We Introduce You

As the first slurred booms of Auld Lang Syne begin tonight, the Bank of England will transfer £42million to the US Federal Reserve.

Although this probably won’t be too widely reported, it will mark the last chapter in the story of Britain’s alliance with America in the Second World War. The transfer of funds represents the last repayment against a loan taken out in 1946.

For most of the Second World War the US supported Britain through a Lend Lease programme. This delivered millions of dollars of military equipment, general goods and food in return for leases on British military bases around the world. Without it Britain’s war effort would almost certainly have been doomed to failure.

Shortly after VJ-Day in August 1945 the Americans suddenly and unexpectedly announced the end of the Lend-Lease system leaving Britain, who had spent 10 of the last 30 years engaged in war, in a very desperate financial situation.

Attlee’s new Labour government had won an election by promoting ambitious plans of creating a welfare state, giving free healthcare and nationalising Britain’s main industries. In September 1945 the cabinet instructed John Maynard Keynes, the economist and negotiator, to go to Washington to negotiate a $5billion ‘moral obligation’ grant, but all he returned with was a $3.75 billion loan fixed at 2% over 50 years.

The entire affair strained the relationship between Britain and the US, even more so when the Americans used the loan as a vehicle to force Attlee to make pound sterling freely convertible by 1947.

In a world crippled by war, most countries duly converted their sterling to the mighty dollar and this contributed to more years of hardship and rationing for ‘victorious’ Britain.

But thanks Uncle Sam and, on behalf of fellow Brits, we’re sorry we failed to stick to the 50-year loan term.

One recent story I find quite interesting is the problems the Financial Inclusion Taskforce is having trying to encourage mainstream lenders to offer low value loans.

The government launched an initiative in late 2004 to try and develop methods whereby the financially excluded (people on low incomes in deprived areas) could get affordable credit. At the time it pointed out that a lack of low cost and low value loans meant that the financially excluded often turned to high cost doorstep lenders and even illegal loan sharks which ultimately made their debt problems worse.

A Social Fund exists whereby the Department of Work and Pensions (DWP) can give out crisis and budgeting loans and as part of the Financial Inclusion initiative the Treasury extended this by getting the DWP to administer a growth fund.

During this year the DWP began to work with the third sector (in essence non profit making credit unions) to administer the Growth Fund in deprived areas.

In December the Financial Inclusion Task Force gave an update on its work with the Growth Fund and said it was working well, but that the number of loans the fund had given out had been below its expectations.

The Task Force also said it had been exploring the extent to which mainstream lenders (such as banks and credit card providers) might move into the market for low value loans (£300-£600). It said, the response had been fairly negative, with all of the lenders approached saying that the reputation risk associated with charging a cost-reflective interest rate to the affordable credit sector is too significant (given the projected returns) for major banks to be prepared to get involved in the market, even through sub-branded subsidiaries.

To me, as the Task Force also acknowledges, it looks as though the only viable solution is to extend the number and coverage of the third sector and there will never be a mainstream solution.

Ah well, the wheels of commerce have started to grind to their annual halt. I wonder how many times ‘Well, there’s no point starting it until after the holidays’ have been echoed around British offices.

On the news front, a story that caught my eye was one that in their monthly newsletter for mortgage advisors the FSA told intermediaries, who use packagers, to look at their procedures.

The FSA said it had visited nine brokers, six packagers and conducted a telephone survey with another twenty-five brokers. This exposed worrying findings into the relationship between mortgage brokers and packagers - where a number of advisers are relying entirely upon the product suggestions made by packagers without making any of their own checks.

The investigation found that approximately a quarter of brokers only sometimes checked the suitability of a product suggested by a packager for the customer. A smaller number of brokers never checked and relied entirely upon the product suggestions made by packagers.

The FSA also pointed out that that where brokers and packagers had contracts saying that it was the responsibility of the packager to give reasons why a product had been selected and if that advice was later found to be incorrect, it was the responsibility of the packager to compensate the end customer were wrong.

The FSA is warning that even if such an agreement has been drawn up, all regulatory obligations remain the responsibility of the broker and it would expect them to evidence the reasons why the product they recommended was suitable for their customer. Information provided to the broker by the packager can form part of that suitability assessment. In the case of non-compliant advice, any resulting regulatory action will be taken against the authorised broker, not the packager - even if that packager sourced the product.

With regards to giving out a Key Facts Illustrated (KFI) to customers, the FSA found that it was sometimes the broker who gave them to the customer and in other cases the packager. The FSA said regardless of who issues the KFI, it remains the responsibility of the authorised firm that is dealing directly with the customer to make sure the KFI is given to the customer at the right time.