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Borrowers face a mortgage affordability test from lenders amid plans by the Financial Services Authority (FSA) to step up the regulation of home loans.

Self-certification mortgages will be banned under the proposals with lenders required to verify borrowers’ incomes.

FSA chief executive Hector Sants said that some people who were able to get home loans in the boom would no longer be able to under the proposed rules.

The industry will have until 30 January 2010 to comment on the plans.

The FSA, in its mortgage market review, has outlined a series of proposals for increasing regulation in the mortgage market.

All borrowers will have to show they have sufficient spare income to finance the repayment of their new home loans.

However, the FSA drew back from any ban on 100% mortgages, or any limit on loan-to-value levels. There was also no ban on loans over a certain multiple of borrowers’ incomes.

However, it did not rule out such caps in the future, if the initial proposals failed to have a “sufficient effect”.

The plans, which the FSA described as more “intrusive and interventionist”, include:

• Making lenders ultimately responsible for assessing consumers’ ability to pay by studying borrowers’ monthly disposable income
• Banning the sale of “toxic combination” loans, such as a high loan-to-value loan for somebody with a poor credit history
• Stopping charges for borrowers who have got behind on payments, but are keeping to an arrangement to repay these arrears
• Extending policing of the industry by the FSA to all mortgage advisers and arrangers.

“We need a new approach to regulation,” Mr Sants told the BBC.

He said that the irresponsibility of the past that put firms and consumers at risk should not be repeated.

“In the past, the prevailing regulatory philosophy was definitely based on the notion that banks would behave properly and not put themselves at risk and not put consumers at risk,” he said.

“I think we just have to recognise that both firms and indeed consumers just don’t always make the best decisions. They don’t always act in their their best interest or indeed in the best collective interest of society. So we need a new approach to regulation.”

Ban plan

The most striking proposal is the ban on self-certification mortgages – the type where customers do not have to prove their income – as these have been associated with a disproportionately high number of arrears and repossessions.

When the FSA first took over the regulation of mortgage selling in October 2004, it proposed that borrowers who were not self-employed should not be allowed to self-certify their incomes. The mortgage industry lobbied against that idea and the FSA relented.

These loans made up nearly half of all the mortgages being offered at the peak of the housing boom, but have been at the centre of a number of mortgage fraud inquiries, when incomes were allegedly inflated by rogue brokers looking for higher commissions.

This led them to be dubbed “liar loans” by some commentators.

If the ban now comes in, lenders will be able to look at the tax returns of self-employed people – who have often used self-certification loans – for evidence of their income, the FSA said.

The regulator’s review came after the mortgage market mushroomed during the housing boom, with some 10,000 different mortgage products available at one point in 2007. Of these, 3,000 were specifically aimed at sub-prime borrowers – those who have inferior credit records.

“That is a level of complexity we could well do without,” Mr Sants said.

He added that lenders needed to give proper consideration to how much a borrower could afford, in what was often their most important financial decision.

Residential mortgage debt in the UK amounts to around £1.23 trillion, accounting for approximately 70% of all credit extended by lenders in the UK, the regulator said.

The FSA also wants the power to regulate buy-to-let mortgages, which are generally treated as business loans, and so currently fall outside the FSA’s scope.

The UK mortgage market has recently started to pick up slightly after dropping sharply during late 2008 and early 2009.

‘Rabble-rousing’

The Council of Mortgage Lenders (CML) described the FSA review as “well thought out and logical”, but described some of the political comment surrounding lending as more “rabble-rousing” than considered debate.

“It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of ‘irresponsible lending’,” the CML said.

John Luke Busby, director of French mortgage group Athena Mortgages, said: “The FSA, it would seem, has been looking across the channel to France for direction when drafting its proposals.

“The French banks have carried out affordability tests for all types of borrowing, whether buy-to-let or owner-occupier, for years and if you look at historical house price trends in France there is a far more gentle variation in prices as opposed to the booms and busts seen in the UK.”

BBC Online

A leading business group has cast doubt on whether the UK economy emerged from recession in the third quarter of 2009.

The British Chambers of Commerce (BCC) said business confidence was improving but the economy was still “frail”.

Official GDP figures are due next week. If they show no growth, it will be the first time the UK has endured six successive quarters without growth.

Separately, UK retail sales rose 2.8% from September 2008, the British Retail Consortium (BRC) said.

But the BRC warned that “we mustn’t get carried away” – as the figures are compared with a “weak performance” last September when turmoil in the financial markets hit consumer confidence.

‘On the brink’

The BCC surveyed more than 5,500 companies and found that confidence strengthened across the board.

Confidence among manufacturers was at its highest level since the beginning of 2008.

But despite “good progress” being made in both the manufacturing and service sectors, domestic orders and sales were still down on the previous quarter, the BCC said.

“The Q3 results support our assessment that the UK economy is on the brink of leaving recession,” David Kern, chief economist at the BCC said.

“However, the improvement is not sufficiently strong to allow us to conclude without doubt that GDP has already returned to positive growth.”

Last week, the National Institute of Economic and Social Research also estimated that the economy did not grow in the June to September quarter.

BBC News

The UK service sector expanded at its fastest rate for two years in September, according to the latest survey of purchasing managers.

The figure for the sector rose to 55.3 in September from 54.1 in August, according to the Chartered Institute of Purchasing and Supply (CIPS).

It was the fifth month above the 50 level, which indicates expansion.

Restaurants, hotels and companies offering services to other businesses were particularly strong.

Activity fell in transport, storage, communication and personal services.

‘Losing impetus’

Last week, CIPS announced that its corresponding figure for the manufacturing sector had slipped to 49.5 in September from 49.7 in August.

Taken together, the whole economy figure rose to 54.3 in September from 54.2 in August.

“While that is still in positive territory, the stagnation on the month, and the further cuts in employment, could be the first signs that the UK economy may already be losing some of the initial impetus that is likely to have dragged it out of recession in the third quarter,” said Colin Ellis at Daiwa Securities.

“That is consistent with our view that the recovery is likely to prove slow and protracted, and we expect subdued growth during 2010.”

‘Upward momentum’

There was upbeat news for a key part of the service sector in the latest quarterly financial services survey from the employers’ organisation, the CBI.

It found that financial firms may be recovering, with business volumes growing for the first time in two years.

Analysts said that the positive news from the service sector would be taken as an indication that the Bank of England’s policy of quantitative easing was working.

“It’s a steady upward momentum, and consistent with the economy pulling out of recession in the second half of the year, probably in Q3,” said Alan Clarke, UK economist at BNP Paribas.

“I’ve estimated that the PMI surveys are roughly five points stronger than they would have been without QE. This survey reinforces that view.”

The Bank’s policymakers meet on Wednesday for their monthly two-day meeting, but no changes are expected to interest rates or the quantitative easing programme.

BBC Business News

Britain’s emergence from recession in 2010 will be stronger than previously thought, according to the International Monetary Fund (IMF).

The IMF now expects the economy will expand by 0.9 per cent, ahead of the 0.2 per cent growth in GDP it estimated three months ago.

The IMF lifted forecasts across the board due to the impact of action by several governments as well as signs of firmer house prices, recovering consumer confidence and a pick-up in world trade.

The UK will lag behind the 1.3 per cent growth expected for the US although it will perform more strongly than the Eurozone, where the IMF predicts a 0.3 per cent rise in output. Ben Bernanke, chairman of the US Federal Reserve, recently said it is highly likely the world’s biggest economy has already emerged from recession, though he cautioned that recovery will be slow. Yesterday, new figures revealed that US GDP fell by 0.7 per cent in the second quarter, lower than the 1 per cent previously reported and was also better than the 1.2 per cent contraction which Wall Street had expected.

Britain is widely expected to emerge from recession by the end of this year, and this week final GDP figures for the second quarter revealed that the economy had shrunk by 0.6 per cent, above the 0.7 per cent contraction originally estimated.

However, Alistair Darling, the Chancellor, struck a cautious note at the Labour party conference this week.

He told delegates: “Many independent forecasters now believe the UK is coming out of recession. I think it is too early to say so with total confidence. But I stick with my budget prediction that, as long as we continue to support the economy, recovery will be under way in the UK by the turn of the year.”

While yesterday, the IMF warned that Britain’s recovery could be at risk because a possible credit shortfall of £180 billion next year, caused by the weakness of the banking sector and the state budget deficit.

The Times revealed this morning that Labour is planning to halve Britain’s deficit with spending cuts and asset sales worth £75 billion without resorting to further tax rises.

Senior ministers are demanding that the pay of judges, top civil servants and NHS managers be frozen within weeks as the cuts package begins to bite. The remaining five million public sector workers can expect only minimal rises, union leaders have been warned privately. They had told the Prime Minister that protecting existing jobs was their chief priority.

Gordon Brown is looking at “a very big list” of defence procurement orders. He plans to shelve or scrap capital projects to pay for new equipment for troops in Afghanistan, seen as an overwhelming political priority.

Times Online

The UK recession has ended, according to a new study that found the biggest rise in business confidence in two years.

The Institute of Chartered Accountants in England and Wales (ICAEW) found a record rise in confidence among professionals.

Its gauge of business sentiment rose to 4.6 per cent for the third quarter, up from a record low of -45.3 in the first three months of the year, marking the biggest jump in the index since it began in 2003.

end of the recession?

This is the first time the index, which represents the opinions of 1,000 accountants working in businesses across the country, has been in positive territory since 2007 and the first move by the study.

The optimism was further underpinned by expected rises over the next 12 months in 13 out of the 14 financial performance indicators the research studies.

Michael Izza, chief executive of the ICAEW, said the study “suggests the UK recession is at an end”.

Policies such as quantitative easing and interest rate cuts by the Bank of England and the drop in VAT had helped businesses to weather the financial storm, he said.

VAT was temporarily reduced from 17.5 per cent to 15 per cent in December in a bid to boost consumer spending in the recession.

Businesses had also helped themselves, he said, by adopting the right measures to ease the slump such as cutting staff.

Mr Izza warned against “underestimating” the challenges ahead, adding that “the recovery is very fragile and I would urge policy makers not to take any actions that could derail it.”

The study found that 41 per cent of senior business professionals were more confident about the economic prospects for their businesses; 6 per cent were “much more” confident.

The IT sector was the most confident, followed by banking, finance and insurance and property.

Sentiment was most upbeat in Wales, followed by Scotland and northern England. London and the South East remained the most nervous.

Despite the widespread doom and gloom about the economy and unemployment figures rising, new research shows that many of us should actually be feeling better off.

The base rate is so low at the moment and with many household bills also falling this means that the average household has seen disposable incomes rise by around 25% over the last year. According to research by Ernst & Young, those lucky enough to have kept their job during the recession will now have an average of £1,075.22 left over each month which is £200 higher than in 2008.

The same research shows that on average, homeowners are paying 20% less on their mortgage repayments than in 2008 if they are on tracker mortgages or have moved onto their lenders standard variable rate (SVR). Contractors with fixed rate mortgages are unlikely to have seen the same drop in their repayments; however you may be saving in other areas.

Household expenses such as energy, petrol and food costs have fallen by just under 8% in the last 12 months according to Ernst & Young which will have given your disposable income a boost. However, whilst this is great news for the average household we cant get too carried away. The cost of other bills such as council tax, public transport and some insurance products have risen in the last year and falling house prices may mean that your biggest asset, your house, has fallen in value.

What should I do with the extra money?

The economy may still have a long way to go on its route to recovery and whilst it might be tempting to spend your new found wealth on treats for you and your family, this money could be put to much better use in terms of helping you to ensure your future financial security. You might find it beneficial to choose one of the following three options for your extra disposable income:

1. Pay off any debts

It’s easy to accumulate credit card debt and personal loans when you are purchasing because debt enables you to spread the cost over a period of time. However, having large borrowings hanging over you can be stressful, especially if you have a spell between contracts, especially given that unemployment insurance is virtually useless for Contract workers.

There are various perks to paying by credit card and cards often offer incentives to spend. However, it is wise to try and pay off the balance each month in order to stop yourself from paying interest at what will still inevitably be a stubbornly high rate. If you have an outstanding balance on your cards then using your new disposable income to clear some of it off each month will not only be a weight off your mind, it will also help to save you money in interest.

If you don’t want to pay off your debts using your extra disposable income then you could try shopping around for a better deal on the debt that you do have. Switching your existing credit card to a provider that is offering a 0% interest period could save you a substantial amount of money over the course of a year. However, make sure that you won’t have to pay a redemption penalty to your current provider if you pay off the balance early. Some personal loans will incur a penalty charge if you repay the balance before the term is up.

Similarly you need to be aware of handling fees that can sometimes take the fun out of an initial interest free deal.

2. Start saving

Having savings equivalent to three months earnings would offer you peace of mind in case you are in between contracts or if anything should happen. If you were to become ill for example then a savings pot would help bridge the gap before your income protection policy kicks in (indeed by asking for a waiting period before a policy needs to be paying out can significantly reduce the premiums you pay). Without money worries you can concentrate on getting over your accident or illness.

An ISA offers an excellent opportunity for you to save on tax whilst putting your extra disposable income away for a rainy day. These tax free savings accounts allow you to save up to £7,200 each year. You can invest in stocks and shares or you have the option to put up to £3,600 in a cash ISA. If you are over 55 then you can now pay up to £10,200 into an ISA and up to £5,100 into a cash ISA (this will apply to everyone from April 2010). The fact that you can often access your money instantly makes these savings accounts very attractive as you know you can get hold of your money when you need it most but often will benefit from far higher interest rates than can be secured on an ordinary account.

Once you have built up your emergency savings pot, you might want to look at other options for saving your extra disposable income each month. A regular savings plan might be a good way to save your left over cash as you can set up a direct debit from your current account and this is a far less painful way to build up a nest egg than relying on you being disciplined enough to manually pay over a cheque into an investment account.

Buying into a stock market based investment could result in a double whammy – you build a financial safety net but could also be buying at seriously depressed prices with substantial potential for upside.

3. Pay more off your mortgage

You may have seen your mortgage repayments fall due to the low base rate, perhaps because you are now on your lenders SVR or because you hold a tracker mortgage. Check that this is not illusionary because you may still be paying over the odds in relation to the wider market.

If you are paying less you could be enjoying the opportunity to pay off outstanding debts, build up your savings or simply to treat yourself.

However, just as a Contractors most valuable asset is likely to your house, for most it is also your biggest financial commitment. If you were to use this money to pay off a larger chunk of your mortgage debt then you could make a substantial difference to your disposable income in the future. Not only would you decrease your overall debt and therefore next months interest payment, you would also help to minimise the effects that falling house prices may be having on your homes value.

With mortgage lenders increasingly reserving their best rates for low ‘loan to value’ clients. Paying more off the value of your mortgage now may mean you find it easier to remortgage in the future.

Contractor Financials

This new breed is far removed from old-style locums. They are coming together in virtual law firms — models differ but a popular one involves solicitors working on an earn-as-you-work basis, from home or sometimes the client’s office, with the practice providing centralised administration, support and marketing.

The recession means that the future is encouraging for such firms. Redundancy rounds have led many solicitors to rethink their lives, while in-house lawyers face big pressures to cut costs. This increases the appeal of a firm where you pay for the advice but not the fancy City office.

When not forecasting the weather — a role that grew from winning a staff talent competition while she was an in-house lawyer at Sky — Denise Nurse runs Halebury, a City firm. It is a group of nine freelance solicitors who work non-exclusively on projects that either they or Halebury bring in (this determines the income split between lawyer and firm).

The flexibility that the lawyers enjoy works both ways, Nurse explains. Some clients simply have a one-off job, while others may need someone for a longer-term placement. Unlike with a locum, “you build up a relationship with us, meaning that even if you don’t need us for a bit, the knowledge doesn’t go away”, she says.

Tellingly, many of the pioneers are former in-house lawyers. Oliver Brice, for example, was group legal director of the Macmillan Publishing Group before establishing Virtual Law, which sells itself to companies as an outsourced in-house legal function.

Excello Law has recently been launched by George Bisnought, formerly the global legal director of Systems Union, a software company. His experience as a buyer of legal advice is that “on the whole clients are satisfied with the service but the bugbear has always been the spend”. Also, he finds that many private practice lawyers love the law but not the working environment — whether it be the macho culture, the glass ceiling or simply the pressure.

The appeal of this new way of working for lawyers with childcare responsibilities is obvious, while for others, particularly men, “I wouldn’t call it a midlife crisis, rather a reflection of where they are in their lives”, Bisnought says. They may want to travel, pursue hobbies (one of Excello’s lawyers is also an author), develop other business interests or perhaps work from the South of France.

One of the first on the scene, in 2002, was Keystone Law, although the founder James Knight describes the firm as “dispersed”, not virtual, because there is a staffed central administrative office. Its 85 home-based lawyers are consultants, rather than freelance, but while the way of working is not traditional, the service itself should be, he explains.

“We make no bones about being dispersed and clients need to know why their rates are so favourable when the solicitors are no less qualified ,” Knight says. “But in all other respects, to be very successful the future is not a dispersed network of individuals because you won’t get good-quality clients. The future is a seamless law firm, even if it does offer its solicitors a different remuneration and lifestyle package.”

Berwin Leighton Paisner (BLP) is one traditional City firm to wake up to the opportunity and threat that this method of practice represents. Its Lawyers on Demand service is aimed at clients looking for an in-house secondment or locum-style arrangement. A pool of 28 freelance lawyers (only one of whom is former BLP) work with clients on a contract basis, vetted and supported throughout by the firm.

Simon Harper, the partner in charge, explains that Lawyers on Demand aims to handle more routine work that companies cannot resource in-house but for which they do not need a City firm. Apart from some profit, the non-financial benefits for BLP are obvious — the service both retains existing clients and attracts new ones, such as Orange and Gucci.

A recent recruitment trend is lawyers who want to continue working a five-day week but as freelancers, Harper says, so they can have more control over their lives and financial affairs.

Going freelance, or virtual, is not just an option for commercial lawyers — Woolley & Co, for example, is a virtual family law practice — or only for those with a client following (although that undoubtedly helps). But clearly you need experience in your field and a certain type of character; for example, you cannot be afraid, Nurse says, of marketing. But this way you see your children, or maybe your piano, and get a far greater reward from your efforts.

“You can get complacent in employment,” she adds. “This is a wonderful opportunity for people to shake themselves out.”

Times Online
31st July 2009

Focusing on Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia, the report shows that most significant opportunities lie in countries where the sector is best established and that have a sound regulatory framework in place – particularly Poland, Hungary, Slovenia and the Czech Republic.

In order to maximize potential benefits when the economy recovers from the current economic crisis, the report says, it is necessary to establish an appropriate regulatory framework for the industry to operate in, eg Bulgaria and Romania.

Poland has the largest number of private employment agencies (2,340) and the highest number of internal staff (4,073), while Bulgaria has the smallest market with total annual sales of €23m (£19.8m) compared with €92m in Romania, the second smallest, and €569m for Poland, which again had the highest number.
Last year, the average penetration rate in the region was roughly 0.6%, the highest was in the Czech Republic at 1.9%, while the lowest was in Bulgaria (0.2%), compared to the EU average of 2%. The highest number of agency workers in full-time equivalent was in Poland (84,931), followed by Hungary (33,860) and Romania (30,305).

Annemarie Muntz, president of Eurociett, says: “As part of its everyday activity, the sector keeps people in touch with the job market and helps laid off workers and ‘outsiders’ to re-enter the workforce. It supports workers by providing them with training to ensure that their skills are in line with market demand.
“The industry acts as a buffer for the labour market as a whole and provides companies with the kind of flexibility they will need to adapt to and recover from the current crisis. In Central and Eastern Europe, the agency work sector still has room for development, which will in turn lead to job creation and better functioning labour markets.”

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