How did we end up with retired people without repayment vehicles for their interest-only mortgages
Thursday, October 10th, 2013

In the last few weeks, we have seen an alarming piece of research about mortgages and the elderly yet I have heard very little from the financial services industry. It may be somebody else’s problem but is that because of a failure of regulation.

A report by the Personal Finance Research Centre and the International Longevity Centre UK suggests that one third of the over 70s with mortgages have interest only mortgages with no repayment vehicle.

Four in ten of the oldest mortgaged households have at least one interest-only mortgage without a linked investment to repay the loan, compared with six per cent among the under 55s – a reflection of changing times and changing policies.

There are other results in this survey that suggest a failure of the mortgage industry or a failure of a banking system for allowing people to keep remortgaging into higher debt which at best saw borrowers marking time on these loans, when they should have been getting closer to paying them off as they got older. (Something for the Help to Buy generation to think about at least).

Yet what is missing is adequate help. I would contend that this may be because of the history of regulation of interest only mortgages and of the associated endowments.

One could argue that along with the national newspapers, the FSA allowed an atmosphere to develop where people believed it was best to cash in their endowments, take their advisers to cleaners over shortfalls and ultimately forget that the loan component, which dealt with the interest only really worked when  associated with some sort of repayment vehicle.

It is clear that the economics turned on the idea of meeting the capital sum in some way. Of course, the blame does not just lie with regulation. The marketing, investment and actuarial departments of the life sector did not slam the brakes on fast enough when it became clear endowments might not necessarily pay out. Some advisers may have continued to recommend the products for too long into the crisis.

But the furore, the naming of it as a scandal, when arguably it wasn’t, created an environment where people were excluded from investment advice when it was needed. And they believed they could get a decent price for their second hand endowment policy and then spend it on a holiday or other sundry expenses of luxuries and somehow then be okay when it came to the mortgage.

What could have been allowed but was never countenanced by the powers that be, was for investment advisers and fund managers needed to offer their asset management capabilities as explicit repayment vehicles to meet the gap. But with the flashing of regulatory traffic light letters, the urgings of the TEP market and the understandable wariness of investment advisers one can see how we got here.

Now we have a bad outcome for consumers for whom it may all be a little too late even if IFAs were prepared to service them post RDR.

As I said earlier, one can blame the mortgage industry, insurers and IFAs to some degree. But when it comes to the investment component, there is an argument to say that the failure rests with the regulator beset by the national newspapers for preventing investment advisers and the investment industry doing its job and now we have pe0ple in their seventies not able to pay off the capital sum. Oh dear. As always comments welcome.
Friday thoughts – Out of date portfolio theory/ Pension fight pen / China’s misselling risk
Friday, June 21st, 2013

Chris Gilchrist has slated modern portfolio theory in Money Marketing this week because it can’t cope with financial crises which is, obviously, a slight problem at the moment. But it is the following point which catches our eye at the Money Debate.

“I regard it as unfortunate that the exam creators at the CII and elsewhere continue to regard MPT as holy writ. More than 10 years of increasingly sceptical academic commentary has yet to make it into the exam syllabus.”

Er quite. But isn’t it time the CII justified itself? If the papers are behind the curve or worse just propounding something that is wrong, then surely it is time to adapt things or if not to explain why not. “Theory used as basis of much investment advice is out of date” is not a great headline for the sector. Last thing it needs in fact. Views welcome.

At the Money Debate we can’t help but refer readers to a rather fiery pensions argument on Henry Tapper’s linkedin group/website/plan for world domination, the Pensionplaypen. It really is too good to miss.

On several occasions, in the last few months, John Lawson pension expert at Aviva has been hitting back at advocates of the Dutch solution which has suddenly got much more timely now the pension minister is also making noises in that direction.

It’s worth reading if only for John’s views of the Royal Society of Arts. It’s the biggest pension row in the neighbourhood at the moment.

Finally, it looks like China is having a credit crunch of its own, but one significant reason is the existence of a shadow banking sector running off the balance sheet (or on another balance sheet!) in many of China’s banks. There may be $2trillion in shadow banking according to Fitch but some of it is in the form of short term ‘wealth management’ products which circumvent centralised controls of lending. Could this be the first time something akin to retail misselling and misbuying has threatened the global economy?
Sorry Mr Jones but clean share prices are surely only the fourth or fifth most important thing for investors
Tuesday, June 4th, 2013

Yesterday the Money Debate received a little press release from Edward Jones which says that clean pricing is probably the most prominent issue in retail fund provision and the hottest topic for retail clients.

Okay, it does says probably, but surely the most important thing happening to investors is what is happening to markets. Perhaps nobody knows, what to do about their bond market exposure if returns look certain to be negative, whether they are diversified adequately including considering that bond issue again, whether their attitude to risk matches what they think they are investing in and, er, well, maybe then clean share classes and transparency.

Still one must say it is fascinating to watch stock brokers make a huge play for the fund market with a very different ways of pricing. There will certainly be a bit of price war. That is great news for the execution only, bargain-hunting veteran investor. However the Money Debate still wonders what it means for the formerly advised, some of whom will now be left on their own. Clean prices? It doesn’t hurt but maybe they’d be better off with it bundled with advice.