www.mortgagestrategy.co.uk ANALYSIS
The rescue last week of
Dunfermline will
inevitably re-ignite the
debate on the governance
of regulated institutions.
While Dunfermline was clearly
facing a uniquely difficult
situation, its story is a vivid
illustration of the dilemma faced
by many smaller financial
institutions in recent years.
From the late 1990s onwards,
smaller players found their
traditional habitat invaded by
hungry new predators who
mounted a challenge that many
were ill equipped to meet.
Most firms saw their margins
shrinking and some responded by
assuming more credit risk.
This growing appetite for credit
risk posed a toxic threat to those
businesses that lacked the
Not many of us like it
when we’re taken by
surprise, and booking
flights with a certain
budget airline recently I was
astounded to be hit with a £57
credit card fee at the end of the
transaction.
This was on top of the
additional costs for baggage, tax
and using the airline’s check-in
services. Suddenly an attractively
priced air fare was almost double
the cost of the advertised price.
Although the airlines view these
add-on costs as optional, who would
go on a fortnight’s holiday without
checking a bag into the hold?
Consumers are often lured in by
headline prices but fail to be
satisfied when they realise the true
cost of their purchases. This begs
the question of when is a bargain
not a bargain.
New rules must
allow innovation
MATTHEW WYLES
GROUP DISTRIBUTION DIRECTOR
NATIONWIDE
necessary expertise to select the
right transactions and price them
appropriately.
The benign trading
environment in the first half of
this decade lulled many lenders
into a false sense of security, which
only served to embolden them to
assume more and more risk.
So where were the regulators
while all this was happening?
Whatever the explanation, it is
clear that some lessons have been
learnt by all the key stakeholders.
In future retail banks and
building societies will be compelled
to limit their risk appetite, simplify
their funding models and
strengthen liquidity and capital.
We can only hope there will still
be room for the innovation and
flexibility that has been such a
positive feature of our market.
Clients don’t want
nasty surprises
ROGER EDWARDS
PROPOSITION DIRECTOR
BRIGHT GREY
So, how can we in the protection
industry ensure customers are
getting value for money? We know
protection isn’t a priority purchase
for most people and we know that
price can be an obstacle, but should
advisers be recom mending a
product purely on cost?
Surely clients would prefer to
pay for a plan that provides best
value rather than just being cheap.
People want good value for the
money they spend, especially in
today’s economic climate, and
advisers need to be confident the
product they are selling meets their
customers’ needs and expectations.
Offering clear advice to
customers at the start, with
literature that lays out all the
options in a simple, jargon-free
style, will at least go some way to
ensuring customers end up with a
product with no nasty surprises.
The protracted termination
of the Dunfermline
Building Society last week
raises some interesting
questions.
Uncertainty about a building
society’s future used to be kept
under wraps until a suitable
takeover partner had been found
and a merger could be announced.
This has not been the case with
Dunfermline where media stories
about a £26m loss were linked with
a government bailout and in some
cases it’s even been portrayed as
the mutual sector’s very own Royal
Bank of Scotland.
Obviously the deal with
Nationwide has been executed
under the new arrangements
contained in the Banking Act 2009
but it would seem that everybody
was playing politics.
If there has ever been a time
for the return of mortgage
indemnity guarantees, now is
it.
For the average first-time buyer
on a £20,000 salary with no savings
and no money available for a
deposit from cash-strapped parents,
buying their first home in this
market is impossible.
The Turner review is likely to
have some impact on LTVs, and
restricting multiples will only
hinder the property market further.
But there are other options. In
the 1990s the idea of MIGs
promised to give the protection
lenders needed to enable them to
lend over 75%. Will we see a return
to MIGs?
In the 1990s MIGs failed due to
the avalanche of claims received
and a lack of understanding of how
these policies work.
Building societies
make errors, too
JOHN MURRAY
CONSULTING EDITOR
LENDING STRATEGY
Even the Prime Minister
jumped on that bandwagon on
Monday, accusing the society as
being “an author of its own
mistakes”, though it sounded more
like a mea culpa moment when he
went on to refer to mistaken
judgements, mistaken investments
and mistaken policies.
Nationwide will obviously
benefit from the acquisition of the
Dunfermline’s mainstream
mortgage book and retail savings
but as the facts emerge it seems
certain that it would have done its
members a huge disservice if it had
jumped in earlier with a more
comprehensive rescue package.
The scale of Dunfermline’s
problems serves as a reminder that
when it comes to making errors of
judgement, the form of ownership
is irrelevant.
Revive mortgage
indemnity policies
CHRISTOPHER TAYLOR
CHIEF EXECUTIVE OFFICER
LONDON & EUROPEAN
Things are different now –
insurers have far more
sophisticated underwriting
techniques and clearly worded
policies coupled with a much better
understanding of risk transfer
could make these policies very
relevant now.
But as ever, the problem is cost.
Back in the 1990s MIG premiums
were around £700. With all other
costs and fees mounting for firsttime
buyers, will this be another
added cost they simply can’t afford?
A new take on MIGs is perhaps
just one example of the options
available to lenders that could help
stop the rot.
We’re all agreed that something
needs to be done to stimulate the
bottom end of the market to get the
property market moving and a
creative approach to risk transfer
could well be the key.
MORTGAGE STRATEGY April 6, 2009 13
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