'Shocking questions from a Lord and a Baroness' blog discussion

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This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.




Please click 'post reply' to discuss below.

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  • VT82
    VT82 Posts: 1,079 Forumite
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    The bit I don't get is: 'Consumers only have a voice in one of the three new bodies (the FCA, not the PRA or the FPC) and they need to have a voice in all of the three.'

    If the PRA is responsible for imposing limits on capital adequacy, liquidity adequacy, market risk etc., how is the 'consumer' supposed to contribute to something that is inherently technical and beyond their understanding?

    Or am I missing something?
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    VT82 wrote: »
    The bit I don't get is: 'Consumers only have a voice in one of the three new bodies (the FCA, not the PRA or the FPC) and they need to have a voice in all of the three.'

    If the PRA is responsible for imposing limits on capital adequacy, liquidity adequacy, market risk etc., how is the 'consumer' supposed to contribute to something that is inherently technical and beyond their understanding?

    Or am I missing something?
    Presumably someone like Which? could provide an expert to argue the case for the consumer?
  • MSE_Martin
    MSE_Martin Posts: 8,272 Money Saving Expert
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    VT82 wrote: »
    The bit I don't get is: 'Consumers only have a voice in one of the three new bodies (the FCA, not the PRA or the FPC) and they need to have a voice in all of the three.'

    If the PRA is responsible for imposing limits on capital adequacy, liquidity adequacy, market risk etc., how is the 'consumer' supposed to contribute to something that is inherently technical and beyond their understanding?

    Or am I missing something?

    Consumer groups are capable of very technical research. Yet the real issue here is the knock on the the PRA/FPC type decision eg.

    We're going to ask banks to limit lending on mortgages to 85% LTV. Sounds good, decreases risk, traps millions into high rate mortgages with the inability to switch. Same with limits on borrowing which end up hitting small biz. Prudential decisions could have consumer impact we don't know yet - but I'd prefer they were there at the start.

    Half the problem is the FSA and its board are made up of people from the industry there is no balancing element
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
    Don't miss out on urgent MoneySaving, get my weekly e-mail at www.moneysavingexpert.com/tips.
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  • torbrex
    torbrex Posts: 71,340 Forumite
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    The 'shocking questions' that were asked might seem like common sense to those in the business but if they had not been asked, how else would Martin & Co's answers made it into the minutes of the session and become permenant record.
  • Errata
    Errata Posts: 38,230 Forumite
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    Remember the phrase 'never ask a question you don't know the answer to' ? Politicians never forget it.
    .................:)....I'm smiling because I have no idea what's going on ...:)
  • jamesd
    jamesd Posts: 26,103 Forumite
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    MSE_Martin wrote: »
    We're going to ask banks to limit lending on mortgages to 85% LTV. Sounds good, decreases risk
    It doesn't even purely limit risk. What it does in part is move the risk from the lenders to the consumers, who have money tied up in the property that they could instead use to make the monthly mortgage payments if they hit financial trouble.

    It's not part of a very holistic view of a borrower's whole financial situation, which should include things like the availability of savings and investments and benefit from no longer paying rent. Too much focus on risk of losing the owned home while forgetting that, for a first time buyer, they already don't have an owned home.

    There are definite correlations between LTV and default rate, though.

    I'm not a fan of a cap of 85% on LTV, nor of things like banning interest only mortgages or mortgages lasting well into retirement, which are useful in part for those who will have a higher income after work and state pensions start than earlier in retirement.
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
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    MSE_Martin wrote: »
    We're going to ask banks to limit lending on mortgages to 85% LTV. Sounds good, decreases risk, traps millions into high rate mortgages with the inability to switch.
    How about a limit to 85% LTV _unless_ the customer already has a mortgage with the bank in which case they have to offer (regardless of credit score, affordability, etc) them a new deal as though they had 85% LTV (as long as they aren't borrowing more money than they already owe)?
    I appreciate that they would be a higher risk to the bank, but given they already owe the bank that money there would be no increased risk by letting them remortgage.

    What effect it would have on the housing market, however, I don't know.
  • oldvicar
    oldvicar Posts: 1,088 Forumite
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    "Don’t you think it’s wrong consumers don’t bear some of the risk and responsibility for where they put their money now we’re protecting all deposit accounts up to £85,000?" – Lord Maples.

    I actually agree with Lord Maples' question, not the assembled experts.

    Why should person A saving in say a 5 year fixed rate account with RiskyBank plc paying (just for argument's sake) 10% AER, be completely protected if they go bust; when person B who is more cautious accepted lower rates of say 4% with some of the safer (or perceived to be safer) banks. If RiskyBank plc goes bust the day after taking person A's deposit then all savers/taxpayers (including person B) have to bail him out. Indeed person A is rewarded with 30% more return than person B - as Lord Maples said in the videoclip he is incentivised to take the riskier offering. It just does not seem FAIR that risktaker A is guaranteed a better return than prudent B.

    I believe in a strong compensation scheme. When the guarantee was 100% of your first £2000, and 90% of the next £18K, there was no such perverse incentive to search out risk. Back then the overall compensation limit was probably too low, and £85k is now much better. A high (but less than 100) percentage guarantee is fair, but probably no longer in line with what people expect or EU directives demand when only 100% will do.



    I offer, as a simple suggestion which people could easily understand and to remove the systemic incentive to take risk, that people's savings are guaranteed (up to an £85k limit or greater as you wish) as follows:
    • 100% of your deposit [the amount put in; plus capitalised interest]
    • None of your interest accrued (or, to be a bit more generous, perhaps a limit on accrued interest to be a little less than 'safe' banks pay - why not say BoE Base Rate as a maximum)
    • In the event of default, deposits are repaid immediately and may not be left invested on original terms. If they remain unclaimed then maybe pay interest at a nominal rate for a while.
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