BUILDING SOCIETY OPERATIONS

ASSIGNMENT 3

 

 

QUESTION 1

 

PART A

 

ALLTOWNS BUILDING SOCIETY

Board Meeting 01 September 2002

Discussion Report about the merger with an overseas banking organization

 

This report aims at presenting the major advantages and disadvantages of a merger with such an institution in respect of customers and the organization including its managers and staff.

 

Advantages to customers

Mutuality is considered to be an outdated concept. Also a wider economic system will result in more competitive prices. They will be entitled to receive free shares and enjoy a wider range of products. Furthermore the profit motive can drive performance and efficiency.

 

Disadvantages to customers

Loss of mutuality means that external shareholders have to be remunerated, which results in less value for customers. Some members will loose out on “free shares” due to cut off time. Furthermore the overseas institution may not care for the needs of customers in the UK.

 

Advantages to the organization

Conversion will free the society from the restrictions of the Acts. The institution will be able to follow a wider corporate role and take advantage of a bigger financial group, with opportunities of increase in customers and cross-selling.

 

Disadvantages to the organization

The new stance may conflict with an existing public commitment to mutuality, creating credibility problems. It has to be investigated whether it is the right time for conversion. Independence and the advantage of offering competitive traditional building society services will be lost.

 

Advantages to managers and staff

Better career prospects may arise as well as better employment opportunities and an increase in mobility between various departments. There are also financial benefits from the share allocation.

 

Disadvantages to managers and staff

Some jobs maybe threatened and the staff may be considered as second class in the new environment. Furthermore there will have to face up heavy workloads due to the change and the new employment package may not be as appealing.

 

As a result, advantages and disadvantages should be weighted very carefully before taking a final decision.

 

Planning Director

01 September 2002

 

PART B

 

The Consumer Credit Act 1974 has the following effect on:

 

Mortgage Lending on the security of residential homes:

The Act covers loans up to £25,000. Loans for house purchase are exempt unless the home improvement loan is made by a second mortgagee, who is different from the original lender or the home improvement loan is made on a property which is mortgage free. The Act affects only loans to personal borrowers.

 

Other types of lending business

 

In respect of other lending, the following must be considered:

·        Quotations must fulfill specified minimum criteria.

·        The lender must issue a duplicate offer followed by a cooling off period

·        A second cooling off period may be applied

·        The lender must quote the annual percentage rate (APR)

·        There are procedures for the lender to follow to recover a loan on default.

·        Matters like credit tokens and modifying agreements.

 

[484 words]

QUESTION 2

 

PART A

With the tied arrangements, banks and building societies have several advantages. Firstly, they can benefit from the customers of the assurance company, by cross selling. It is cheaper than establishing their wholly owned assurance company and better commissions can be agreed between them. For the assurance company it is beneficial because it can gain more customers from the bank or building society exclusively with less administration costs.

 

PART B

The establishment of wholly-owned assurance companies by many banks and building societies is beneficial. Basically they are trying to achieve the bancassurance concept, meaning that financial services should be provided as a “ one stop shop”.  In this way, they can  retain their existing customers much easier and increase their business by cross-selling. On the other hand, the initial costs are very high and they do not have the experience of their competitors in the field.  They will need to train their staff, adapt to change and use effective marketing techniques to promote their services.

[168 words]

 

 

QUESTION 3

 

PART A - The effects of establishing a call centre operation for mortgages

Operational Performance

A call centre incurs high set up costs due to new technology, training and implementation but in the long run it should be more cost-effective. It is more beneficial for national organizations rather than regional.

Risk factors

Many existing customers may refuse to switch to the new facility and the new customers may not be enough to overweight the costs. 

Legal and technical matters

Matters to be considered are obligations under the Mortgage Code and Data Protection Act 1984, several procedures and IT systems, prevention of money laundering.

 

PART B – Introducing a secured car loan product for existing mortgagors

Operational Performance

It provides a very good incentive for customers, thereby it will help to attract existing mortgage customers as well as new customers who will have at least two benefits.

 

 

Risk factors

It is riskier for the business because the possibility of default increases. Further credit scoring should be performed to assess the new financial condition of customers under two loans instead of one.

Legal and technical matters

Factors to be considered are the Consumer Credit Act 1974, underwriting processes, lending policy rules, targeting the appropriate market segments, etc.

 

PART C – Collaborating with other regional building societies to form a captive insurance company for the sole purpose of underwriting mortgage indemnity guarantees.

 

Operational Performance

The formation of an MIG company helps the society to eliminate the restrictions imposed by an external insurance and have more control on its own policy and products.

Risk factors

MIG business is risky. Losses are very high at times when the housing market and general economic conditions turn against lenders and borrowers.

Legal and technical matters

A society is empowered to set up an MIG but under the permission of Building Society Commission and being under the limit of 75% residential lending.

[314 words]

 

QUESTION 4

 

PART A

The services available through an estate agent

·        Sale of residential mortgage

·        Sale of land

·        Valuations

·        Surveys

·        Letting property

·        Collecting rents

 

Organizations entered the estate agency because it seems to be a profitable area and the first step that customers take when they want to buy a house. It does not require many skills and due to increased competition, when the first organization entered into this field successfully, the others had to follow inevitably.

Withdrawals have occurred because initial set up costs are very high and business was not as high as expected, with not many cross-selling opportunities.

 

PART B

Branch Networks

Advantages

·        More personal approach

·        Opportunities of cross-selling

·        Many customers prefer it since it is the traditional way they consider safer

Disadvantages

·        Very high set-up and running costs

·        Location problems-there are not branches everywhere

·        Problems when branch location changes

 

 

Direct Mail

Advantages

·        Cheaper than other distribution channels

·        Can be directed to the segments most interested

·        Can be read by the customer at any time

Disadvantages

·        No personal contact with customer

·        May considered as junk mail

·        Success rate may be very low

 

Telebanking

Advantages

·        Direct talk with the customer

·        Investigate customer needs

·        Opportunity of cross-selling

·        Modern Image

·        More convenient

Disadvantages

·        Cannot access cash

·        Security considerations

·        Lack of confidence by the customers

 

Electronic Methods

Advantages

·        Available everywhere and any time

·        Lower operating costs

·        More accurate, mo mistakes

Disadvantages

·        Technology may fail

·        High initial set-up costs

·        Need to keep up with technology

 

 

[275 words]

 

QUESTION 5

 

PART A

The regulatory regime introduced by the Financial Services Act 1986 went a considerable way towards meeting its main objection, there was a growing feeling through the 1990s that the overall structure was still fragmented for in the increasingly integrated world of financial services in the UK. For example, many of the large banking groups were regulated by a number of different organizations, including the Bank of England and all the self-regulatory organizations. This led at times to confusion as to where the regulatory responsibility lay. The collapse of Barings Bank in 1992 highlighted many of the anomalies, with the roles of Bank of England and SFA being criticized.

 

PART B

Under the Financial Services and Markets Act 2000, financial services are under one umbrella, the Financial Services Authority. This makes the financial services industry more uniform and fair. With the new risk based approach of the FSA, risks can be identified before they occur, following a proactive approach rather than a reactive one. The Bank of England, and more precisely the Monetary Policy Committee, is responsible for setting interest rates in order to deliver price stability.

 

PART C

The financial services environment is changing rapidly, moving fastly towards deregulation. Mortgage Lending is expected to be covered by the FSMA as at September 2002. The one umbrella regulation is more efficient so financial business not covered by the Act, is expected to move under one umbrella. Globalisation of financial services market needs to be considered. A lot of regulation already comes from Brussels and Basle. Leading companies are run globally so regulation needs to consider the global changes rather than focusing on market changes and needs in the UK as a closed system.

 

[286 words]

 

[TOTAL: 1537 words]