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Mutuality is considered to be an outdated concept.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
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
·
·
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
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
[286 words]
[TOTAL: 1537 words]