Legislation II Flashcards
List the main events in the credit crises.
Pre-2007: Bull market in the USA characterised by massive growth in lending, fuelled by low interest rates. Market deteriorates as a consequence of some or all of the following:
- Significant increase in sub-prime lending from under-estimation of risk
- Sales of loans at initially attractive interest rates, created to lock borrowers into contracts that would ultimately be unaffordable
- A decline in mortgage underwriting standards
- The willingness of borrowers to release equity in real estate
- Predatory lending
- Belief that domestic property prices would only grow
Mid-2007: Securitisation was long established in the USA but newer to the UK. UK banks invested funds in mortgage-backed securities, and these securities became impossible to sell as markets became nervous. The downturn in the market in the USA drove up wholesale interest rates that in turn exposed many UK financial institutions to risk, as many had relied on the wholesale market for funding. Investment banks start struggling with their complex derivatives.
Autumn 2007: Northern Rock approaches BoE for emergency funding as it’s unable to get funds from conventional wholesale sources at sustainable interest rates. The publicity of this causes a run on the bank.
Mid-2008: £500 billion government rescue plan for RBS and Lloyds to restore stability. Several smaller banks and former BSocs encounter difficulty and their toxic assets are taken into public ownership. Financial institutions who were less reliant on wholesale markets were ~ okay.
The Credit Crises had a major impact on IBs. One reason is that IBs play a crucial role in assisting lenders to raise funds. Mortgage lenders create loans but they use investment banks to fund the debt by issuing bonds, the proceeds of which can be used for further lending. This is how securitisation works. However the demarcation between the role of primary lender and the investment bank was blurred when primary lenders took responsibility for securitisation and IBs became primary lenders. The USA had in fact attempted to segregate retail and investment banking in 1929 but these restrictions were removed in 1999 as part of a programme of deregulation. IBs took that opportunity to chase short-term profits that went sour with wholesale market conditions. Bear Stearns and Lehman Brothers collapsed whilst Goldman Sachs, Merrill Lynch and Morgan Stanley barely survived.
Who are the regulatory bodies in the EU?
There are three European Supervisory Authorities (ESAs):
- The European Banking Authority - ensures common regulatory and supervisory standards accross EU & perform stress on banks tests to find weaknesses. Can theoretically overrule member states’ regulatory authorities.
- European Securities and Markets Authority - works in the field of securities legislation and regulation to improve the functioning of financial markets in Europe, strengthening investor protection and cooperation between national competent authorities
- European Insurance and Occupational Pensions Authority - support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries
To complement these authorities, there is a European Systemic Risk Board (ESRB), under the responsibility of the European Central Bank.
- European Systemic Risk Board - tasked with the macro-prudential oversight of the financial system within the European Union in order to contribute to the prevention or mitigation of systemic risks to financial stability in the EU. These are risks that threaten the whole financial system and not just individual institutions.
Who are the international regulators?
- International Monetary Fund: has provded financial support & brokered rescue packages to governments experiencing financial crises. Operates the fixed exchange rate system that pegs currencies against the US Dollar.
- G20: Represents more than 20 countries as the EU is considered one member. Discuss matters of concern. Coordinate policies to reduce risks arising from money laundering and terrorist financing. Promote transparency in fiscal policies of state. Facilitate exchanges of information in relation to taxation in member states.
- Bank fo International Settlements: regular revision of capital adequacy requirements for banking organisations through the ‘Basel Accords.’ The Basel Accords comprise of 3 sets of agreements in 1988, 2004 and 2010.
What is the Financial Services Compensation Scheme (FSCS)?
Who does it protect?
A statutory fund of last resort if an authorised firm cannot meet the monetary claims against it.
It protects personal customers and some smaller businesses.
Who monitors the Lending Code?
What is the Lending Code 2009?
Who does it apply to?
- It is independently monitored by the Lending Standards Board
- Sets minimum standards of best practice that banks, BSocs and credit card providers should provide. It is NOT legally binding.
- It applies to:
- loans
- credit cards
- lending to micro-enterprises/small charities
- current account overdrafts
How many sections are there in the Lending Code?
What are the Key Commitments?
There are eleven
The Key commitments are generic statements of best practice set out in section 1. Subscribors will act fairly and reasonably in all their dealings with customers by, as a minimum, meeting all the commitments and standards of the code. They are:
- subscribers will make sure that advertising and promotional literature is fair, clear and not misleading and that customers are given clear info about products and services
- customers will be given clear info about accounts and services, how they work, their terms and conditions and the interest rates that apply to them
- regular statements will be made available to customers (if appropriate). Customers will also be informed about changes to the interest rates, charges or terms and conditions
- subscribers will lend money responsibly
- subscribers will deal quickly and sympathetically with things that go wrong and act sympaphetically and postively when considering a customers financial difficulties
- personal info will be treated as private and confidential and subscribers will provide secure and reliable banking and payment systems
- subscribers will make sure their staff are trained to put Code into practice
What rules does the Consumer Credit Act 1974 lay down?
Failure to comply with the act can make the loan unenforceable:
- The form and content of credit agreements - agreements in writing must contain various crap
-
Advertising loans defined as one of three types:
- Simple: these are basic adverts that usually promote an image of the lending institution and do not refer to specific lending products, so no requirement to show APR.
- Intermediate: The advert may be more detailed but is subject to restrictions and some info is prohibited, though the customer must be informed that a quotation may be requested
- Full: these are detailed adverts with full information on the loan, fees and charges, interest rate and security required, and usually include an illustration.
- The calculation of APR
- Procedures in relation to early repayment
- Procedures that must be followed when agreements are breached and the lender wishes to recover the loan
- Extortionate credit bargains
A consumer is an individual, an unincorporated body or partner.
In the CCA 1974, what are the three types of regulated agreement?
-
Running account and fixed sum credit:
- Running account: where the contract enables the debtor to draw down credit from time to time, usually subject to a max credit limit e.g. a credit card. Any device of this type is called a credit token.
- Fixed sum: arises where the agreement is for a specific sum to be repaid over a period of time; usually by instalment e.g. a personal loan
-
Restricted and unrestricted use credit:
- Restricted use: an agreement where the creditor has control over how the funds are used, e.g. a second mortgage.
- Unrestricted use: where the debtor can use the funds in any way he or she chooses
-
Cancellable and non-cancellable:
- Cancellable agreements: those where face to face discussions are held with the customer about the credit arrangements but where the customer does not sign the agreement on trade premises. Have a cooling off period.
- Non-cancellable agreements: where there are no face to face discussions or where the agreement is signed on premises.
What is the Consumer Credit Act 2006?
CCA 1974: It protects private consumers who enter into certain types of credit agreement.
CCA 2006 adds: create a fairer and more competitive market. Effectively it loaded things in favour of the borrower.
Other changes from CCA 1974:
- A consumer is individuals and partnerships with 2-3 partners.
- Rights and redress for consumers were made better by bringing disputes into the realm of the Financial Ombudsman Service
- Judgement and fairness introduced as measures when considering enforcement
- Concept of ‘unfair relationships’ introduced to deal with loan sharks
- enforcement of default rules made clearer and more in favour of the consumer
- Empowers the Office of Fair Trading to investigate applicants for consumer credit licenses (the FCA does this now)
What loans does the CCA 2006 Cover and what’s exempt?
- Loans greater than £25,000 (previously above £25,000 was not reg’d)
-
Exemptions include:
- CCA 1974:
- family arrangements when there is no intention of entering a legal relationship e.g. pocket money
- loans for the purpose of improving/repairing a private residence
- CCA 2006:
- The debtor being of high worth
- The loan exceeding £25,000 and being entered for business purposes
- CCA 1974:
What is a consumer credit license?
Under CCA 1974 consumer credit licences were required for consumer credit and hire businesses, credit brokerages and credit reference agencies. The list is now widened to include debt administration and credit info services in CCA 2006.
Who by & how is an applicant judged to be fit to hold a consumer credit licence?
The office of fair trading; assesses:
- exp and knowledge of the applicant and his staff and the practices and procedures that will be implemented
- whether applicant has committed an offence involving fraud or violence
- whether the CCA 1974 or FSMA 2000 have been contravened in the past
- whether the applicant has practiced discrimination
- whether the applicant has engaged in business practices which appear to be deceitful, oppressive, unfair or improper
