisation, identifying risks and resolving them. To do this effectively and efficiently it’s imperative AP departments have the correct tools in place to ensure they follow a simple process that allows them to save time and money, helping their organisation both in the short and long term
 (The Hackett Group, Key Issues Study 2020)
 Source: https://www.qsoftware.com/fraud-prevention-and-detection/erp-fraud-prevention-key-measures/
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