The FT reports this morning that:
Bankers are sounding the alarm over interest-free credit cards, warning they are a “ticking time bomb” that could lead to the kind of revenue scandal that hit supermarket Tesco.
Lenders that offer zero per cent balance transfer cards book upfront some of the revenue that they expect to gain once a customer ends the interest-free period and starts paying a high rate.
But several bank chief executives and analysts have told the Financial Times that the practice is extremely risky as it is based on the assumption that customers will still have the debt on the card when the deal ends and start to pay a high interest rate.
At the heart of this is something simple: it is imprudent accounting.
As a young man training to be an accountant I learned that I was to be prudent on all occasions. Profits were never to be anticipated. And the exact opposite was the case with losses, which should be anticipated whenever there was a chance that they might arise.
The accounting for banks shows just how far in the other (wrong) direction accounting has moved since then. Losses are not recognised now until they are 'realised', which means they have been proved to exist by the failure to pay. This is why bank profits were over-stated before the 2008 crash. Anticipation had disappeared from loss accounting when once it was ever-present.
And as the above-noted accounting for credit card profits that might never arise demonstrates, profits are now anticipated.
There were reasons for prudent accounting.
First it made directors face the reality of their actions when it came to losses.
Second, it prevented directors making up profits for their own gain.
Third, it protected creditors by ensuring that capital was never overstated and the true level of risk that creditors faced was known to them.
Fourth, it encouraged a culture of respect for the responsibilities owed to others that should be at the heart of corporate governnance, but is not now.
All these safeguards have been abandoned by an accounting profession that has abandoned its belief in public duty and which has subjugated itself to the wish of its corporate clients.
Who pays the price? Creditors do. And who are the creditors of the banks? There are three of significance.
The first is anyone with a bank account that is in credit: that's what the credit means.
Second, it's us who has to bail them out when everything goes wrong.
And third, that's the government, with spillover effects we've all noted since 2008.
So please don't think reckless accounting is cost-free. You pay the price for it.
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Nothing it seems has been changed then since Enron, or Barings or BCCI.
This is not banking or accounting is it?
It’s speculation.
A more accurately:- betting.
So this Government tells the people that benefits are the problem, or that too many council houses are under used to divert their attention away from the fact that the Tories allow this sort of stuff to go on right under their noses.
The FT seems to be behind a rather expensive pay wall. Anyone know of a cheap way to access material?
Do you still have access through a university library?
You’ll need someone in the uni IT dept to setup a VPN (virtual private network) for you.
There is a free way:
Put the headline into a google search, then click the link to the article from the search results.
The FT want the traffic from search engines whom they think are potential new subscribers so let you in for free.
Direct links to FT articles are confronted by a paywall as they’ve already got your attention.
To be fair to the Tories (ouch, that hurt!) the Blair/Brown governments had a similar policy towards the financial industry. Something that their apologists never mention. And to be fair to them (which hurts a bit less), the sea change in accounting and banking which you describe goes right back to the Thatcher/Regan era
I accept that
But the impact is growing and so is the awareness of it so now there is no excuse for not demanding change
Excellent and trenchant argument. The economics profession, and especially economic forecasting took a battering for its general failure to see the 2007-8 Crash coming. At least there has been some post-crash professional agonising, and even some reconsideration of received economics wisdom.
It was remarkable that the accountancy profession appeared successfully to avoid the same criticisms as the economists for their contribution to the Credit Crunch disaster, and go on today, much as if nothing needed attention; although the profession would presumably acknowledge that generally it is responsible for corporate score-keeping (and has been throughout ‘modern’ times). Actually, I do not think it would acknowledge this; candidly I am not sure what the profession is responsible for; if anything (which may be its ingenious purpose).
It does not seem to me that either the economists or accountants, say over the last ten years, have given sufficient attention to providing professional advice on the best solutions to politicians and public alike, to fix the regulatory problems exposed by the Credit Crunch. It is at least surprising to me that they do not have much more to say on the detailed regulatory apparatus that establishes the framework for their professional output (especially from the perspective and interests of the public, as the professions’ public status rests on an assumed public trust in the professions).
I am reminded of the wisdom of the ancients; Juvenal to be precise:
Quis custodiet ipsos custodes?
Who indeed?
A decent and wholly independent regulator would be a start
Some decent academics willing to ask awkward questions would also help no end
“Decent and wholly independent” regulation has always been a fundamental ‘sine qua non’ for the operation of a genuine “free market”. The problem in Britain is that Regulators in Britain have always ended their hapless existences as the creatures of the industry they regulate. We have Form and this proposition is not new, but well established. There are numerous examples that could be given; not least, but famously the unlamented Department of Agriculture and Fisheries. I will not waste your time listing the inadequacies of financial regulation; or the risible reliance, and political support given to “self-regulation”; even in banking – of recent embarassing memory. I could go on endlessly.
The problem in Britain is quite deep (the Americans at least understand the principle at stake – for them to ensure a genuine market, whatever the executional failures); we, however have a serious ‘cultural’ problem with genuinely independent regulation, and I can say this because the British performance on establishing genuine, independent Regulators is, frankly, abject.
Agreed, emtirely
Who will guard the custard?
To be sure, a conundrum which has haunted me since youth.
Eh, I think the custard pie is safe; and we have the slapstic regulation already.
It all started to go wrong in 1694 when Queen Mary was persuaded by her Dutch husband and William Patterson to allow a Bank of England. Had she listened to her cousin, Archbishop of Dublin Francis Marsh a great deal of trouble then and since might have been avoided.
I have to admit, I took advantage of one of these no-interest credit cards last year to help finish off furnishing my new extension. 27 months interest free on new purchases and I’ve treated it as an interest-free loan. I’ve a standing order paying it off in increments and it will be gone by Christmas, at which point I’ll cut up the card. This is something which has obviously caught the bank’s attention as the credit limit has more than doubled in an attempt to get me to borrow more! Of course, I’d imagine many of the people tempted by these ‘deals’ have rather less stable finances than myself, and this might be what comes back to bite the banks.
It says a lot about modern day banking that my Post Office branded credit card is actually operated by the Bank of Ireland which only exists because of a bailout by the Irish taxpayer. I wonder if these taxpayers are aware of the speculative lending which is still going on?
Ditto – Just done the same to finish my extension after my builder went bust – Seems he owed HMRC rather a lot of VAT. It will be paid off well before interest starts.
But of course many peope are not as disciplined and end up payig the interest but it does not make sense to recognise that potential profit before it actually arises! And there must be a risk that some will over extend themselves through tehese offers and end up not being able to pay the credit card off, so there will be write offs … Well that of course has never happened before.
Interest free borrowing on credit card balances that are transferred is hardly a new idea.
I remember numerous card issuers offering the same back in 1997. BarclayCard went a step further and took 5% off the balance you transferred if you took one of their cards. One of the people in the office I was working in at the time managed to keep funds interest free, transfer them to BarclayCard who took off 5%, transfer them to another credit card company interest free before convincing BarclayCard to give him another card and which point they took off another 2% to encourage him!
But my expenditure wasn’t a balance transfer – it was new spending. Offering 27 months interest free on anything I purchase on the card up to that end date. Heck, since they’ve doubled my limit, I could go out and spend another 5 grand on something now and not have to pay it off for the best part 16 months! The BoI will lose a fair amount from the card deal with me, I’d imagine.