Rosanna Bryant, Addleshaw Goddard LLP
It is only a few months since the upheaval this spring caused by the UK’s Mortgage Market Review (MMR) which imposed stricter lending requirements on borrowers. Now the industry must prepare for further regulatory change from Brussels which a reluctant Government and regulator have to implement in readiness for the EU’s deadline of 21 March 2016. The Mortgage Credit Directive (MCD) seeks to prevent a repetition of irresponsible lending and borrowing practices, create a more efficient and competitive single market for mortgages, improve consumer confidence and mobility, as well as establishing a level playing field for cross-border activity.
This article discusses the key changes arising from the MCD and how they will be implemented. In particular, how second charge mortgages will be impacted, the proposals for consumer buy-to-let loans and additional regulatory rules. It also looks at the timescales for implementation and what the changes mean for firms.
The MCD seeks to increase the cross-border provision of mortgages and intermediation services. While firms may wish to explore these opportunities, it is likely to be challenging to operate in other EU markets where borrowers prefer local lenders and the differences in legal and judicial systems will add further uncertainty to business models.
As the UK’s residential mortgage market has been largely regulated for a decade and the Financial Conduct Authority (FCA) has recently implemented new rules under the MMR, HM Treasury has been openly sceptical about the MCD’s value and plans to minimise its impact as far as possible. MMR took effect from 26 April 2014 and affects responsible lending, product distribution and disclosure, arrears management and non-bank mortgage lending. In consequence, measures in the directive on, for example, affordability of lending and forbearance (when a borrower is experiencing financial difficulty) will have less impact on UK firms than in other Member States.
Nonetheless, areas such as second charge lending, consumer buy-to-let and disclosure requirements are subject to significant change that will require mortgage businesses to adapt processes and amend their documentation. Moreover, in contrast to the MCD, the FCA (through the MMR) has sought to reduce information overload for customers by replacing information disclosure documentation with a requirement for firms to disclose “key messages” to the customer, thereby reducing the trigger points for the presentation of Key Facts Illustrations (KFI). To avoid any regression in this regard, the FCA proposes, as far as possible, to keep the same timing triggers in respect of disclosure for the new European Standardised Information Sheet (ESIS), and retain the requirement to provide key messages verbally where there is verbal interaction with customers.
Unusually, but reflecting the Government’s sceptical approach, the UK will not (with some notable exceptions) use “copy out” to transpose the directive into law. Instead, it will make such bespoke changes as are necessary to UK legislation and the FCA’s rulebook (e.g. the Mortgage Conduct of Business Rules ((MCOB)).
The transfer of second charge loans to mortgage regulation from the Consumer Credit Act 1974 (which HM Treasury planned in any event), will mean the loss of certain bespoke consumer credit protections. There will though be provisions in respect of certain protections for back-book loans. Historic lender activity will be assessed against the rules in force at the time (e.g. information disclosure requirements when the loan was agreed) and where MCOB cannot provide equivalents (e.g. the ability to challenge unfair relationships and the rules over early settlement).
Buy-to-let from a UK perspective, is the most contentious part of the MCD and, until recently, HM Treasury planned to maintain the regulatory status quo but this has not proved possible. To comply with the directive for “consumer buy-to-let,” HM Treasury proposes to introduce an appropriate framework in secondary legislation. Buy-to-let borrowers subject to the appropriate framework include “reluctant landlords,” (i.e. those who have inherited properties or have lived in them and are unable to sell for the time being).
The methodology for calculating the annual percentage rate of charge (APRC), although not dissimilar from MCOB will be copied out from the MCD, which is similar to that in the Consumer Credit Directive. In a further change, a second APRC will be needed where interest or charges are variable.
Firms should review their business models and ensure that processes and procedures align with the proposed changes to consumer credit and mortgage regulation. Much “re-papering” of documentation is likely with some buy-to-let lenders and brokers having to register with the FCA under the appropriate framework regime.
Work will also be needed to put in place knowledge and competency arrangements for staff. A further year will be allowed (after March 2016) for staff to comply (although, the FCA considers these are already met in the UK except for product design and for those granting credit). Businesses will have until March 2019 to move away from using only professional experience to assess knowledge and competency.
The question of how to deal with pipeline business remains. HM Treasury and the FCA are considering how best to minimise disruption. There is also the issue of second charge back-book loans transferring over from the consumer credit regime while retaining some, but not all consumer protections, and how lenders are to manage this business in the context of their overall lending book.
In contrast to HM Treasury’s paper, which focuses on the Government’s policy towards implementation and legislative changes, the FCA seeks comments on its authorisation process and detailed rules changes.
HM Treasury plans to finalise the necessary secondary legislation by March 2015 with feedback due until 30 October 2014. Meanwhile, the FCA will publish its final rules in a policy statement in the first quarter of next year; feedback to its consultation is due by 29 December 2014. Firms will then have a year to prepare for the amended regime on 21 March 2016. This is important because with the exception of the new ESIS and competency arrangements, there are no transitional provisions. To help this objective, the FCA will allow firms to use the new rules early from December 2015.
Rosanna Bryant is a partner within the Financial Regulation team at Addleshaw Goddard LLP. She provides regulatory advice to financial services clients on compliance of financial products such as bank accounts, credit cards, charge cards, loans and mortgages and savings and investment products. Within these segments Rosanna has substantial experience advising on large scale regulatory implementation projects, product structure and design, compliance risk, drafting of terms and conditions, marketing materials, policies and manuals and commercial arrangements with third parties. Email: [email protected]
Why investing should be treated like healthcare
By Qiaojia Li, co-founder and CEO at the award winning wealthtech company, Rosecut
For many people, the process of investing can seem opaque and impenetrable, and filled with jargon.
They can see the potential benefits, but they can also see the Financial Conduct Authority (FCA) risk warnings.
Despite – or perhaps because of – this, the long-term trend suggests that more individuals are open to investing. One set of statistics suggests the percentage of individuals investing in stocks and shares in the UK grew nearly three per cent between 2010 and 2018.
Here are four steps for sensible investing:
1. Figure out why you invest, ahead of everything else
The key here is knowing what the overall goal is.
It is a constant source of amazement that when it comes to investing, few people stop to consider why they are actually doing it. Whether they have £100 or £100,000, many do not think about how their approach should be dictated by their overall goals.
For instance, someone looking to buy a house in the next 12 to 24 months should not be looking to dive into the world of bonds and equities, because they have a short-term target which requires reasonably fast access to cash. Tying their resources up in different funds and stocks will not only limit how quickly they can get their hands on their money when it comes to putting down a deposit, but they will not see the return that they would expect due to the short term price fluctuation of these assets. They would be better using a Cash ISA and enjoying the tax-free allowance.
On the other hand, if they have spare cash lying around that they won’t need for the next 3-5 years or longer, or they want to get a headstart on earning their retirement or long-term financial freedom, investing into financial markets is the way to generate compound return. That will give them a chance to beat inflation and, in all likelihood, it will give them a higher return than real estate would.
It is like any big project – determining the overall goal informs the strategy, which dictates the tactics. In the world of investment, this means management. Yet even deciding what goals they are working towards can be challenging for some people – they might have overinflated ideas or be too conservative.
This is where independent, objective, and knowledgeable financial planning comes in. By giving an individual’s finances a thorough check-up – much like visiting a GP – a qualified and experienced financial planner can consider circumstances, wishes and constraints. Only when this has been completed can they assess how feasible a client’s goals are, and the client can start considering how they should invest.
It needs to be a bespoke diagnostic and prescription process, in much the same way that a trip to the doctor requires the practitioner to have an understanding of any contributing factors and your medical history.
2. Seek professional help
If you were going to buy a property, you would look for a capable and qualified property lawyer instead of reading legal textbooks and undertaking training. The same logic applies to other professional advice, such as accounting, medical treatment and tax. Strangely, though, when it comes to investing, many people attempt to teach themselves.
While this approach is to be applauded, and there is certainly a huge amount of information readily available within a couple of clicks, the intricacies and vagaries of asset classes and funds, opposing investment styles, individual savings accounts and a hundred and one other terms can be overwhelming.
Forging ahead without professional guidance is a bit like having a pain in your hand and deciding to do a bit of exploratory surgery based on watching medical documentaries – there is only a slim possibility everything will turn out fine. This is why 99% of people have lost money by DIY-ing their own investments. It is a risky learning curve that, frankly, is better outsourced. Learning how to find a good investment provider can be a more efficient and less risky use of your time.
3. Do not trade
In the report quoted above, there is an alarming line: “Investors are now holding onto their shares for 0.8 years on average before selling them. In 1980, the average was 9.7 years, representing a decline of 91.75%.”
The proliferation of trading apps brings convenience and lowers barriers, helping people to access financial products, but the user friendliness of the technology often encourages over engagement at a real financial cost.
On an individual basis, each time you buy and sell any financial product (not just shares, but funds too) you lose a tiny slice of your capital, even if you can trade for free – this is due to “spread” which, put simply, is the price difference between purchase price and sale price. As you trade, this quickly adds up and eats into your principal, which you need to earn back before seeing any profit. This is a direct cost, in addition to the time you invest, checking the share price several times a day, the sleep you lose during volatile days, and the potential for developing an addiction, which is a common result of trading. Take a look at your work pension investment report if you have any – there is a reason why professional investors don’t buy and sell frequently.
On a collective basis, crowd trading behaviour drives more “boom and bust” cycles of financial markets, which has happened many times before and will continue to happen in the future. It is a more pronounced characteristic of less developed financial markets where there are fewer professional/institutional investors to stabilise the market for everyone’s benefit.
4. Diversify globally, meaningfully
Sensible investing requires a skillset that is the opposite of most professional careers or entrepreneurship. In the latter, one strives to become an expert in a chosen arena in order to command the highest possible pay or profit margin. A wise investor, meanwhile, needs to be a generalist rather than a specialist, and investing is about hedging all possible risks before seeking a return. One of the biggest principles to reduce risk is to diversify on various levels:
- Your holding currency – for example, GBP has lost more than 15% in value against USD compared to the pre-Brexit high of five years ago, so it is a bad idea to hold all your assets in GBP only
- Your country/geography exposure – for example, you can buy GBP priced US assets, or USD priced US assets, such as S&P 500 tracker, to have a slice of US economy growth. We strongly encourage people to consider a globally diversified portfolio, for the reason that different economies go through business cycles and are at different stages at any given point of time. With a globally diversified portfolio, you can always benefit from the growth of some country, somewhere, at any given point of time
- Asset classes – If all your money is in London real estate, for example, you are likely to have felt some value depreciation since 2014. You take a risk if you tie your financial future to a single city’s economic cycle and potential rise and fall.
- Industry allocation – as a former banker I never bought banking stocks or bonds, simply because my job and salary were already tied to the UK banking sector, and owning a piece of banks is like doubling down in a casino – not wise for risk mitigation. This is an often overlooked risk – people like to invest into companies and sectors they know well, typically from professional exposure and “inside knowledge” but this leads to blind spots and concentration risk.
Investing should be part of one’s long term financial strategy hence there is no one size fits all recommendation that I could give here. A simple step by step guide is:
1. Save a good portion of your monthly income, that allows you to enjoy your current life but also prepare for the future
2. Shortlist 3 financial planners (include Rosecut as one option) and pick one that you feel you can trust and who is cost effective to lay out your big picture and future plan
3. Invest regularly into a globally diversified, professionally managed portfolio that fits with your future goal and then make minimal changes. Ideally you should only even consider changing on an annual basis
4. Learn from this loop, iterate and optimise, ask many questions along the way!
Rosecut is a financial planning partner and investment manager, giving access to the knowledge you need to plan for the future you want. Start your free financial health check today at https://app.rosecut.com/ or download the app.
Are clients truly getting value from their BR solution?
By Matt Dickens, Senior Business Development Director at Ingenious
Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?
1. Total fees and charges
Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.
Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.
2. Real investment returns
Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment. Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.
While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.
3. The relationship between fees and risk
Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.
Annual performance target, net of fees: 3%
Annual fees: 3%
Gross performance target: 6%
Annual performance target, net of fees: 4%
Annual fees: 1%
Gross performance target: 5%
Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.
In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.
Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions
Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.
This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.
The Energy Transition team report an industry leading speaker faculty for 2020, including:
- Eileen Murray, Chair, Finra
- Philip Lane, Chief Economist, European Central Bank
- Gregory Davis, Chief Investment Officer, Vanguard
- Hanneke Smits, CEO, BNY Mellon Investment Management
- Pascal Blanque, Chief Investment Officer, Amundi
- Desiree Fixler, Group Chief Sustainability Officer, DWS
- Joe Lubin, CEO, Consensys
- Bahren Shaari, CEO, Bank of Singapore
- Mark Machin, CEO, Canada Pension Plan Investment Board
The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.
Why investing should be treated like healthcare
By Qiaojia Li, co-founder and CEO at the award winning wealthtech company, Rosecut For many people, the process of investing...
Endpoint Security Industry: An Overview
Endpoint protection is the practice of stopping unauthorised actors and campaigns from targeting endpoints or access points of end-user computers...
Tech-enabled cash management strategies have come to the fore during the Covid-19 pandemic – and will be key to firms’ recovery from it
By Ed Thurman, managing director and head of Global Transaction Banking at Lloyds Bank Commercial Banking, outlines how technology-enabled solutions are...
5 ways to keep your team connected with split working
By Sam Hill, Head of People and Culture at BizSpace As the government switches its message back to “work from...
How to overcome the ‘groundhog day’ effect Of remote working
By Chris Farmer, leadership and management training expert and founder of Corporate Coach Group The ongoing pandemic means that for...
FinTech in Credit Markets: Efficiency and Potential Risks – Free webinar
As the financial industry’s landscape continually changes, the ever-quickening development in information technology has led to an unprecedented wave of...
The new virtual leaders – adapting your leadership style for a changed workforce
By Debbie Clifford, Head of People and Talent at Olive During this pandemic, organisations across all sectors have witnessed a dramatic...
Asset-based lending is often called ‘working capital finance’ for a reason…
By Alex Beardsley, director at ABL Business. At the start of lockdown, many businesses went into panic mode, wondering whether...
Supply Networks: The Future of Procurement
By Sean Thompson, EVP of Network and Ecosystem, SAP Procurement Solutions No supply chain has been spared by the impact...
Technology: the saving grace of the month-end headache in financial reporting
By Tiffany Newkirk, Financial Solutions Manager at SplashBI The end of the month is a challenging time for many accountants and...