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Fine-tune

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Following the payment protection insurance misselling scandal, details of regulatory action on two further banking scandals emerged last week. Much more detail is still to emerge over both the Libor rate fixing and swap rate scandals but a common feature of all three scandals is another demonstration of why customers of the banks involved, the big four, would be naive to rely solely on advice from any of these banks, even if in some cases it may be good.

Final FSA mortgage market review deliberations include whether to allow lenders more flexibility in terms of giving advice or not when dealing with certain types of transaction, particularly product transfers. With many borrowers on cheap lifetime trackers, or SVR caps, more bank scandals highlight the risk of allowing banks to recommend what may be an inappropriate product transfer without a proper advice process.

Fines are not a deductable expense in a bank’s corporation tax computation but it seems bizarre that the FSA reduces the fees charged to each regulated sector, or fee block in FSA terminology, by reducing the following year’s fees which would otherwise have been charged to that sector.

The FSA’s funding requirement for 2012/13 is £560m. Last year, its income from fines was £70.7m. Barclays’ fine for the Libor rate fixing scandal alone was £59.5m and several other banks are involved in this investigation. Based on past form the bank that cooperates first with the regulator is treated more leniently than others although this will presumably also depend on the scale of any culpability of other banks.

If additional substantial fines are imposed in 2012/13, the FSA’s total income from fines this year will dwarf last year’s and might even exceed total fees which would otherwise be charged to the banks next year.

It would be completely unacceptable for the banks to pay little or nothing in FSA fees. A new system is needed but the money should stay with the FSA and should not be passed to the Treasury.

I suggest that from now on when fees are calculated by the FSA or its successor bodies, the fines received each year should be applied in reducing the fees pro rata for every regulated business not fined in the previous year. This would provide a regulatory dividend for good practice and might even act as an incentive against treating customers unfairly.

The Financial Times has reported that 36 per cent of Americans believe in UFOs but only 22 per cent feel they can trust their banks. Perhaps the Building Societies Association should commission a similar poll in the UK, asking also about trust in building societies. I suspect the cost would be handsomely repaid in the free publicity such a comparison would generate as well as providing plenty of marketing opportunities for the mutual sector.

Ray Boulger is senior technical manager at John Charcol

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  1. Julian Stevens 8th July 2012 at 12:21 pm

    [It] “would be naive to rely solely on advice from any of these banks” ~ so what is Mr Boulger suggesting? That those who’ve applied to their bank to borrow money should pay somebody else to cast an eye over the terms of the offer and then, if questions as to its suitability or safety or fairness are identified, go back to the bank and try to negotiate different terms? What is the response from the bank likely to be? Oh yes, Mr Smith, we can see why you might be less than comfortable with what we’re offering. How about if we remove condition X, modify clause Y and restructure various other elements of our offer to make it conform to what you’d like to see, as opposed to what we’re prepared to offer? It’s not going to happen is it? The bank will simply say This is what’s on offer, take it or leave it ~ or see if you can get anything better elsewhere, which is almost certain to be impossible because banks lend only to existing customers who’ve already been with them for quite some time. An SME can’t just go to Bank B and say We’d like to open an account and then for you to lend us £250,000 of working capital because the terms of the offer put to us by Bank A, with whom we’ve been for the past 10 years, have been identified by a third party, to whom we’ve paid £2,000 for their opinion, as being unacceptable. Bank B will tell the firm to get lost, not least because it’s highly unlikely to take on a new customer that’s going to argue the toss over the terms of any offer of a loan that it might be prepared to put forward.

    Or am I missing something here?

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