Child trust funds could sock away cash for first home

21-01-2008

Child trust fund (CTF) cash could transform the market for first-time homebuyers with young people using their lump sum as the deposit on their first home, enabling them to get on the property ladder at a much earlier age.

CTFs could provide a £2.4 billion a year boost to young people’s spending power after the first mature in 2020, research carried out by Social Issues Research Centre (SIRC) for The Children’s Mutual says. Calculations from Children’s Mutual reveal that although the average first time buyer will probably require a deposit of £18,800 to buy a home by 2020, a fully topped-up CTF might provide a cash lump sum at maturity at age 18 of £37,100. This assumes that the full £1,200 a year allowable top up is added to the CTF and the investments show an average return of 7% a year. But when asked what they would do with this money, young people ranked buying a home third – behind continuing to save and paying for university education. The CTF generation could leave university debt-free. However, the SIRC is predicting that as the value of a degree wanes, children might have to spend longer in higher education, taking a post graduate course to improve their job prospects. With university looking less attractive SIRC is predicting a rise in the number of young entrepreneurs, with one in five young people saying that if the CTF had existed today, they would have started their own business. ‘Seven out of 10 of today’s children expect to go to university, graduating with a debt of £12,000, while the cost of a deposit for a house rose 450% in the 10 years following 1995,’ said David White, chief executive of Children’s Mutual. ‘For parents with children aged five and under, topping up their Child Trust Fund and inviting grandparents and other family members to do the same is a potential solution,’ White said. Clearly many parents are doing this. Children’s Mutual which has 20% of the three million CTF market reports that over half of all CTFs opened receive top-up payments from friends and family. Engage Mutual, also a big provider of CTFs, reports a similar savings habit developing. January is the most popular month of the year for parents to open Child Trust Fund (CTF) accounts – possibly as parents seek to find a home for cash Christmas present given to children. Of CTFs opened with Engage Mutual almost 12% were opened in January, far more than the monthly average for the rest of the year. The number of parents opening a CTF in November is almost half the January figure. Despite January being the most popular month to open a CTF it came middle of the league in terms of the proportion of CTFs opened with regular monthly top-ups. The highest proportion of CTFs with savings paid by a direct debit was opened in June. The most popular month for one-off payments was March, when many workers receive bonuses at the end of the financial year. Overall the amount of people topping up children’s CTFs in 2007 increased by 40% from 2006, showing that the appetite for saving for the nation’s children is growing.

Friends Provident rises on Flowers bid speculation

21-01-2008

Friends Provident’s share price rose this morning following the revelation that private equity giant JC Flowers has been building a stake below the disclosure limit.

Its shares were up 2.1% to 155.7p at 10.03am after it was revealed that JC Flowers was contemplating a £4 billion bid for the beleaguered financial institution. JC Flowers already owns almost 2% of the firm according to the FT, and is now considering whether to increase its position or launch a takeover offer, with the firm reportedly prepared to pay around 175p per share. With rumours of a takeover rife, it is also understood that Friends Provident made a move to poach Standard Life’s chief executive of financial services, Trevor Matthews, and install him as its own chief executive following the departure of Philip Moore. However, it is believed Matthews has chosen to reject the offer, opting to stay put at the insurance giant. Friends Provident declined to comment about either the approach to Matthews or the move by JC Flowers to increase its stake in the firm. It is currently undergoing its strategic review, with an announcement about the company's plans going forward expected at the end of the month. Standard Life also declined to comment on the approach for Matthews.

Mortgage brokers fight for commissions in RDR

21-01-2008

The Intermediary Mortgage Lenders Association is repeating its opposition to the Financial Services Authority’s (FSA) Retail Distribution Review by calling for an assessment of its potential effects on the UK mortgage market.

The association labels the wide-ranging proposals ‘market change by stealth’ which could ‘seriously damage’ the distribution of mortgages, some 70% of which are now channelled through intermediaries. While the RDR is primarily aimed at investment intermediaries, since mortgages came under the FSA’s regulatory umbrella in 2004, there are fears that regulators will ‘read across’ and impose the unwanted changes on the distribution of mortgage products. One criticism of the RDR proposals is that the changes would create several different kinds of advisers ranging from those who can give only generic advice and direct salespeople, to totally independent, impartial, fee-charging IFAs, but with other categories in between. The fear is that consumers, who have only recently begun to understand the value and importance of independent advice, will become confused by the proliferation of different types of advisers. IMLA warns that the potential for regulatory creep is huge and creates an environment of uncertainty as to the future shape and structure of the mortgage market. ‘With respect to the mortgage market, we totally disagree with the FSA’s assessment that commission-based sales lead to bias in the advice provided by intermediaries and lack credibility in the eyes of the consumer,’ commented Peter Williams, executive director of IMLA. Williams says that commission is accepted and understood by consumers looking for a mortgage and that the important point is not how the intermediary is remunerated, but whether or not there has been a whole-of-market search to find the most appropriate product. There is considerable evidence that consumers prefer commission, provided it is disclosed, rather than finding the cash to pay fees. Williams rejects the criticism that commission leads to ‘churn’ with intermediaries encouraging homebuyers to switch lenders. ‘The reality of the mortgage market place is that churn is as much driven by the consumer’s desire to revisit the market to secure more favourable rates or products as by the broker’s desire to earn a commission.’ He maintains that current outcomes for consumers in the mortgage market are generally very favourable. ‘In short there is no major problem to fix,’ Williams said. The RDR proposals also raise the spectre of different regulatory and disclosure regimes for investments and mortgages, even though in many cases the same IFA firms and the same providers conduct both categories of business. Williams points out that 58% of IFAs also handle mortgage business, and over 3,000 directly authorised firms can give investment and mortgage advice. ‘Whether wittingly or unwittingly, the FSA is setting out on a course of divide and rule within financial services,’ Williams said. ‘IMLA believes that having the two types of business differently regulated would be highly undesirable for consumers and costly for brokers.’ IMLA calls on the FSA to reconsider its position. ‘Given the current conditions in the mortgage market and the considerable uncertainties that exist, we are convinced that wholesale replacement of the existing commission-based system could be disastrous,’ Williams warns. ‘While recognising that some reform may be appropriate, we do not accept that the present system is broken.’