July News Round Up
11th July 2019
FCA eyes curbs to the sale of online financial products
Britain’s Financial Conduct Authority said a “strong case” could be made for regulating how financial products are marketed following a surge in online promotions. “What’s concerning is that we have seen an explosion in the number of high-yield investment opportunities that get offered on the internet,” FCA Chief Executive Andrew Bailey told a news conference. The marketing material is unregulated, even though the firms publishing them are. What concerns the regulator is that it is very hard to keep track of all these things. The FCA was in contact with major internet service providers, but they take a fairly limited approach to scrutinising what goes online, Bailey said. Bailey advises people not to buy high-yield investment products on the Web. The FCA’s handling of investment firm London Capital & Finance (LCF), which collapsed in January, is being independently reviewed and one of its conclusions could be to make promotions a regulated activity.
Economy already in recession?
The U.K. could already be in a technical recession and may face a severe downturn in the event of a no-deal Brexit, a leading think tank warned today. The uncertainty over the U.K.'s departure from the European Union, currently scheduled for October 31, has seen U.K. growth falter, the National Institute of Economic and Social Research said in its economic forecast. If a no-deal Brexit is avoided, the economy is forecasted to grow at around 1% in 2019 and 2020. In an orderly no-deal exit scenario, the economy is forecasted to stagnate, before starting to grow again in 2021. Tory leadership front-runner Boris Johnson, who is expected to become the new prime minister on Tuesday, said he would take the U.K. out of the European Union on October 31 "do or die." His rival Jeremy Hunt has also said he would be willing to leave the European Union without a deal if the bloc does not move on the controversial Northern Irish backstop. The risk of a general election to break the Brexit impasse, and the policy uncertainty around a new government, is also weighing on the U.K. economy. NIESR predicts sterling could depreciate to around $1.10 if politicians fail to negotiate Britain's orderly departure from the European Union.
Highly leveraged mortgage risk
There are more highly leveraged mortgages—those with high loan to value (LTV) ratios—being issued than at any time since before the financial crisis. Data from the Bank of England, released last week, showed that mortgages with LTVs greater than 90% constituted 18.7% of all lending in the first three months of 2019. That’s the highest level of highly leveraged lending in more than a decade, since before the financial crisis of 2008-09. These figures appeared in a report published last week by the central bank’s Financial Policy Committee, which monitors risks to the financial system. They collated data about lending product sales from the Financial Conduct Authority and the Bank's own calculations. But highly leveraged mortgages allow borrowers to put down just 10% or even 5% of the purchase price of the property as a deposit. With average house prices at £229,431, that means they need just under £23,000, or just under £11,500 upfront. Traditionally, lenders charged more for these products than other mortgages, to reflect their lending risk. However, interest rates on highly leveraged mortgages have dipped recently, as lenders compete for business. According to Moneyfacts, the average rate on a two-year fixed rate mortgage for 95% LTV loan have dipped from 5.35% to 3.25% over the past five years. And the number of highly leveraged mortgages on the market has risen too. There were just 149 fixed rate deals available to those with a 5% deposit in July 2014. Today there are 336. The data suggests that banks are loosening lending criteria a decade on from the financial crisis.
US interest rate cut around the corner?
The Federal Reserve is set to cut interest rates by 25 basis points at its policy meeting this month, as the US central bank settles on a cautious approach to monetary easing despite political pressure for deeper stimulus. Recent public appearances by Fed officials have revealed a broad desire to move towards looser monetary policy to shield the US economy from risks related to trade tensions, weakness in global growth and persistent low inflation. Markets are pricing in further easing measures from the European Central Bank — including possible rate cuts — as soon as this week, while the Bank of England has recently adopted a more dovish tone. One of the clearest signs that the middle ground among Fed officials is in favour of approving a more limited stimulus in July came after the New York Fed clarified that an ultra-dovish speech from John Williams, its president, should not be seen as a guide to future policy.
Absolute return fund exodus
Standard Life Aberdeen's (SLA) giant Global Absolute Return Strategies (Gars) fund continues to haemorrhage assets as performance lags. Investors pulled a net £5.3 billion from Gars strategies over the first six months of the year, only slightly lower than the £5.6 billion outflow in the first half of 2017. The UK version of the fund was once the country's largest, with assets peaking at nearly £27 billion in May 2016. But with assets having now fallen to £17.5 billion, it has fallen behind the £23.8 billion M&G Optimal Income fund. Targeted absolute return funds were supposed to be a safe haven in times of turmoil, delivering positive returns even when markets were falling. In 2016 these funds attracted £5 billion. Investors are now voting with their feet and pulling billions of pounds out of the sector. They are angry that many of the funds have failed to deliver on their stated aim of absolute (more than zero) returns but are earning performance fees of millions of pounds for often very mediocre performance. If you still hold such funds, in the belief that they may recover, experts say this is the time to think about quitting.
BTL landlords at risk from HMRC crackdown
A HMRC has been mailshotting thousands of UK landlords as part of its Let Property Campaign, suggesting it knows that they are not declaring the full tax they owe. Overseas landlords, many of whom are UK expats rather than wealthy foreign investors, are now coming forward in response to the campaign, which is designed to encourage landlords to voluntarily disclose to HMRC that they have not paid the full amount of tax on their rental income. Over the last tax year, 397 overseas-based buy-to-let landlords admitted to HMRC that they had not been paying the tax on their rental income, up 61% on the 246 that came forward in the previous year, according to accountants Moore Stephens. If landlords do not respond within 30 days of receiving a letter from HMRC, they are liable to face penalties based on what HMRC believes they owe, or even criminal investigations for non-compliance. HMRC is using its immense artificial intelligence (AI) database, Connect, to gather more information on landlords. Connect allows the tax authority to cross-check activity across innumerable information sources from property disclosures on tax returns to estate agents’ client lists and land registry data, as well as social media profiles and extraordinary spending patterns to identify instances of tax avoidance and evasion.
Mortgage rates to be slashed for green homes
Homeowners could reduce their mortgage rate, save money on their energy bills and reduce emissions from their homes under new government proposals. A £5m fund has been launched by the Department for Business, Energy and Industrial Strategy (BEIS) to the financial sector to increase the number of ‘green’ mortgages available. Households that successfully upgrade the energy rating of their home will be rewarded with access to discounted ‘green’ mortgage rates. The government has committed to producing net zero emissions by 2050, and essential to this will be improving the energy efficiency of the 17 million homes currently with an Energy Performance Certificate below band C. Currently, green mortgages favour homeowners in new properties who find it easier to make their homes more ‘green’. Older properties can be a challenge to make more environmentally friendly with homeowners unable to increase their rating sufficiently to make any meaningful savings on their mortgage. BEIS has said that a separate £10m innovation fund will be launched to help the industry find ways to retrofit older properties with environmentally friendly technology, with minimum disruption to homeowners. Green mortgages have been available for several years, but have not yet reached the ‘mainstream’, remaining a niche product. They tend to be available from smaller lenders such as the Ecology Building Society, which rewards customers with a 1% discount on their borrowing if it is used to make ‘green’ improvements such as having their loft insulated or solar panels installed. Barclays launched a green mortgage last year, but it is limited to giving buyers of new-build energy efficient homes access to lower interest rates and is not available to homeowners that improve the energy efficiency of their existing home. And BNP Paribas working in partnership with Eon are developing a green mortgage plan to enable homeowners to extend borrowing on their mortgages with a linked ‘energy efficient home improvement’ loan.
Self-assessment fines on the rise
HMRC has fined 14% more people year-on-year for late self-assessment tax filing, leaving well-intentioned taxpayers frustrated. “The pool of people at risk of being fined for late payment is now bigger than ever as self-employment continues to grow,” said Tim Woodgates, associate and tax specialist at Moore Stephens. “UK taxpayers are feeling the pinch. As a result, some do not have the money to pay the tax bill on time, even though they want to.” In 2015/16, 291,000 taxpayers were penalised for late payments, while that figure jumped to 331,000 in 2016/17 (the latest full year available). In 2017/18, HMRC has already raised 233,000 fines says Moore Stephens. The jump in fines may be attributed to the record number of self-employed individuals, which has soared by 180,000 in just one year to make a grand total of 4.93m in March 2019. Moore Stephens suggests that new taxpayers are unfamiliar with tax deadlines and suffer as a result while appeals are increasingly in vain. If the taxpayer is 30 days or more late in paying their tax returns, they are issued with a fine of 5% of all the outstanding tax. At six months, they are issued with a further fine of 5% of all the tax due at that date, and repeated again at 12 months.
A golden opportunity?
When one of the world's leading fund managers, renowned for his passion for equities, says every investor's portfolio should have a heavy dose of exposure to gold, it is time to sit up and listen. That is exactly what happened last week when veteran manager Mark Mobius, a long-time investor in emerging markets, said he 'loved' gold and that investors should have at least 10% of their assets in the precious metal. His comments came as its price climbed to a six-year high of more than $1,413 (£1,125) an ounce. According to experts at trader BullionVault, gold prices for UK savers have only ever been higher on 20 other occasions throughout history. It confidently predicts that by the end of the year, the all-time peak of £1,195 – reached in the summer of 2011 when debt crises were sweeping across Europe and the United States – could look 'cheap'. The surge in gold prices has been fuelled by a number of factors including mounting geopolitical tensions in the Middle East, the continued trade war between the United States and China, and downward pressure on interest rates. This basket of concerns has highlighted gold's status as a store of value and a safe haven during times of uncertainty. Commentators believe that over the next decade deflation will dominate the economies of the United States and Europe, resulting in suppressed interest rates. In times of deflation, he says gold is a 'good asset diversifier' and proves popular as investors search for real, physical financial assets.
London property prices to benefit from proposed stamp duty changes
Stamp duty change could revive prime property prices by £700,000, helping the top end of the housing market to recover from the current slump which is attributed to the high level of tax and Brexit uncertainty. Boris Johnson, the favourite candidate to become the next Prime Minister has pledged to abolish the property tax on homes under £500,000 and reverse the rise on prime and super prime homes that was introduced in 2014 by the then Chancellor George Osborne. New research by prime London property portal Vyomm, has revealed the extent of this initial decision on the market and says that a reversal in stamp duty tax thresholds at the top end could help boost buyer demand and increase high end house prices by as much as £700,000. Before December 2014 the stamp duty rate for properties between £1 million and £2 million was 5%, rising to 7% from homes sold for £2 million or more. This was increased to 10% on homes from £925,000 to £1.5 million and 12% over £1.5 million. As a result the average sold price for homes above £1.5 million in London fell by 3.41% or £101,410 in a year and for properties above £10 million it fell by 4.66% or £738,653 over the same period.