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Alan Lakey: Catch-22 on commercial decisions

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I am a great fan of commercial judgement.  After all most readers would not still be in business if they or their employers hadn’t made sound commercial determinations at some point.

Of course, not all commercial judgements are sensible or even well thought through and the end result can be detrimental to one or more parties.  In financial services if the consumer is the sufferer then somebody generally stands up and shouts for change.  Which leads nicely to the FCA and mortgage lenders.

Last year I had cause to write to Lynda Blackwell at the FCA regarding the antics of a major lender.  This lender chooses to re-evaluate the risk of its existing customer base when a customer makes contact to explore options following the expiry of a fixed or tracker rate deal.

It operates a pricing policy whereby interest-only borrowers are placed on a significantly higher interest rate than those on a capital and repayment basis. This is regardless of the fact that the borrowers in question are not looking to borrow more money or ajudged as higher risk when they originally applied.

Its unpalatable excuse is interest-only borrowers are a higher risk and so must pay a higher interest rate.  Of course, as any sane observer will note, the very act of applying a higher interest rate transforms the borrower into a higher risk, creating a Catch-22 situation.

The FCA response amounted to a rationalisation that the lender was exercising its commercial judgement and therefore it was not unduly worried.  But the FCA added that should this or any other lender operate a dual base-rate policy then it would most certainly intervene, as this would be unfair to consumers.

I see no difference in whether profiteering tactics are used on fixed, tracker or base rates; but  the point made is that in the eyes of the regulator such a strategy represents commercial judgement.

Now consider a firm of advisers that elects to operate an adviser charge representing 8 per cent of the value of new investments.  Such a firm would be scrutinised carefully and is likely to fall foul of Treating Customers Fairly or whatever new mantra may be in vogue at that time.

The counter argument that such charging represents commercial judgement is likely to be scoffed at and sanctions promptly applied.

So where does commercial judgement start and end?  If the determining factor is consumer detriment then both of the examples above result in this. 

On a more amusing tangent, some time back I vented my spleen concerning the proliferation of cool phrases, particularly those used by sales managers determined to expose their ultra-hip credentials.  I recently heard two new expressions.  Apparently when making presentations we need to “turbo-charge” them, which I presume to mean pedal-to-the-floor focused salesmanship.  

The second, indicative of today’s world is, “fill it with Red Bull” – a distinctly higher level of affectation and insincerity.

Alan Lakey is partner at Highclere Financial Services 

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  1. Julian Stevens 20th June 2014 at 7:29 pm

    Given that the FCA is unburdened by any sorts of commercial considerations (should it overspend, it just ramps up next year’s levies), what does it know or, more to the point care, about them?

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