COMPETITION COMMISSION – PPI

The Competition Commission (CC) has provisionally decided that consumers will benefit from the introduction of a point-of-sale prohibition for all forms of payment protection insurance (PPI), with the exception of retail PPI. Retail PPI is a small part of the overall PPI market relating to protection taken out on repayments for shopping through home catalogues, typically accounting for about 2.5 per cent of PPI gross written premium paid by customers.

The point-of-sale prohibition would stop the completion of sales of PPI during the sale of the associated credit product such as a personal loan. It was one of a package of measures the CC planned to introduce following its investigation into PPI, which concluded that businesses that offer PPI alongside credit face little or no competition when selling PPI to their credit customers.

The report and in particular the proposed point-of-sale prohibition were the subject of a legal challenge last year to the Competition Appeal Tribunal (CAT) by Barclays, supported by Lloyds Banking Group and Shop Direct Group Financial Services Ltd. Whilst upholding the CC’s conclusions as to the competition problems in this market, the CAT ruled that it must in particular consider further the role and importance of a potential drawback to the prohibition, namely that it might inconvenience customers.

Since then, the CC has carried out a detailed analysis of the likely effects of such a prohibition including undertaking customer surveys, and an assessment of parties’ internal documents and of various experiments looking at the possible impact of splitting the sales processes of credit and PPI. In its provisional decision published today, the CC has concluded that the benefits of a package of remedies including the prohibition, by introducing greater competition and choice and lower prices to the market, will outweigh the disadvantages, in particular the potential inconvenience to some customers.

The exception is retail PPI, where it is not clear to the CC, from the evidence presented so far and from a new survey of retail PPI customers, whether the advantages of introducing the prohibition alongside other measures would outweigh the disadvantages. It is inviting comments on whether alternative remedies would be more effective or would deliver equivalent benefits at less cost.

The CC has also assessed changes in PPI markets since it published its report in January 2009 and provisionally concluded that despite the effects of the economic climate and regulatory action, the underlying problems identified remain firmly in place. In its 2009 report, the CC stated that the vast majority of the UK’s more than 12 million PPI policies are sold at the same time as a consumer takes out a loan, credit card or other type of credit. The CC found that many consumers are unaware that they can buy PPI from other providers, rarely shop around to compare prices and terms and conditions of PPI policies, and rarely switch PPI providers. The resulting ‘point-of-sale’ advantage makes it difficult for other PPI providers to reach credit providers’ customers and in the absence of such competitive pressure, consumers are charged high prices.

During the investigation, the CC liaised closely with the FSA as well as the Financial Ombudsman Service. The CC’s focus has been on examining whether there is effective competition in the market as a whole.

The CC will now invite comments on its provisional decision before publishing its final verdict in July. If it upholds its provisional decision, it will move to introduce the full package of measures as swiftly as possible.


Source: Competition Commission

CC Website

ARE YOU INVOLVED IN THE SALE OF PAYMENT PROTECTION INSURANCE (PPI)?

Has the Financial Services Authority (FSA) contacted you to undertake a thematic review of your PPI sales?

If you can answer YES to either of these questions then you need the skills of The Consulting Consortium (TCC) to help you.

Since starting work on the thematic review of PPI in 2005 the FSA had taken enforcement action against 22 firms (up to September 2009) and had imposed fines of £11.8 million over poor PPI selling practices.

TCC can provide assistance to firms, large and small who are involved in the PPI market. We can also provide a PPI calculator.

For more information on how TCC can help you cope please call us on 020 7645 8808 or email info@theconsultingconsortium.com.

TCC Website

ABI – DO NOT USE CONSULTANTS TO DODGE THE HIGH TAX RATE

Britain’s biggest investment institutions have issued a warning to blue-chip company directors not to rely on unscrupulous pay consultants and not to endanger corporate reputation by approving elaborate schemes to help executives to dodge tax.

The Association of British Insurers, whose members control about 15 per cent of the stock market, has written to the remuneration committee chairmen of Britain’s biggest 350 listed companies, urging them to be on their mettle as the annual boardroom pay and bonus season reaches its climax.

The ABI is concerned that the recession and increased pressure to avoid the new 50 per cent tax band, which comes in on April 6, may lead to some executives receiving excessive or unmerited pay rises as non-executives exercise discretion to top-up pay packages that would otherwise be sagging.

The ABI has called on remuneration committee chairmen to take responsibility and not to place undue reliance on remuneration consultants, nor to delegate responsibility to them for talking to shareholders.

Peter Montagnon, director for investment affairs at the ABI and the author of the letter, said:

“They can’t simply hire consultants to tell them how to get round the ABI guidelines. Unfortunately there are cases where this is how the process works.”

However, he added that many consultants did good work and played a valuable role.

Mr Montagnon expressed concern that consultants, who stand to win new business by devising ever more generous pay schemes, were exercising too much influence in some cases:

“The question is, who is in charge? The remcos [remuneration committees] have got to stay in charge.”

On tax, many companies are working on pay schemes to avoid the new 50 per cent tax band, which applies to income above £150,000. Most exploit the yawning gap between the income tax rate and the capital gains tax rate of 18 per cent. Rewards are structured as capital gains rather than income.

While companies should aim to be tax-efficient, they should not devise schemes that risked damaging their reputation, the ABI said. Nor should they compensate executives for the higher tax rate they will have to pay from April.

Mr Montagnon said that there was no problem if the schemes were legitimate and did not lead to extra costs for shareholders:

“We do mind if it is naked evasion, or if there are extra costs.”

In a wide-ranging position paper that suggests shareholders are braced for a difficult pay season ahead, the ABI said that it was issuing the guidance to minimise the risk of misunderstanding and confrontation. Shareholders are also concerned that companies may not fully engage with them before new pay plans.

“Consultation does not mean calling the shareholder late in the evening ahead of a fait accompli the following morning,” Mr Montagnon said.

It meant timely communication before minds had been made up and when there was still time to change pay schemes. The ABI said remuneration committees, which still have considerable discretion on cash bonuses and on the conditions attached to future share schemes, should not be tempted to soften their stance because executives were facing a leaner year this year.

Companies with a December year-end are busy deciding cash bonuses for the year just gone and setting the terms of future bonus schemes. Details will be published in the new round of annual reports, beginning in late February.

“It is now that they will be making some of those discretionary decisions,” Mr Montagnon said.

The ABI also gave a warning against the danger of windfall gains created by large falls in company share prices. Where option grants are based on a multiple of salary this could lead to the grant of a greater number of shares. It also questioned the efficacy of retention bonuses.

Source: The Times

Times Online

CML – BUY TO LET ACTIVITY SETTLES AFTER STAMP DUTY HOLIDAY

Data published by the CML shows that buy-to-let activity in the first three months of this year settled back to former levels, following a modest upturn in house purchase by investors at the end of last year triggered by the stamp duty holiday. As a result, the number of buy-to-let loans declined by 15% to 22,000 in the first three months of 2010. Over the same period, the value of lending also declined, by 12% to £2.1 billion.

Leaving aside the impact of the stamp duty holiday, however, buy-to-let lending has now remained broadly flat over each of the last five quarters. Compared to the first quarter of 2009, the value of buy-to-let lending in the first three months of this year is unchanged, while the number of loans declined by just 2%.

Low interest rates are continuing to contribute to a modest improvement in buy-to-let arrears. At the end of March, the number of loans with arrears of more than 1.5% of the mortgage balance totalled 19,300 (1.56% of all buy-to-loans), compared with 20,700 (1.69% of loans) at the end of 2009, and 28,800 (2.47% of loans) a year ago. The number of buy-to-let properties taken into possession in the first quarter of 2010 totalled 1,400, an increase from 1,200 taken into possession in the preceding three months but unchanged from the total a year ago.

Meanwhile, cases where a receiver of rent had been appointed totalled 11,200 at the end of March, down from 11,900 three months earlier but up from 9,200 a year ago. These cases are similar in many ways to a lender taking possession of a mortgaged property, with the landlord being removed and the receiver collecting rent and passing it on to the lender to apply to mortgage payments.

Commenting on the figures, the CML's director general Michael Coogan said:

"Ignoring the effect of the stamp duty holiday, the lending figures show that the buy-to-let market has settled into a period of stable, low-volume activity. Generally, prospects for the rental market are good. But uncertainty over house prices, interest rates and the availability of mortgage funding is continuing to hold back the buy-to-let market at this stage."

"We also want to see how the new coalition government takes forward the Treasury's initiative to encourage higher investment in the private rented sector, bearing in mind the scope for growth that exists to meet future demand from tenants. There is a case for targeted measures in the Budget, even though the primary focus will be the fiscal deficit."


Source: Council of Mortgage Lenders

CML Website

CML – ARREARS AND REPOSSESSIONS DOWN

The number of mortgages in arrears and the number of repossessions both fell in the first quarter of 2010, according to the Council of Mortgage Lenders. But this welcome decline gives no cause for complacency as a large number of households, who are just coping, still remain vulnerable to shocks that may arise from the economic uncertainty ahead.

Repossessions as a proportion of all mortgages remained steady at 0.09% in the first quarter, the same proportion as in the previous quarter and down from 0.12% in the first quarter of 2009. The number of repossessions was 9,800, down from 10,600 in the previous quarter and 13,200 in the first quarter of 2009.

The proportion of mortgages in arrears also fell. The total proportion of loans with arrears equivalent to 2.5% or more of the mortgage balance was 1.64%, down from 1.72% in the previous quarter and 1.87% in the first quarter of 2009. The number of loans in arrears was down from 206,800 at the end of the first quarter of 2009 and 196,400 at the end of last year to 186,300 at the end of the first quarter of this year.

However, the fall was more marked in the lower arrears bands than among those with more substantial arrears, where the reduction was only very modest. This suggests that low interest rates and relatively stable employment have been helping to prevent new households falling into difficulty, but that many households with more entrenched problems are still struggling to restore their financial position and repay arrears. This debt overhang will require careful management over an extended period.

Against a backdrop of significant continuing economic uncertainty, the CML is cautious about revising its forecasts for the number of arrears and possessions cases in 2010, although it expects to do so later in the summer. However, if current levels of government support continue, if interest rates do not rise, and we have no new economic shocks, the 53,000 repossessions forecast for the year is pessimistic.

Despite this welcome assessment, and mindful of the pressures on the public finances facing the new government, the CML strongly emphasises the need for ongoing commitment from government to supporting home-owners facing financial difficulty. There is a risk that higher interest rates or unemployment would tip into arrears a number of finely-balanced households who are currently coping, and would undermine the capacity of households struggling to get back on their feet.

Lenders have worked hard to help their borrowers and are continuing to do so, but the financial situation for many households remains fragile. Together with Shelter and Citizens Advice, we have today written to the Chancellor to encourage him to make a clear commitment in his first budget to extending current support measures for the borrowers in most financial difficulty.

CML director general Michael Coogan commented:

"With all eyes on the new government and what steps it will take to address the fiscal deficit, we cannot emphasise too strongly the importance of continuing to fund the support mechanisms that are proving effective in containing mortgage arrears and repossessions."

"We hope and expect to be able to revise down our 53,000 forecast for repossessions in 2010, but we are acutely conscious of the beneficial influence that low interest rates and the package of support have played so far. The dampening effects on households and the wider housing market that fiscal tightening is likely to exert are still to be felt, but it should be a key priority to support borrowers most in need and maintain funding for the government’s housing policies."


Source: Council of Mortgage Lenders

CML Website

LLOYD’S – EUROPE’S VOLCANO RISK PUT AT $85 BILLION

The plumes of ash spewed from the volcano in Iceland that brought flights over northern Europe to a standstill highlighted the economic chaos that a volcano can wreak.

Yet the cost of the Eyjafjallajökull eruption would be tiny compared to the bill were Italy’s Mount Vesuvius to start spewing lava again, according to research by the Willis Research Network (WRN). A serious eruption could kill or injure 21,000 people and cost more than $24bn, it says.

Significant impact
The WRN study found that, together, the ten most dangerous volcanoes in Europe could affect almost 2.1 million people with a combined exposed residential property value of $85bn. Eyjafjallajökull doesn’t even make the top ten list, although Iceland’s most active volcano, Hekla, is ranked ninth.

"There are significant numbers of highly active volcanoes in the wider European region,” says Dr. Rashmin Gunasekera, a catastrophe risk analyst at Willis Re.

Vesuvius tops the ranking because it poses the greatest risk to life and property, with 1.7 million people and $66.1bn worth of residential property vulnerable to its eruption. The volcanic threat to Naples is high, as the city nestles between Vesuvius and Campi Flegrei – listed as Europe’s second most dangerous volcano by WRN. Italy features heavily on the list, as Etna is also ranked fourth.

Although volcanic eruption is not such a big worry for insurers as hurricanes or earthquakes, because they occur much less frequently, the threat they pose should not be overlooked, experts warn.

Catastrophic losses
Professor Robin Spence, an academic at the University of Cambridge and an author of the WRN study, says:

"Large explosive volcanic eruptions are rare events, but when they do occur, they have the potential to cause huge economic and human losses. In 2002, for example, rain combined with ash fall alone caused economic losses of around US $960m after the eruption of Mount Etna in Sicily.”

Major cities in the US and Australasia are also vulnerable to volcanic activity. In a report last year, risk modelling expert Risk Management Solutions stated that:

“volcanic risk poses a potentially catastrophic loss to major cities including Seattle, Portland, Naples, Tokyo, and Auckland".

Despite the economic threat they pose, there are no computer models currently available to assess the insurance risk from volcanoes. That’s because it is so difficult to predict volcanic eruptions, as it’s impossible to predict how long they will last, how big they will be or when they will reach their climax – all of which are vitally important to insurers when deciding whether to provide cover and at what price.

Managing the risks
Unlike an earthquake or hurricane, which may be over in hours, volcanic eruptions can last for years, even decades. But great strides have been made in predicting a range of possible scenarios should an eruption occur, which can help organisations to manage the risks, says RMS.

WRN argues that the volcano risk ranking it has developed, grading active European volcanoes that could affect over 10,000 people if they were to erupt, could be used as the basis for creating the first detailed insurance risk model for volcanoes situated in Europe and the overseas territories of European countries.

Source: Lloyd's

Lloyd's Website