Posted by Bradley in : consumers , comments closed
The House of Lords today interpreted the Consumer Credit Act 1974 in OFT v Lloyds TSB to the effect that issuers of credit cards to customers in the UK are liable under s 75(1) in respect of misrepresentations and breaches of contract by suppliers in relation to transactions financed by a credit agreement which take place and are performed outside the UK and are subject to foreign law. Lord Mance's judgment, with which the other Law Lords concurred, points out that arrangements for credit card usage have changed since 1974 so that the decision means that credit card issuers have potential liability in respect of the actions of suppliers who just happen to be part of a credit card network. The Law Lords' decision is consciously protective of consumers on the basis that the intention of the statute was to protect consumers. For example, Lord Mance states:
In relation to overseas transactions, there would be likely to be an even greater discrepancy between the card holder's ability to pursue suppliers on the one hand and the ease with which card issuers could obtain redress through the contractual and commercial ties which Crowther contemplated would link them and suppliers. Card issuers' ability to bear irrecoverable losses and so "spread the burden" exists in relation to both overseas and domestic transactions.
In relation to the card issuers' difficulties he says:
That, in today's market, arrangements between card issuers and overseas suppliers under schemes such as VISA and MasterCard are indirect (rather than pursuant to a direct contract as is still the case with American Express and Diners Club) is a consequence of the way in which the VISA and MasterCard networks have developed and operate. Likewise, the fact that the rules of these networks give card issuers no direct choice as to the suppliers in relation to whom their cards will be used. The choice of suppliers is, in effect, delegated to the merchant acquirers in each country in which these networks operate, and provision is made, as one would expect, to ensure and monitor the reliability of such suppliers in the interests of all network members. That network rules may not provide all the protections that they might, eg by way of indemnity and/or jurisdiction agreements, is neither here nor there. They could in theory do so, and it is apparent that there are some differences in this respect between different networks. The Crowther Report and 1974 Act proceed on the basis of a relatively simple model which contemplated that card issuers would have direct control of such matters. A more sophisticated worldwide network, like VISA or MasterCard, offers both card issuers and card holders considerable countervailing benefits. Card issuers make a choice, commercially inevitable though it may have become, to join one of these networks, for better or worse.
Posted by Bradley in : audit , comments closed
The EU Commission has published a report which it commissioned from Oxera, a consulting firm, on the relationship between rules on ownership of audit firms and competition in the market for audit services. The Commission's press release describes the report's conclusions as follows:
-The audit market for major listed companies is dominated by the Big Four audit firms. For the smaller audit firms, important investments might be necessary over years in order to expand and to enter the international audit market.
- Analysis of an investment model developed to assess such potential expansion plans indicates that an audit firm owned by external investors, instead of auditors, might take more easily the decision to expand into the market of large audits. One of the reasons is that existing ownership structures may be estimated to increase audit firms' cost of raising capital by perhaps as much as 10%.
- Nevertheless, restrictions on access to capital appear to represent only one of several potential barriers to entry. There are other barriers which also play an important role: reputation, the need for international coverage, international management structures, and liability risk. The impact of liability risk on the cost of capital can be significant and may lead to capital rationing.
- There may also be good reasons for audit firms to stick to their current structures: for example, to retain their human capital. From the regulatory point of view, existing ownership structures have been justified by the necessity to protect independence of audit firms. However, the analysis of the decision-making processes in large audit firms indicates that alternative ownership structures are unlikely to impair auditor independence in practice. Specific conflicts of interest could be dealt with through the establishment of appropriate safeguards.
We already know that we should not try to regulate crises out of existence: that would be like trying to ban earthquakes. But the weaknesses in our infrastructure that have been exposed need to be addressed. We need to make sure that the regulatory infrastructure is strong enough and simple enough to handle crises in a globalized world...
...Perhaps most importantly, the crisis reveals the range and the risks of financial globalization. Those at risk are not just loan originators in the United States, but banks in Germany and the United Kingdom, borrowers in eastern Europe, and ultimately exporters in Asia and Africa. This points to the vital importance of multilateral cooperation on financial market issues. It is possible for a few countries to get together and come up with regulatory changes, but they are unlikely to come up with the best global solution, because they do not represent all of those affected. And without the participation and ownership of all countries who have to implement it, translating even the best-designed proposal into reality will be a very difficult task.
The democratic challenge, which becomes ever more complex as the scale of human interactions increases, is to mimic the governance system of the small hominid troop. We need a state that rewards us for cooperating and punishes us for cheating and stealing. At the same time, we must ensure that the state is also treated like a member of the hominid clan and punished when it acts against the common good. Human welfare, just as it was a million years ago, is guaranteed only by mutual scrutiny and regulation.
..the IIF’s Board of Directors is launching a major initiative to refine best practices for market participants. Our Board brings together leaders of some of the largest financial institutions from across the globe who are committed to this initiative.
The Board is establishing a committee to produce recommendations by the Spring of 2008 that reflect the views of leaders of our industry and that can enjoy strong support from financial services firms across the world and that complement efforts underway by the official community.
The committee's agenda will concern a variety of key aspects of important issues, including those relating to structured products, comprising:
* Risk management, credit underwriting practices, and pricing of risks;
* Conduits and the contingent liquidity risks that firms have been exposed to by using off-balance sheet instruments;
* Valuation questions, especially where markets are thin or absent;
* Ratings – interpreting and evaluating them; and,
* Transparency, disclosure and communications to define appropriate standards.
Posted by Bradley in : financial education , comments closed
Today is Get Smart about Credit Day. The American Bankers Association and the US Treasury teamed up to provide financial education together:
U.S. Treasury Department officials and bankers across the country will team up Thursday to promote wise credit habits for U.S. teens as part of the American Bankers Association Education Foundation's annual Get Smart About Credit Day. Students will participate in lessons on the responsible use of credit and the importance of a positive credit history, as Treasury officials and staff travel to schools nationwide to teach classes with local bankers.
Posted by Bradley in : markets , comments closed
In the US, and encouraged by the Treasury,banks have agreed to provide liquidity in the market for asset backed commercial paper:
Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM) and several other financial institutions have reached an agreement in principle to create a single master liquidity enhancement conduit ("M-LEC"). Once established, M-LEC will agree, for a set period of time, to purchase qualifying highly-rated assets from certain existing SIVs that choose, in their sole discretion, to take advantage of this new source of liquidity. Access to such liquidity is intended to allow participating sellers to meet pending redemptions and facilitate asset-backed commercial paper rollovers.