Consumers’ faith in the spending situation also deteriorated during July with the Spending Index decreasing by three points. At 93 this index now stands only slightly above its long-run average of 91.2 points.

The Present Situation Index remained unchanged during the month and continues to struggle to recover from its all-time low of 16 points seen in July 2009.

In line with recent house price figures, consumers expressed a more guarded optimism towards the housing market in July. Consumers now expect the value of their home to increase by just 0.4% over the next six months – a decrease of three tenths of a percentage point from June’s figure

Martin Gahbauer, Nationwide’s chief economist, said:

“Consumers continued to show caution towards the strength of the economic recovery during July. The index has now seen three consecutive months of decline and this has largely been fuelled by uncertainty as to what the next six months hold. In particular, there appears to be a growing concern among consumers as to their level of disposable income in the months ahead.

“July will have been a time for many consumers to reassess their individual circumstances following the Chancellor’s emergency Budget, and inflationary pressures, such as rising food and fuel costs, may now be leading to more negative sentiment among consumers as they start to feel the pinch on their spending power.

Consumers concerned about what the future holds

“Over the previous few months we have seen a general downward trend in confidence that could be linked to the general election and consumer perceptions surrounding the impact of post-election policy changes.

“Expectations for the future have been a key driver behind the fall in overall confidence, with a lack of confidence in the future economic and employment situation forcing the index down. Since reaching a historical high of 120 points in February, the Expectations Index has now recorded a total drop of 44 points in the past five months, bringing it well below the long-run average of 92.1 for this measure.

“The number of consumers who believe their household income will be lower in six months’ time has edged up since February, and in July reached its highest level since the index began in May 2004. This is perhaps largely a product of consumers taking stock of their personal situation following the emergency Budget, although fears over the state of the job market and economy as a whole are still playing a part as the UK continues on its sluggish path to recovery.

Sustained low base rate will be welcome news for many consumers

“The fall out from the emergency Budget, concerns over the direction of the housing market and concerns over the rate of inflation are still very real. However, the Bank of England’s decision this month to hold base rate at 0.5% for the eighteenth month running will be welcome news for many consumers who will continue to benefit from the positive impact that low mortgage repayments are having on their disposable income.

“It remains unlikely that we will see an increase to base rate before the end of this year. Nonetheless, with inflation remaining above the Government’s 3% upper limit, it is possible that we could see base rate start to slowly increase over the course of 2011 as the Bank of England looks to head off the risks that high inflation can have to the recovery. Any increase in interest rates would represent an additional squeeze on disposable incomes.”

Mortgage fraud accounted for over half of all fraud committed against the financial sector in this period.

One of the biggest cases was worth £50 million, involving two solicitors who were charged with commercial mortgage fraud in relation to obtaining a money transfer by deception and dishonesty, while an estate agent was jailed for six years after attempting to pull off a £2 million mortgage fraud after stealing the identities of two homeowners.

Hitesh Patel, Partner, KPMG Forensic commented on the figures:

“The fact that increasing amounts of mortgage fraud are being prosecuted is cold comfort for the financial services industry. Clearly, more of it is coming to light and more will follow. It is highly probable that the issue is far bigger than our figures demonstrate.

“This is a legacy issue for the banks from the pre-recession boom years when house prices inflated, providing the opportunity for fraud.  Banks will be hoping that they have uncovered most of their fraudulent loans.  But the trend remains upwards and it could be some time before we see the peak.”

Overall, the Fraud Barometer, which considers serious cases of fraud with charges in excess of £100,000 in the UK courts, found 166 cases of serious fraud in the first half of this year – the highest number of cases in a six month period in the Barometer’s 22 year history.

The cases had a total value of £608.5 million – down 4.3 per cent for the same six month period in 2009 (£636.5 million).

However, the 2009 figures were inflated by one case worth £200 million on its own, whereas in this period the biggest case was worth £66 million, meaning that without this outlier the average value per case has risen.

Management wreak fraud havoc

Managers in companies inflicted far greater fraud damage than their employees, KPMG’s figures show. Though there were more employee cases than management ones (47 compared to 32), management frauds had a far greater value, at £135 million compared to £45 million.

At an average value of over £4 million per case compared to £1 million per employee case, managers are clearly able to carry out larger frauds due to their positions of greater authority and the trust they are afforded.    

One example was of a Birmingham finance boss who manipulated the profits of a steel supply firm to ensure a bonus by falsifying the company’s accounting records. He spent over £100,000 at a local lap dancing club, and by doing so 11 redundancies had to be made at the firm, which was nearly bought to its knees as a result of his actions.

Professional criminals remain public enemy number one

Professional criminals perpetrated the most fraud during the period – 56 cases were reported at a value of £391 million, over half the total amount included in the Barometer. Often, professional criminals are targeting investors.

21 such cases totalling £185 million were recorded in the first six months of 2010. Financial institutions were also widely targeted in 48 cases worth £172 million.

‘Boiler room’ schemes are also a favourite scam for many professional fraudsters. Typically they involve firms operating from outside the UK where they try and persuade investors to part with money for shares that are worthless and impossible to sell-on, often at inflated prices.

Vulnerable individuals are targeted which may make their often difficult situation even worse. The Barometer recorded five cases of boiler room fraud, totalling £84 million over the six month period.

Hitesh Patel comments:

“While interest rates remain low, it unsurprising that investors who are looking for new ways to grow their capital, remain susceptible to being targeted by fraudsters. At the same time, professional criminals show themselves to be highly adaptable and always looking for new scams.

“As soon as one avenue is blocked, they will move on to another one.  That is why it is important for investors to remain continually vigilant.”

Government departments targeted by fraudsters

Government was targeted in 38 cases worth £178 million: a number of government frauds were tax scams involving benefits, VAT, or carousel fraud, as Hitesh Patel comments:

“At a time when the country has a huge deficit, it’s clear that government needs to do all it can to protect itself from fraud and claw back lost funds.

“It becomes a problem that affects us all.  Contrary to popular perception, fraud is not a victimless crime, particularly at a time when social welfare and infrastructure budgets need to be carefully protected.  Any losses to fraud are losses from those budgets.”

London and the South East – fraud hotspot

Regionally, London and the South East remains the biggest hotspot for fraudsters – the region accounts for over half of the total cases (88), which equates to a staggering 81 per cent (£493 million) by value. The North East is its nearest rival, with 26 cases reported at a value of £43 million.

Turning risk to advantage

Finally, the Fraud Barometer demonstrates the importance of ensuring that companies have mechanisms to prevent fraud and detect misconduct effectively.

Hitesh Patel concludes:

“Companies who took fraud risk management seriously before the downturn should now be emerging stronger because of it.

“The discipline that they have subjected their businesses to should help them gain a competitive advantage while their competitors get distracted in their reactive combat against fraud and misconduct as the economy recovers.”

Some of the key proposals include:

- Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;

- Requiring verification of borrowers’ income in every case to prevent over inflation of income and to prevent mortgage fraud;

- Extra protection for vulnerable customers with a credit-impaired history.

The tough new proposals, published in the consultation paper, form part of a major review by the FSA into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.

The FSA found that:

- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;

- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;

- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;

- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;

- Borrowers with a credit-impaired history are particularly vulnerable.

Lesley Titcomb, FSA director responsible for the mortgage market, said:

“There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.  

“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”

Today’s report also includes the key findings from the FSA’s review into arrears charges, which indicated significant variation in the level of arrears fees across the market.  

The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.

The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.

Payplan, the free debt advice provider, has welcomed the FSA’s latest changes to the way lenders should treat customers in arrears, particularly the requirement for lenders to consider all options for borrowers before taking action for possession of the property.

According to Managing Director, John Fairhurst, most Payplan clients with mortgage arrears also have a range of unsecured debts (typically of around £40,000).  

He said:

 “In our experience, mortgage arrears need to be dealt within the context of the overall financial situation that the customer finds himself.

“In trials where we are working with a small number of mortgage lenders to talk to their clients who are in arrears, we have found that by engaging the customer about the totality of their debt situation we are nearly always better able to effect a solution that stabilises and makes the client’s repayments on his unsecured debt more manageable, leaving a greater proportion of available income to put towards improving the mortgage arrears situation.

“Without having to run the risk of giving advice, lenders adopting a more holistic approach to their customers’ arrears problems, can turn the FSA’s new rules to their own advantage put more customers back on the straight and narrow and fulfil their obligations under TCF.

“Rather than being an extra burden, lenders should see the FSA’s requirements to consider all options for clients in debt as an opportunity to help tackle underlying unsecured debt liabilities at source and thereby free up more disposable income for repayment of mortgage arrears.”

CML director general Michael Coogan said:

“There will always be a regulatory trade-off between protecting consumers from over-borrowing, and increasing the barriers to home-ownership. The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending.

“The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future.

“We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side-effects that may arise from well-intentioned regulation.

“There is also a need to manage the regulatory burden that may emerge if the UK proceeds with changes just at the time that the European Commission is also due to publish proposals on the same aspects of mortgage regulation.”

“The amendments to the Capital Requirements Directive voted today by the European Parliament target the investments and practices that lie at the root of the recent crisis.

“The requirements on pay and bonuses send a strong political message: there will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks. Banks will need to change radically their practices and the mentality that have led in many cases to excessive risk-taking and contributed to the financial crisis.

The tougher capital requirements for banks’ trading books and their investments in securitisations – the kind of highly complex products that have caused huge losses for banks – will ensure that banks hold significantly more capital to cover their risks. This will make the sector as whole better able to resist stress.”

Remuneration

With regard to remuneration, the Capital Requirements Directive (CRD) primarily aims at giving effect at EU level to the Financial Stability Board (FSB) principles and standards on compensation agreed by G20 leaders. The Directive will require credit institutions and investment firms to have remuneration policies that are consistent with effective risk management.

The Directive pursues three objectives:

- To impose a binding obligation on credit institutions and investment firms to have remuneration policies and practices that are consistent with and promote sound and effective risk management, accompanied by high level principles on sound remuneration;

- To bring remuneration policies within the scope of the supervisory review under the CRD, so that supervisors would be able to require the firm to take measures to rectify any problems that they might identify;

- To ensure that supervisors may also impose financial or non-financial penalties (including fines) against firms that fail to comply with the obligation.

The new rules on remuneration can apply as early as 1 January 2011 with principles on remuneration applying to all variable remuneration payable on or after this date, including when it was awarded in 2010.

Capital Requirements for trading book and securitisations

The Capital Requirements Directive will strengthen banks’ capital position and increase market confidence through reform of the capital rules for the trading book and for securitisations:

- Capital requirements for the trading book: The trading book consists of financial instruments that a bank holds with the intention of re-selling them in the short term, or in order to hedge other instruments in the trading book. The new rules reform the way that banks assess the risks connected with their trading books to ensure that the assessment takes full account of the potential losses in the kind of stressed conditions experienced during the recent crisis. These revised rules will substantially increase levels of capital held against the trading book.

- Capital requirements for complex securitisations: Complex securitisations played a role in the development of the financial crisis, when banks incurred unexpectedly high losses in such instruments. The new rules impose higher capital requirements for re-securitisations, to reflect properly the very considerable losses that banks holding complex securitisations can be exposed to in certain circumstances.

- Disclosure of securitisation exposures: The new rules will reinforce disclosure requirements to ensure adequate disclosure of the risks to which banks are exposed through their securitisation positions. Proper disclosure of the level of risks to which banks are exposed is necessary for market confidence.

The new rules on trading book and securitisations can apply as early as 31 December 2011.

Savers investing the average amount nine months ago would have received £1,209 in interest, compared to just £978 today.

Michelle Slade, Spokesperson for Moneyfacts.co.uk, commented:

“Providers are focused on mortgage lending and as they strive to attract new business by reducing mortgage rates, they are in turn cutting savings rates to balance the books.

“Uncertainty over when bank base rate will rise means most savers are only taking a short term view, but they are being punished by the biggest reductions in rates.

“At 2.62%, the average rate on a one year bond stands at an all time low.

“Prudent savers who rely on the interest from their savings to supplement their income continue to be hit the hardest.

“Inflation also continues to take its toll on savers and is effectively depreciating the value of savers’ capital.

“Savers hoping for incentives from last month’s Budget were left bitterly disappointed and many continue to feel their needs have been forgotten during the credit crisis.

“With a change in bank base rate still predicted to be a little way off, the situation for savers is likely to get worse before it gets better.

“To limit the effects of falling rates, savers need to review their portfolio regularly to ensure they are receiving competitive rates.”

The Budget saw Chancellor Osborne follow through on his commitment to cut the public sector deficit more quickly, with £32 billon of spending cuts and £8 billion of net tax rises announced.

The Office for Budget Responsibility downwardly revised its pre‐Budget forecast for growth in 2011 from 2.6% to 2.3% but we think this and the years following could still be too strong.

The OBR expects consumer spending to grow by 1.3% and 1.7% in 2011 and 2012 respectively. At a time when we expect unemployment to still be rising, real disposable income growth to be weak and bank lending to remain constrained, this seems too strong.

Furthermore, a strong bounce back in private sector investment is expected, but we think investment will recover more slowly in the aftermath of the financial crisis due to constraints in lending. Finally, the sluggish recovery in the eurozone, the United Kingdom’s main export market, will hinder the export‐led recovery.

If growth is lower than the OBR expects, public borrowing is likely to have been underestimated and further spending cuts and / or tax rises could be necessary.

However, we expect the fiscal tightening announced will result in lower long term interest rates as bond markets react positively to clearer plans for reducing the deficit. In addition, the Bank of England may respond to slower growth by keeping interest rates lower for longer.

Charles Davis, managing economist at cebr commented:

“We think the Office for Budget Responsibility’s projections for growth are still on the high side. We see a weaker consumer recovery and more risks to the export led recovery than the OBR.

“Although inflation has been above target in early 2010, the fiscal tightening means growth in demand will be weakened, so we expect the Bank of England to keep interest rates lower for longer, on hold at 0.5% into 2012.”

Douglas McWilliams, chief executive officer at cebr commented:

“Bond markets reacted positively to the Budget today and we think long term interest rates will fall back over the coming months. This is good news for households as mortgage rates should fall back. However, with another VAT rise to stomach households will probably be feeling overwhelmed by bad news.

“The danger is that there could be more bad news to come. If the Office for Budget Responsibility’s growth forecasts turn out to be too optimistic, as we expect, then more spending cuts and tax rises could be necessary.

“Coming out of the financial crisis, we expect growth to average of one and a half percent in the UK over the next three years, whereas the OBR is forecasting a two and a quarter percent growth. If growth is lower, it could mean around £10‐£20 billion more cuts could be required.”