Memorandum from Carmel Butler
CONSUMER AND TAX PAYER
"|Let us be clear that the reason for today's
injection is the lack of openness and honesty by the banks on
the amount of bad debts that they have on their books|"
JOHN McFALL MP
1. The banks have stated their case. They
say: the banking crisis ensued from bad borrowers to bad debts
to toxic assets to taxpayer support. The banks with their powerful
lobby, powerful public relations and easy access to the media
have framed the public debate. Consumers on the other hand do
not have such powerful infrastructure to effectively rebut the
bankers' defamatory accusations. This written evidence challenges
the bankers' version and endeavours to dispel the bankers' myths.
The chain of events is rooted in lenders' abuse of unfettered
power to impose unsustainable interest and charges on consumers
combined with their determination to avoid contributing to the
2. The evidence contained in this memorandum
is focused on two fundamental issues. Firstly, the consumer issues
that arise in the context of Special Purpose Vehicles ("SPVs")
that are incorporated as securitisation companies who issued the
infamous "toxic-assets"; and secondly, the taxpayer
heist at the hand of the SPV securitisations companies. The evidence
will illuminate the hitherto hidden truth that the tax payer is
supporting the profits of foreign owned companies incorporated
in tax havens and their private investors.
3. I am British Citizen resident in the
UK and a qualified lawyer admitted to practice in New York, U.S.A.
I have an LLB Laws from the London School of Economics and a JD
(Juris Doctor) from Columbia University, New York. I practiced
securities law at Sidley Austin LLP New York office from September
2006 to December 2007. Whilst at Sidley Austin I worked on various
Structured Finance transactions such as mortgage securitisations,
CDOs and various derivatives. I am also a consumer of a mortgage
product that has been securitised. Consequently, as both an ex-practitioner
of securitisations and a consumer subjected to a securitisation,
the intention is to focus on consumer issues that arise from mortgage
securitisations, its central causal role in the banking crisis
and its detrimental effect on the economy and public purse.
4. Six key submissions are evidenced in
Passing on the Interest Rate Cuts
(see paras. 5 to 13). Banks do not pass on the interest rate cuts
to borrowers because they do not have that power. That power is
vested in the SPV securitisation companies.
Openness and Honesty (see paras.
14 to 37). The Government has saved banks from the allegedly bad
debts on their books. But banks are unable to say the extent of
the bad debt problem. This is because, in truth, there are no
bad debts of any significance. Two sleights-of-hand are discussed
under the headings "the legal ruse" and "the auditor
ruse". Enlightenment of the combined effect of these manoeuvres
explains how the allegedly bad debts appear on the bankers books.
The FSA Regulatory Role (paras. 38
to 43). The Practitioners Panel have called for rigorous enforcement
of the FSA's MCOB rules. Consumers would concur with this principle.
The Fallacy of Financial Advice (see
paras. 44 to 52). The source of this issue is the mortgage originators'
failure to disclose material facts on the products sold to consumers.
The lenders' concealments render independent financial advice
a nullity and an academic exercise.
The Rule of LawRepossession
or Dispossession? (paras. 53 to 78). The Financial Services Practitioner
Panel calls for the faithful application of the rule of law with
respect to the performance of contractual obligations. There is
no difficulty in concurrence with this principle. Accordingly,
the Treasury Committee are invited to consider the SPV securitisation
companies performance of its contractual obligations and the effect
of their abrogation from such obligations on the functioning of
the mortgage market.
The Perfect Storm (paras. 79 to 88).
The cause of the banking crisis is widely mooted as the abrupt
closure of the wholesale money markets in August 2007 but the
public debate on why the market seized is conspicuously absent.
It is submitted that new tax laws were the catalyst instilling
fear which caused the flight. The money-men fled from securitisation
companies on the real prospect of their being called upon to contribute
to the Treasury. The liquidity had to be filled. The tax-paying
public was rallied to fill the gap and to suffer the economic
fall-out. Paragraphs 83 to 86 recommends: a potentially effective
solution in which the Government can revive the housing market
and economy without the need for the banker's acquiescence to
the hitherto unheeded pleas for the bankers to commence lending.
Conclusion (paras. 89 to 91). Confusion
through concealment creates complexity. Transparency is the antidote.
Once illuminate, securitisation is simple. Follow the asset and
follow the cash which reveals that the supreme beneficiaries of
the crisis are the banks, the SPVs and their investors.
Recommendations: The Committee is
invited to consider the recommendations at paragraphs: 37, 43,
52, 79 and especially the recommendation at paragraphs. 85 to
5. The Committee has rightly been concerned
to elicit a reason for banks failure to pass on the Bank of England
interest rate cuts to borrowers and yet, do pass on the interest
rate cuts to the savers.
The answer to the question is simple. The banks have passed the
interest rate cuts to the savers because the banks have the power
to set the interest rate for the savers. Conversely, the banks
do not have the power to pass the interest rate cuts to the borrower.
6. This is because, the banks have sold
the mortgage contracts to the SPVs and it is the SPVs alone, that
have the contractual power to determine the borrowers interest
rates. Consequently, it is the SPVs that decide whether or not
to pass on the interest rate cuts. It is the SPVs that have decided
not to pass on the interest rate cuts.
7. This fact is evidenced by the various
and respective Prospectuses that the SPVs file at the UK Listing
Authority. In general, the bank that originates the loans will
make a True Sale
of the mortgages to the SPV which means the contractual power
to set the borrower's interest rate is vested in the SPV.
8. Following the bank's True Sale of the
mortgages, the bank's contractual relationship with the borrower
is extinguished. The SPV, as assignee, becomes the party that
is in privity of contract with the borrower. However, neither
the bank nor the SPV inform the borrower of the SPV's ownership
of the mortgage contract.
The SPV will remain concealed. The borrower is unlikely to discover
the SPV's ownership of their mortgage contract because, following
the sale to the SPV, the bank and the SPV enter into a contract
wherein, the bank agrees to administrate the mortgages on behalf
of the SPV and in return, the SPV remunerates the bank for its
administrative services. Consequently, whilst the bank has extinguished
all its right and title to the consumer's mortgage contract, the
bank's connection to the consumer's mortgage is through its administration
agreement with the SPV only. Following these legal manoeuvres:
(i) the consumer and the SPV are in privity of contract under
the mortgages; (ii) the bank and the SPV are in privity of contract
through their administration agreement; and (iii) the world will
remain ignorant of these events because, the bank continues to
service the loans as if nothing has happened.
9. Therefore, the bank's only interest in
the loans following its True Sale of the mortgages is that of
a mere administrator and servicer of the loans. It is the SPV
that is the bank's client from whom the bank earns its servicing
fees and from whom it receives its instructions. Consequently,
the bank's loyalty is to SPV client only. The power to set the
borrowers interest rates is a contractual power contained in the
mortgage contract:a fortiori when the contract is sold to the
SPV, the contractual power to set the borrowers interest rates
is vested in the SPV and not the bank. Therein is the reason why
the banks have not passed-on the interest rates cuts. It is simply
because: they cannot. They must, in accordance with their administration
agreement with the SPV, implement the interest rate policy of
their client, the SPV.
10. Evidence of these submissions is best
demonstrated by example. In the case of Northern Rock, the SPV
has given Northern Rock the authority to set the interest rates.
However, Northern Rock has undertaken to set the interest rate
at a level that not only covers Northern Rock's administration
costs, it is contractually obliged to set the rate at a level
sufficient to support the entirety of all the administration costs,
expenses and profits of each of the numerous entities involved
in the securitisation structure.
This means that Northern Rock must set the interest rate at a
level that will ensure the SPV suffers no revenue shortfall. In
the event that Northern Rock fails to set the rate at a level
sufficient to satisfy the SPVs required revenue, then the mortgage
trustee may "notify the administrator that|the standard variable
rate and the other discretionary rates or margins for the mortgage
loans|should be increased|the administrator will take all steps
which are necessary|to effect such increases in those rates or
Consequently, Northern Rock may only exercise the interest rate
pursuant to the SPV's authority to do so under the terms of its
administration agreement, and in any event must set the rate at
levels to the satisfaction of its SPV client. In other words,
Northern Rock does not have the autonomous power to set the rates
independent of its SPV client. Accordingly, it is the SPV that
controls the interest rate setting power.
11. Whilst Northern Rock has been used as
the example, the Treasury Committee is reminded that this circumstance
is not unique to Northern Rock. It is standard to most SPVs. In
conclusion, it is recommended that the Committee encompass within
its inquiry consideration of the role of the SPV in the banking
crisis and the relationship between the banks and the SPVs.
12. Finally, if the Government is determined
that the interest rate cuts are passed on to the borrowers, it
must ask the SPVs.
13. In conclusion, this means that the correct
answer to the Committee's question No. 170:
". . . Are the banks just pocketing a few bob
for themselves here?": the full and correct answer isNo,
it is the SPVs that are pocketing a few bob for themselves.
14. There are no bad debts on the banks
books. And if there is any bad debt, the amount is de minimis.
A primary purpose of a securitisation is: to remove the credit
risk from the bank's books. The bank, under a `true sale' will
sell all its rights and title in the mortgages to the SPV and
the SPV will in return pay the bank cash for the mortgage assets.
This plain truth has remained elusive because under the terms
of the true sale contract, the bank and the SPVs have unlawfully
agreed to keep the transaction concealed from the borrower and,
from H.M. Land Registry. Thus giving the false appearance to the
world that the banks still own the mortgages.
15. Two sleights-of hand are at play in
this manoeuvre. One is the legal ruse, the other the auditor ruse.
This is not to suggest that the professions have conspired, they
are each compartmentalised and each are generally unaware of the
16. First, the legal ruse. The law provides
mortgagees with a statutory power to transfer a legal charge.
It is under these statutory provisions that the banks exercise
their right to assign the mortgages to the SPVs. In a contract
of sale that provides for a disposition
of an interest in land, the legal title will be conveyed immediately
from the seller to the buyer
on the completion date. There can be no doubt that on completion,
the buyer has acquired the legal title, but there will inevitably
be a "registration gap" between the conveyance date
on which the buyer acquired the legal title and the date on which
his legal title is registered at H.M. Land Registry. During this
registration gap, the law provides that the buyer's title: "does
not operate at law until the relevant registration requirements
17. This is where the legal ruse comes into
play. It is this "registration gap" that the SPV unlawfully
exploits in order to conceal its ownership and control of the
mortgages. Under the Land Registration Act 2002 ("LRA 2002"),
of a registered charge is required to register at H.M. Land Registry,
its ownership of the mortgage that it purchased.
Therefore, it is a legal requirement that the SPV register its
proprietorship of the mortgage at H.M. Land Registry. Whilst the
law implicitly permits the registration gap as a matter of pragmatism,
the law also implicitly mandates that the registration requirements
are to be observed expeditiously. Nonetheless, in contumacious
disregard for its legal duty to comply with the registration requirements
of the LRA 2002, the contract of sale expressly provides that
the SPV will not register the transfer at H.M. Land Registry indeed,
the contract provides that notice of the transfer is to be concealed
from the borrowers and H.M. Land Registry and a fortiori concealed
from the world.
18. The suppression and concealment of this
information from H.M. Land Registry is a criminal offence,
and in furtherance of this offence,
the SPV's legal title to the mortgages is also concealed from
the county courts and the Government. The Banks remain registered
as the proprietor of the mortgages and accordingly all interested
parties are deceived by this concealment with one exception. The
SPV does inform its investors that the bank sold its legal title
to the SPV (to whom, the right to register the legal title to
the mortgages is important). Consequently, the bank appears to
be the legal owner, but it is not.
19. For example, in the case of Northern
Rock as the seller of mortgages, the prospectus states: "under
the mortgage sale agreement dated March 26, 2001 entered into
between the seller, the mortgages trustee, the security trustee
and Funding, the seller assigned the initial mortgage portfolio
together with all related security to the mortgages trustee|".
Additionally, under the terms of Northern Rock's mortgage sale
agreement, it is, "entitled under the terms of the mortgage
sale agreement to assign new mortgage loans and their related
security to the mortgages trustee". 
(bold emphasis added).
20. Northern Rock may remain falsely registered
as the putative `legal owner' but in truth, Northern Rock is merely
the administrator of the mortgage loans. Again the Prospectus
states: "The seller acts as administrator of the mortgage
portfolio under the terms of the administration agreement, pursuant
to which it has agreed to continue to perform administrative functions
in respect of the mortgage loans on behalf of the mortgages trustee
and the beneficiaries, including collecting payments under the
mortgage loans and taking steps to recover arrears."
(Bold emphasis added).
21. The legal reality is that: (i) Northern
Rock sold its legal title to the SPV, in this case, to Granite
Finance Trustees Limited
and therefore, Granite is the legal owner; (ii) Northern Rock
is the administrator of the mortgages and falsely holds itself
out as the legal owner of the mortgages; (iii) Granite Finance
Trustees Limited should be, but is not, registered as the owner
of the mortgage; and (iv) all these facts remain concealed because
Granite and Northern Rock have unlawfully contracted to suppress
this information from H.M. Land Registry.
22. Notwithstanding that the SPV conceals
its legal title from H.M. Land Registry, the SPV will, nonetheless,
avail itself of, and exercise, all the statutory and contractual
legal powers that the legal owner enjoys. For example, the SPV
will exercise the legal owner's statutory power to create a legal
on the borrower's mortgages. The SPV will file at Companies House
a Form 395 "Particulars of a Mortgage or Charge" within
the statutory 21 days, to register the Legal Charge that the SPV
created against the mortgage loans in favour of the SPV's trustee,
as security for the payment of money due to its investors and
23. The SPV's exercise of the legal owner's
contractual and statutory legal powers leaves no doubt that SPV
is: the legal owner of the mortgages. Nonetheless, the banks and
the SPV unlawfully exploit the "registration gap" in
a smoke and mirrors tactic to cause confusion and conceal the
SPV's legal title. The SPV is the legal owner. The banks are the
24. The Treasury Committee has endeavoured
to discover the amount of bad debts on the banks' books. An answer
to that question has hitherto evaded an adequate response. As
discussed above, the bank has sold the mortgages and thereby transferred
the credit risk to the SPVs which means, that the banks do not
have these (allegedly) "bad" debts on their books.
Therefore, to provide the Committee with the full answer, the
question must be re-framed as: having sold legal title to the
debts, how do these allegedly "bad" debts appear back
on their balance sheets?
25. Likewise as discussed above, the SPVs
legal title to the mortgages is also concealed from the auditors.
The auditors know that the bank originated and owned the mortgage
loans and therefore, the mortgage loans are initially and correctly
`recognised' as an asset on the bank's books. However, when the
bank securitises that asset, the bank has sold the asset to the
SPV. This means that the SPV owns both the benefits and the credit
risks of the assets. Accordingly, the bank's transfer and sale
of legal title should result in the assets being `derecognised'
as an asset on the banks' books. However, the auditor's continue
to recognise the assets on the bank's books. This is because of
an inadvertent erroneous evaluation and application of the IAS39
26. IAS39 sets out three main scenarios
in which an asset will be derecognised and removed from the bank's
books. Under any one of these three scenarios, the mortgage loan
assets that have been securitised should be derecognised with
the consequent effect that the assets are removed from the banks
27. The mis-application of the IAS39 derecognition
policy is best illustrated by the following example. In the Northern
Rock's Annual Report and Accounts 2007, the derecognition policy
"The Group also derecognises financial assets that it transfers
to another party provided the transfer of the asset also transfers
the right to receive the cash flows of the financial asset."
In a securitisation, that is exactly the legal effect. However,
auditors are called upon to make an evaluation of the bank's legal
rights in their analysis. The auditor must determine who has the
legal right to the cash flows. Understandably, an auditor is not
best qualified to make an accurate legal determination. Nonetheless,
the auditors do see that: (i) the bank's legal title is still
registered at the Land Registry (albeit falsely); (ii) the auditors
see the bank's administration of the mortgage loans; and (iii)
the auditors see the cash flows from the mortgage loans are paid
to the bank. In contrast, the auditors do not see (iv) the contract
of sale wherein the bank transferred to the SPV, all its title
and rights to the asset; (v) do not see the bank's administration
agreement with the SPV which evidences the bank's interest is
merely authority to administrate the mortgage loan asset; and
(vi) do not see that the bank has no right or title to the cash
flows it receives from the mortgage loans. Consequently, the auditors
understandably fail to accurately evaluate the legal rights and
accordingly fail to derecognise the asset. As a result, the asset
erroneously remains recognised as an asset on the bank's book.
28. However, the auditors are mindful that
the asset has been securitised and that such transactions require
some acknowledgment and entries in the accounts. Again, IAS39
is the culprit. IAS39 directs the auditor to "Consolidate
all subsidiaries (including any SPE)".
The IAS39 therefore instructs the auditor's to consolidate the
special purpose entity
(or vehicle), into the group accounts.
29. This is an extremely bizarre instruction
to auditors for three reasons. Firstly, this instruction contradicts
the foundational principle of a securitisation structure which
is: that the originator of the asset must be `Bankruptcy Remote'
from the SPV. That is, that the SPV is a wholly independent company
that is in no manner whatsoever connected with the originator
of the assets it has purchased. The true sale must be an `arms-length'
transaction between the two wholly independent entities. This
is an essential element of the securitisation structure to ensure
that the SPV and its assets are not in any way affected by the
bankruptcy or insolvency of the asset originator. Secondly, the
bankruptcy remoteness of the SPV is the credit rating agencies
predominant factor for the SPV's Notes achieving the triple A
rating. Thirdly, there is no legal basis on which a wholly independent
company, (iean SPV) should be included in the consolidated accounts
of another company where the SPV is not a subsidiary or legal
undertaking of that company.
30. Notwithstanding that the SPV and Northern
Rock are wholly independent and separate companies, the mortgage
loan assets and liabilities that the Granite SPV own, was consolidated
onto the Northern Rock's Group accounts.
31. To illustrate this point, take for example
Granite Master Issuer plc's prospectus where it expressly states:
"The Issuer is wholly owned by Funding 2|The Issuer has no
subsidiaries|The Seller [Northern Rock] does not own directly
or indirectly any of the share capital of Funding 2 or the Issuer".
32. Therefore, when reading the Northern
the figure of £43,069.5 million stated as a Northern Rock
liability, is in fact, Granite Master Issuer plc's liability.
The "Debt Securities" issued of £43,069.5 million
is the liability of Granite Master Issuer plc, a wholly independent
company which the auditor has erroneously consolidated on to the
Northern Rock Group accounts solely because of the erroneous application
That liability is Granite's liability to its investors.
33. Likewise, Granite's assets also appear
on Northern Rock's balance sheet. Consequently when reading the
figure of £98,834.6
million stated as a Northern Rock asset, at least £49,558.5
is in fact, Granite Master Issuer plc's asset.
34. The Committee is respectfully reminded
that whilst Northern Rock has been used to illustrate the point,
this application of IAS39 is common practice.
35. In summary, the assets "appear
back on the books" due to the misapplication of IAS39. The
error is compounded through the unlawful exploitation of the registration
gap which conceals the facts necessary for an accurate application
of IAS39. It is this concealment that causes the auditor confusion.
These assets and liabilities should not be on the bank's balance
sheet. They are there solely because of the combined effect of
the legal and auditor ruse.
36. In consequence, the British tax payer
is not just the supporter of British banks, the tax payer is the
unwitting guarantor and supporter of all the privately owned,
wholly independent SPVs foreign companies incorporated in tax
havens. Their consolidation into the group accounts of British
banks means that the tax-payer is also funding the capitalisation
of the SPVs. These foreign SPV companies and their investors must
be extremely satisfied with the UK tax payers support. After all,
there are always winners in any crisis.
Auditors should reconsider the application
of IAS39 and perhaps seek legal opinions on the bank's legal rights
and obligations in its evaluation and application of this accounting
standard. It is recommended that the law firm that acted on the
actual securitisation is not used for this purpose, and that an
independent barrister may be more suitable. Moreover, an SPV should
never be consolidated into the Group accounts unless it is an
actual legal subsidiary or a legal undertaking of the Group.
Both the SPVs and banks must be held
to compliance with the Land Registration Act 2002 and accordingly,
complete the registration requirements under the Act. For those
that do not comply with the registration requirements, enforcement
action should be considered. Transparency is the antidote that
will cure the abuses facilitated by concealment.
38. Whilst the FSA regulates mortgages,
it does not regulate the SPVs that own the mortgages. Given that
it is the SPV's that exercise the power and control over mortgagors,
interest rate policies and repossession policies, there is a major
lacuna in regulatory oversight. Through the medium of the ruse
discussed above, an added bonus of concealment is that the SPV
circumvents regulatory oversight. It may be argued that such lacuna
is covered by the FSA's authorisation and regulation of the loan
administrator. However, this argument does not address the inherent
conflict between the bank's compliance with the FSA's regulations
and its loyalty to its SPV client. This is because the SPV is
vigilant on the bank's implementation of its policies under their
administration contract whereas, the FSA in contrast are widely
known for its apparent determination not to enforce
rules and regulations. Therefore, given the choice between the
impotency of FSA deterrence on the one hand, and client loyalty
and profit incentive of banks and SPVs on the other hand, the
dominant motivation that will inevitably prevail is the satisfaction
of the profit incentive. This means that the bank's allegiance
to its SPV reigns supreme over the bank's regulatory obligations
to consumers. After all, the irony of the FSA's `Treating Customers
Fairly' principle, is that the SPV is the customer of the bank
whereas, the borrower not. The borrower is in fact, the customer
of the SPV.
39. But all is not lost. The Financial Services
Practitioner Panel is in consensus with the principle that the
FSA's MCOB rules should be enforced. In its Annual Report 2007/8
it stated: "This was a major area of risk from a consumer
point of view and the Panel considered that the Mortgage Conduct
of Business (MCOB) rules were not achieving the objectives that
were intended by themin fact, to some degree, they had
served to compound the issue ".
The Practitioners Panel then goes on to call for the FSA to supervise
and enforce the MCOB rules, it continues, "The Panel remains
concerned that the FSA's supervisory and enforcement activities
in this area continue to move too slowly to significantly improve
standards in this sector."
The principle quoted here is highly laudable, and to the extent
quoted above, this principle from the consumer's perspective,
would attract strong consensus.
40. To be accurate however, the Practitioners
Panel is vociferous for FSA enforcement of the MCOB rules only
to the extent that they apply to the 3,000 small businesses that
provide services in the financial intermediary sector. Nonetheless,
the Consumer Panel and Practitioners Panel both support the FSA's
enforcement of the MCOB rules in principle and apparently, both
the Practitioner and Consumer Panels would wish to achieve the
objectives that were intended by the MCOB rules.
41. Whilst the Practitioner Panel's call
for MCOB enforcement is supported in principle, it is suggested
that enforcement against the many small business in the intermediary
sector should be deferred because: (i) enforcement in that sector
would yield no immediate assistance to the consumer or small businesses;
(ii) that sector of the economy is at present, relatively inactive;
(iii) it is probable that some of those small businesses may not
survive the economic downturn and the FSA should not exacerbate
their plight for survival at this juncture; and (iv) the Government
aspires to assist small businesses in any event.
42. Accordingly, in recognition that the
FSA's resources are finite and therefore should be focused and
targeted to achieve the Government's aspirations, it is suggested
that the enforcement campaign focus on the MCOB rules to the extent
applicable to mortgage administration and mortgage repossessions.
An FSA publicly announced policy decision to take enforcement
action against mortgage administrators non-compliance with the
would have an immediate deterrence effect, concentrate the mortgage
administrator's mind, attitude and conduct on its regulatory obligations
and in turn, produce immediate assistance to consumers in financial
difficulty. The announcement of such policy may also achieve the
added bonus that the FSA's TCF objectives, (which were also intended
to protect consumers), may also be realised as a result of an
enforcement policy. Moreover, an actual enforcement may have a
longer-term deterrent effect and re-position the FSA's supremacy
in the conflict between the bank's deference to its SPV clients
prevailing over its obligations to consumers. Finally, and most
pertinently, from a public relations perspective, it may restore
a large degree of public confidence in the FSA and the financial
industry generally and stem the repossession trend.
the Treasury Committee give its fullest
support to the Panels aspirations and immediately recommend that
the FSA vigorously enforce the MCOB rules; and
the courts are informed of the claimant's
administration and repossession legal obligations under the MCOB
rules and that the courts assure themselves of the administrator's
strict compliance with those rules before ordering repossession.
Again, this would have immediate impact to assist consumers in
1.9 AND 3.7)
44. On 14 January 2009, Mr Tutton of the
Citizens Advice Bureau gave oral evidence wherein he enunciated
the principles that "|borrowers need to have the risks properly
pointed out to them|to understand the consequences|what is the
interest rate, what is it going to cost me?|and borrowers are
properly helped to decide what they are getting into."
45. There is an abundance of consumer laws
and regulations that govern credit agreements and in particular,
govern the advice that independent financial advisers provide
to consumers on mortgage products. In practice however, the consumer's
choice of lender and product is often a nullity and can be deemed
an academic exercise. This is because, whilst the consumer may
be advised to select a mortgage product from Bank X and may choose
to enter into a contract with Bank X on that advice, the reality
is that Bank X will not be the company with whom the consumer
will ultimately be in privity of contract, nor will Bank X be
the entity that performs that contract.
46. In general, neither the IFA, nor the
consumer knows at the outset that Bank X will merely originate
the mortgage contract and that Bank X will sell the mortgage contract.
Moreover, whilst the consumer may be informed of the initial `pass-the-parcel'
of their mortgage contracts to various entities, the consumer
will never be told of the final and ultimate owner of their mortgage
contract, namely the SPV entity that securitises their mortgage
contract. In other words, neither the IFA nor the consumer is
aware of, nor considers the impact of the "originate-to-distribute
model" when providing or considering financial advice.
47. To illustrate the practical impact of
the SPV's concealment from the borrower, take for example, a consumer
that was advised to choose a GMAC-RFC standard variable rate mortgage.
Firstly, some of those borrowers would have been securitised through
an SPV called Clavis Securities plc. Thus, the consumer's advice
as to the lender is rendered academic. Secondly, unbeknown to
the borrowers, Clavis unilaterally decided that borrowers who
had purchased a GMAC standard variable rate mortgage contract
would be treated as if they had purchased a track-rate mortgage.
Accordingly, Clavis' decision renders the consumer's advice on
product as also academic. Thirdly, it was irrelevant to Clavis
that the borrowers contracted to pay GMAC's standard variable
rate, because Clavis at all times charged its borrowers at least
0.25% in excess of GMAC's standard variable rate. Accordingly,
Clavis at all times demanded (and was paid) interest that the
borrowers were not contractually obliged to pay.
48. In one case on point, the non-contractual
demanded interest rate overcharge was disputed. The response was
that it had the "power and liberty" to charge as they
pleased. Following a vigorous defence of this contention, it was
finally conceded that it had overcharged interest but at the same
time, inferred that the overcharge was de minimis as it only amounted
to approximately £3,000. However, this amount is not de minimis
to an individual nor when taken in the context of the securitisation
as a whole. That securitisation involved a pool of approximately
4,500 mortgages contracts each of which would have been subjected
to the same contractual abuses. As Clavis had overcharged each
of those consumers an extra non-contractual 0.25% and assuming
that that overcharge was in the region of £3,000 for each
consumer, such modus operandi would yield a conservatively estimated
extra £13.5 million.
49. There is an abundance of anecdotal evidence
that consumers are instinctively aware that their mortgage accounts
are being abusively charged.
However in the majority of cases, it is improbable that consumers
would be able to identify and articulate the character and nature
of the abuse sufficient to present such defence in a court. Therefore,
this type of abuse remains substantially, undetected. From the
consumer perspective it inevitably results in repossession, but
on strict construction of the borrower's mortgage obligations
it is in fact, dispossession.
50. Therefore, with respect to mortgage
products that will be securitised, the notion that a financial
adviser can advise consumers, and the notion that consumers have
choice, is a pure fallacy. The evidence shows that whilst the
fault cannot be laid on the adviser, it does not change the practical
reality for the consumer who will be aggressively held to their
obligations (including, in some cases demands for money which
they are not contractually obliged to pay), whilst the SPV lender
will conveniently absolve itself of its obligations (including,
in some cases substituting the product with a completely different
product). Consequently, neither adviser nor borrower can make
an informed decision on that which, directly and substantially
affects them. They cannot know how much the interest rates will
be, and cannot know how much it will cost them, because all of
these variables are dependent on the arbitrary decisions of the
SPV with whom the borrower is ultimately in privity of contractand
that information is at all times, concealed.
51. Finally, this issue highlights the importance
of the principle of Transparency. To echo the Prime Minister,
"all transactions should be transparent and never hidden".
The concealment of the SPV from the borrower presents the SPV
with the opportunity to abuse with impunity, safe in the knowledge
that the consumer would never know who is really perpetrating
the abuse and whom they should hold accountable. The borrower
should know with whom they are in privity of contract and that
information should never be concealed.
Mortgage originator's must make full
and frank disclosure of the effect of securitisation on the borrower
The contractual formula for interest
rate setting must be fully disclosed and fixed such that the extensive
discretionary powers are abated and/or
The SPV's unfettered powers to unilaterally
inflate the borrower's obligations should be curbed.
THE RULE OF LAWREPOSSESSION OR DISPOSSESSION?
53. The Committee's attention is drawn to
the Practitioner Panel's promulgation in its Annual Report 2007-08
under the heading "Caveat Emptor" wherein it stated:
"The Panel believes that a consumer's legal responsibilities
should be those underpinned by contract law, which includes a
duty to act lawfully and in good faith, not to make misrepresentations
or withhold material information, to abide by the terms of the
contract, and to take responsibility for his or her own decision."
54. The Practitioner Panel's is commended
for its enunciation of these principles under the banner "caveat
emptor" as it demonstrates that the Panel have correctly
identified that `the buyer beware' maxim is an appropriate forewarning
which consumers should heed when purchasing loans from powerful
financial institutions. Consumers should always be alert to the
shenanigans of sellers with whom they contract. However, at this
juncture it is apposite to remind the Committee that irrespective
of a prudent purchaser's precautions, the consumer cannot beware
of that which is deliberately concealed. Consequently, the consumer
is doomed to become the unwitting counterparty to the SPV in their
mortgage contracts in any event. The consumer did not expressly
agree to contract with the SPV more accurately, it is the SPV
that imposed itself on the consumer.
55. Two observations to the Practitioner
Panel's promulgation are appropriate. Firstly, the Panel's axiomatic
principles are tantamount to a demand for the faithful application
of the Rule of Law. That demand invites an exorable concurrence
from consumers which invitation is unreservedly accepted. Secondly,
as the Treasury Committee has rightly observed, there are two
parties to the contracts and they both share risk.
Accordingly, the principles apply with equal force and conviction
to the SPVs legal responsibilities.
56. In consideration to the faithful application
of the Rule of Law, it is necessary to illuminate the conduct
of SPVs in their performance of their legal obligations under
the mortgage contracts.
57. The material provision in the mortgage
contract is that the lender will loan the advance for a term of
25-years. The SPV imposed itself into the mortgage contract as
assignee, and as such, assented to perform this fundamental term
of the contract. However, the SPV has no intention of performing
that 25-year term. The SPV uses its wide discretionary interest
rate setting powers to demand interest, often in excess of that
which the consumer is legally obligated to pay, and often sets
its rates at levels that are specifically designed to force consumers
to seek to remortgage to a more reasonable rate. For those consumers
who do not, or cannot remortgage, the excessive fees and interest
rate charges are designed to guarantee arrears such that, the
alleged arrears can be contrived as the grounds for repossession.
Either way, the strategy ensures that the mortgages in the securitised
pool will be redeemed within a 2 to 5 year period. Hence, the
practice is designed to defeat the SPV's obligation to lend for
the 25-year term. Moreover, it does so in a manner that gives
the impression that it is the borrower in default of contract.
58. Therefore, with respect to the Practitioner
Panel's call for disclosing material information, it is necessary
for originator's to disclose the material facts that (i) the consumer's
contract will be sold to an SPV and that the SPV may not intend
to fully honour its contractual obligation to lend for the full
25-year term; and (ii) that the SPV's interest rates will reflect
not only the bank's administration of the mortgage loans, but
also the extensive fees and expenses
of all the entities involved in the securitisation transaction.
59. Evidential support for these contentions
can be found in the repossession policies and the interest rate
setting policies. There is also evidence from the lightening speed
in which the SPV pays down its Investors and there is prima facie
evidence from the amount of new business in mortgage market for
(in comparison to new business written for a house purchase mortgage).
Such evidence is best illustrated from actual examples:
60. In June 2006, Clavis Securities plc
became the owner of 4,293 consumer mortgage contracts that were
originated by GMAC-RFC Limited. Clavis securitised those mortgages
totalling £587,945,144 in a securitisation transaction which
issued £600 million
of Notes to Investors. This £600 million of Notes mature
in the year 2031
which reflects the 25-year term of the mortgage contracts.
61. In theory, the principal amount on the
Investors Notes should pay down in exact correlation with the
consumer's payments of principal on the mortgage. From the consumer
perspective, this means that it should take at least a couple
of decades to pay down the Investors. However, the Clavis Investors
Report in December 2008 shows that miraculously, Clavis have paid
down £456.8 million of these 25-year consumer mortgage contracts
in only 2½ years. This means that within the short duration
of only 2½ years, Clavis has successfully manipulated over
77% of its borrowers to redeem either through duress perpetrated
on the borrower to remortgage
through its interest rate policy and/or through repossession.
Either way, Clavis has absolved itself of performing its 25-year
loan obligation to the vast majority of its borrowers.
62. It is submitted that it can reasonably
be inferred from these facts, that Clavis had no intention of
performing its 25-year obligation. Whilst the Clavis securitisation
is used to illustrate the point, this course of conduct is not
an isolated example. It is ubiquitous throughout the securitisation
industry and illustrates that the SPVs are in breach of contract
for their evident intention not to perform and/or their failure
to perform their contractual obligation to the consumer for the
63. To achieve the SPVs absolution from
its 25-year obligation, the SPVs use their wide discretionary
interest rate setting powers to manipulate consumers to remortgage.
For those consumers who cannot remortgage, it is almost a certainty
that they will be subjected to repossession action at some juncture.
In all cases, the interest rate charged is designed to create
arrears. There are cases where one or more of the following examples
apply: (i) borrowers who are current in their payments are suddenly
informed that arrears had accrued some years earlier for which
immediate payment is demanded;
(ii) the arrears are contrived through applying interest and charges
that the consumer is not contractually obliged to pay;
(iii) adding fees and charges and falsely claiming that they are
interest arrears contrary to the MCOB;
and (iv) the amount claimed as arrears is exaggerated by claiming
amounts that are not yet due. In all cases, the consumer has to
trust the mortgage administrator's calculations and is rarely
in a position to challenge the accuracy of the alleged arrears.
The SPV, through their mortgage administrator will commence action
grounded on the alleged arrears which are often erroneous, inflated
and/or plain false.
64. The abusive use of the SPV's discretionary
powers to demand non-contractual interest is best explained through
illustration. GMAC borrowers who contracted under GMAC's standard
variable rate ("SVR") product, agreed to pay GMAC's
SVR following the initial fixed period. Under the legal principle
nemo dat qui non habet,
GMAC did not possess the contractual right to charge its SVR borrowers
in excess of GMAC's SVR rate. As GMAC did not possess a contractual
right to charge more than its SVR, it did not possess, and could
not, assign to any assignee, the right to charge GMAC borrowers
in excess of the GMAC SVR. In other words, if GMAC could not contractually
enforce the borrower to pay more than its SVR, nor could an assignee
of that contract. Therefore, an SPV that acquired a GMAC SVR mortgage
had no contractual right to charge the borrower any amount in
excess of GMAC SVR. In short, an SPV as an assignee can only lawfully
demand of its borrowers to like extent that GMAC could lawfully
65. However, in practice, the SPVs violate
this fundamental Rule of Law and unlawfully demanded that consumers
pay at interest rates in excess of GMAC's SVR. Failure to remit
the unlawfully demanded payment rendered the borrower in jeopardy
of repossession. Consequently, the SPVs were in breach of contract
to each of those borrowers to whom they charged interest in excess
of the GMAC SVR.
66. It is the excess interest that consumers
were unlawfully overcharged that often formed the basis of the
alleged arrears. Additionally, those falsely alleged arrears were
used to form the basis of the SPVs alleged right to further exacerbate
the borrowers account with considerable charges such as monthly
arrears fees, debt counsellor's fees, legal fees, etc. Following
these abusive (and unlawful) charges, the SPV's use a further
strategy of claiming future payments as alleged arrears to further
exaggerate the appearance of large arrears. It is these strategies
of overcharges and exaggerated claims, that contrive the false
appearance of the borrower's breach of contract which the courts
accept without reservation and the borrowers are unable to challenge.
67. Again an exact example will demonstrate
the point. Clavis Securities plc, through its mortgage administrator
issued proceedings on 14 December 2006
alleging arrears of £4,530.63 for which they requested an
immediate possession order. Of the £4,530.63 claimed as arrears,
£1552.27 were not arrears because that amount was not due
for payment until 31 December 2006. Nonetheless, the exaggeration
of arrears strategy had the effect of giving the court the false
impression of substantial arrears which would cause undue prejudice
to the consumer before judge.
Of the remaining £2978.36 claimed as arrears, £1489.18
represented the payment due on 30 November 2006 and therefore
was only 14 days overdue and the final £1489.18 represented
the payment due on 31 October 2006 and therefore was only 44 days
68. On strict construction of the contract,
the SPV invoked the one-month arrears clause to commence the action.
However, the only payment that was one month in arrears was the
October payment of £1489.18.
Moreover, on strict construction of the consumer's obligation
to pay interest, as discussed above, interest was at all times
overcharged (which was eventually admitted).
The admitted interest overcharges amounted to some £3,000.
Therefore, in this case, out of the total alleged arrears of £4530.63:
(i) £1552.27 was not due for payment at all on the date that
the amount was falsely claimed as arrears; and (ii) the remaining
alleged arrears of £2978.36 could be more accurately classified
as representing the £3000 interest overcharges rather than
arrears. The conclusion is that the entirety of the repossession
claim was falsely alleged and falsely claimed.
69. Again, whilst the example illustrates
Clavis Securities plc's unlawful breach of contract, this conduct
is not isolated to the Clavis Securitisation. It is ubiquitous
generally, and standard practice in the context of GMAC mortgages
that have been assigned to other SPVs.
70. As another example, consider the repossession
policies of Northern Rock plc. The Treasury Committee have searched
for explanation for Northern Rock's repossessions rates and its
failure to pass on interest rate cuts, adequate explanations for
which has hitherto, remained elusive. There are two fundamental
questions that should be answered in order to illuminate an adequate
explanation for Northern Rock's interest rate and repossession
policies. The first fundamental question is "who" sets
these policies and the second question is "why" the
policies are implemented and apparently immutable.
71. Northern Rock merely administrates the
mortgages on behalf of the SPV that owns the mortgage contracts.
The SPV that owns the mortgage contracts that Northern Rock originated
is Granite Finance Trustees Limited (a Jersey incorporated company).
It is Granite Finance Trustees Limited that exercises the contractual
powers under the mortgage contracts and it is Granite Finance
Trustees Limited that determines the interest-rate setting policy
and the repossessions policy. Northern Rock plc as the administrator
acts as agent for the SPV and implements the SPV's policies.
Therefore, when endeavouring to elicit an explanation for the
policies, the Committee should be mindful that it is Granite Finance
Trustees Limited who set the policies that Northern Rock must
72. The second fundamental question is "why"
those aggressive policies are dogmatically pursued. The answer
is: in June/July 2008 Granite Finance Trustees Limited required
more than £8.8 billion to redeem some of its Notes. Throughout
2008, the SPV's monthly Investor Reports
stated that: "All of the notes issued by Granite Mortgages
03-2 plc may be redeemed on the payment date falling in July 2008
and any payment date thereafter if the New Basel Capital Accord
has been implemented in the United Kingdom." The same notice
is given on a further five Note issues alerting the investors
to the same advice.
73. The condition that triggers the Note
redemption is the implementation of the new Basel Capital Accords,
a condition that has been satisfied.
Accordingly, the Granite Master Issuer's Notes for each of the
series 2003-2, 2003-3, 2004-1, 2004-2, 2004-3 and 2005-1, may
now be redeemed. Naturally, this means that Northern Rock plc,
in its capacity as administrator and cash manager, acting as agent
on behalf of the Granite SPV, must raise the cash that will be
required for such redemptions. The cost of these redemptions amounts
to £8.8 billion.
74. Nick Ainger M.P. observed that in the
half-year to June 2008, Northern Rock's repossessions increased
68% on the previous period, and he queried whether there was a
link between the aggressive repossession policy and the staff's
bonus incentive scheme. He requested an explanation from Mr Sandler,
Northern Rock's Non-Executive Chairman. In reply, Mr Sandler admitted
that the staff incentive scheme "|is designed in the early
years around the objective of debt repayment".
Mr Ainger's instinct was correct and the full open and honest
answer to his question is: that the incentive scheme was designed
around the objective of debt repayment because Northern Rock's
client, Granite Finance Trustees Limited and Granite Master Issuer
plc, requires £8.8 billion in cash to redeem its Notes.
75. In these premises, it is submitted that
the SPVs are in violation of a material term of their legal obligations
under the mortgage contracts. The SPVs' course of conduct evidences
that they have no intention of honouring their contractual obligation
to loan to the consumer for the 25-year term. The Practitioner
Panel's calls for the Government to support the rule of law. To
that end, consumers would be assisted if the owners of the mortgage
contracts would be held to honour their contractual obligations,
and/or pay damages to each of the borrowers whom they force to
76. The SPVs breaches of contract are not
limited to the examples above. The Early Redemption Charges ("ERC")
are also unlawful. These ERCs are often in tens of thousands of
pounds and do not reflect the SPVs reasonable costs of the redemption.
They are therefore, penalties imposed on the consumer and are
unlawful because the imposition of such excessive charges on the
consumer is a violation of the FSA rules.
Moreover, the SPVs impose the charges on properties that they
have repossessed. Notwithstanding that ERCs in the tens of thousands
are unlawful in any event, the contractual trigger for an ERC
charge is when the borrower voluntarily redeems. In the context
of repossession, the borrower is not voluntarily choosing to redeem,
rather it is the SPV that demands redemption. Thus, the ERC clause
is not triggered and should not be charged. Nonetheless, in breach
of contract, the SPV demands that charge and borrowers are unlawfully
forced to satisfy that non-contractual overcharge too.
77. To conclude, the Practitioner Panel's
demand for faithful observance of the Rule of Law is welcomed.
They may have intended that only those laws that benefit their
members be considered, however on review, consumers would greatly
benefit if the courts would properly construe the contracts and
that judicial support for the SPVs ubiquitous and excessive and
unlawful charges are refused. The consumers would benefit if the
SPV were held to their contractual obligation to provide the loan
for the 25-year term, and the consumers would benefit if the SPVs
were prevented from abusing their discretionary powers to set
interest rates. In short, consumers would benefit if the rule
of law was observed and that the principle of equality before
the law had real meaning, substance and effect.
78. In conclusion: in light of the SPVs
legal obligations which are generally performed in violation of
the FSA's MCOB rules, and generally, in breach of contract, it
begs the question whether the SPVs are lawfully repossessing the
homeowner or more accurately dispossessing the homeowner.
Strictly apply the rule of law. Statute
law is merely words on paper until brought to life through judicial
observance, application and enforcement.
Empower the consumer to access the
law to effect the enforcement of their rights, both contractual
80. The Committee has heard the widely rehearsed
crie de coeur from bankers that the wholesale markets abruptly
closed in August 2007 and that they "didn't see it coming".
Which means that the real question to be determined is: why did
the wholesale markets abruptly close?
81. The bankers' explanation is that the
assets became toxic. The bankers blame the source of toxicity
on the allegedly "bad" borrowers who defaulted on their
loans. This universal defamation of the borrowing public unjustly
stigmatises the homeowner when in fact, in August 2007, the default
rates were no more than would be ordinarily experienced. To accept
the bankers' allegation without question requires a gullible belief
that a minority of defaulting borrowers had the power to bring
down the whole of the banking industry. That contention is too
incredulous to countenance and consequently, it is submitted that
the bankers' explanation should be rejected.
82. A more reasonable and logical explanation
for the source of the toxicity can be found in tax law. In the
Finance Act 2005, the Government took tentative steps with new
tax law targeted specifically at securitisation companies. The
2005 Act provided "interim relief for securitisation companies".
Then, on 21 March 2007, H.M. Revenue and Customs made a public
stating that legislation would be introduced in the Finance Bill
2007 that would affect "Large companies involved in securitisation
or issuance of debt" and that the measures would have effect
following its Royal Assent. The Finance Act 2007 received its
Royal Assent on 19 July 2007. It cannot be a mere co-incidence
then, that the wholesale money markets went into meltdown within
a couple of weeks apparently with the cry "toxic-assets".
On the facts, it is logical to deduce that the source of toxicity
is tax rather than the bankers' defamatory allegation against
the allegedly "bad" borrower. The flight from funding
was fear. Fear of paying tax.
83. The twist of fate turned the tide on
tax policy and trumped the Treasury's tax intentions. The SPVs,
rather than being the new contributors to the Treasury coffers
became the greatest recipients of the Treasury coffers. The consumer
now pays the money-masters twice. First directly to the banks
and then indirectly through the Treasury.
84. To exacerbate these events, a further
factor came into play. The banks cry for capital. The cry was
driven by the apparent immediate need to comply with the new Basel
Capital Accords. Angela Knight informed the Committee that the
banks' capital requirements "jumped" overnight
which naturally implies, that the banking industry was caught
off-guard. Again, this assertion is too incredulous to attract
credibility. Nonetheless, this lame excuse is the generally accepted
foundation for the tax payer funding the banks' balance sheets.
The result is that the ordinary public was hit with this double-whammy
of tax policy and Basel.
85. The Government aspires to stimulate
the economy which requires the revival of the housing market.
The Government appears to be in state-mate with the banks. There
is demand for property purchases, but the banks will not facilitate
the buyer's desire to buy. Again, the Government is at the mercy
of the banks. But the Government does not necessarily need to
beg the bankers to lend. It can apply the rule of law and revive
and give life to law that already exists.
86. The Law of Property Act 1925 s.95 contains
a provision: "Where a mortgagor is entitled to redeem, then
subject to compliance with the terms on compliance with which
he would be entitled to require a reconveyance or surrender, he
shall be entitled to require the mortgagee, instead of re-conveying
or surrendering, to assign the mortgage debt and convey the mortgaged
property to any third person, as the mortgagor directs; and the
mortgagee shall be bound to assign and convey accordingly"
87. This means that the borrowers have a
statutory right to assign the mortgage debt to a buyer. The loan
already exists. No new lending is required. The borrower can assign
the debt to the buyer as part of the property sale. The SPVs have
made use of their statutory rights to assign. It is now time to
give life and real effect to the borrower's right to assign. The
Government does not need the bankers, the funding is already available.
The Government can revive the housing market without the acquiescence
of the bankers. If nothing else, the threat of facilitating the
public's use of this provision would add weighty negotiation leverage
to effect the Government's aspirations. The Government has given
the golden carrot to the bankers who have coveted that carrot
to the exclusion of all. It is perhaps time to use the stick.
88. Implementation of this provision is
simple. H.M. Land Registry could create a new Transfer Form to
facilitate the mortgage assignment. For example, the TR1, transfer
of the property and TR4, transfer of mortgage charge, could be
used as the basis to create a new form to simultaneously transfer
and assign both the property and the mortgage debt to the buyer.
Additionally, the HIP pack could be amended to include disclosure
of the mortgage product.
89. The Government has supported the minority,
the bankers to the absolute detriment of the majority, the public.
The Government should re-focus its perspective and support the
majority. Consumers only need the Government commitment to enforce
the rule of law to empower the ordinary public.
90. Qui Bono? Who benefits? The banks and
the SPVs. The banking-crisis has undoubtedly been the greatest
heist of public money at the hands of money-men wielding their
power in the guise of victimhood. In reality it is passive-aggressive
intimidation. Power is being concentrated in the hands of the
few remaining banks that have successfully dispensed with competition,
leaving the public at the future potential mercy a cabal of bankers
and the attendant possibility of a concealed cartel. The golden
rule will prevail. He who holds the goldRules! Private
foreign companies and their investors have also done exceptionally
well. The SPVs are being capitalised by the public purse through
bank consolidated balance sheets and consequently, the public
purse will carry any SPV losses. The investment paradigm appears
to have shifted. Historically, investors capitalised their companies
and received high returns for taking risk and, if the risk manifests,
investors lost their investment; but now, the Investors still
receive high returns but, the public capitalise their companies
and guarantee the investors' returns.
91. The intention of this memorandum is
to highlight securitisation issues from the consumer and the tax
payer perspective. It is not intended to give the impression that
the securitisation process is harmful per se but it is intended
to demonstrate that without checks and balances, this financial
engineering dysfunctions to the detriment of the consumer and
ultimately the economy. Transparency is essential, together with
openness and honesty from the financial institutions.
92. The contractual relationship is not
one of equals, it is one of Goliath and David without the stone!
The scales of justice are in urgent need of recalibration. To
restore equilibrium between the contracting parties the remedy
is: the faithful application of the rule of law. The failure of
British courts to give effect to consumer rights makes the UK
a most creditor friendly jurisdiction (which means a most debtor
unfriendly jurisdiction) in the world attracting the highest creditor
friendly rating of A1.
This high rating is achieved not through the lack of consumer
protection law, but rather through the lack of consumer law enforcement.
Consumers do not necessarily need new protection laws, consumers
need empowerment to enforce their contractual rights and the consumer
laws that exist.
This memorandum is respectfully submitted for
105 John McFall M.P.: question to the Chancellor of
the Exchequer on 19 January 2009 in reference to the Government's
£37 billion cash support to the banking industry. Back
See eg, Chairman's Q116, Q117, Q169 and Q170. Treasury Committee
Banking Crisis Uncorrected Transcripts of Oral Evidence Back
True Sale means "This is a genuine sale with title passing
to the issuer SPV." Source: H.M. Revenue & Customs CFM20030
at: http://www.hmrc.gov.uk/manuals/cfmmanual/cfm20030.htm Back
Additionally, both the bank and the SPV unlawfully suppress and
conceal this information from H.M. Land Registry. Back
See eg, the SPV's revenue receipts waterfall setting out the order
of priority of payments to the many and various creditors followed
by the payments due to and investors. Granite Master Issuer plc
Prospectus Supplement dated 23 May 2005 at page 144 onward. Back
Granite Master Issuer plc Prospectus Supplement dated 23 May 2005
at the 1st para. on page 103 Back
See Q170. Angela Knight of the BBA states in explanation that
the housing market reduction is value is "affecting the risk
weighting of those assets|so the amount of capital that banks
hold against that risk also increases". In fact, the bank
have sold the assets and passed that risk to the SPV and therefore
with respect, Ms Knight's reasoning is defective. In effect, the
governments initiatives are supporting the SPVs and their investors
and not (as it believes) the banks. This begs the question, why
should the tax payer be called upon to guarantee the return of
investments? Investors are warned and know that their investments
may go down! Back
Law of Property Act 1925 s.114 and Land Registration Act 1925
s.33 (note the LRA 1925 is repealed as of October 2003 pursuant
to the LRA 2002) Back
The legal definition of a disposition includes the conveyance
of a mortgage. See Law of Property Act 1925 s.205(ii) Back
See Megarry & Wade 7th Ed. Para.7-150 Back
See Land Registration Act 2002 s.27(1) As legal title does not
operate until registration, it operates in equity pending registration.
Also note equity's rule that: equity regards as done that which
ought to be done. Back
A transfee is: an assignee of a legal charge. See Law of Property
Act 1925 s.114(2) Back
See Land Registration Act 2002 s.27(3) and Schedule II, paras.
8 and to 10. (Sch. II, para. 10: "In the case of a transfer,
the transferee, or his successor in title, must be entered in
the register as the proprietor" (bold emphasis added). See
also Law Commission Report printed 9 July 2001. Law Com No. 271
HC114 at para. 4.30 Back
The contract provides that the SPV will not register unless certain
events occur such as, if the mortgage trustee wishes to enforce
the security due to the insolvency of the bank, thus defeating
any of the bank's creditors claiming against the asset. Back
See Land Registration Act 2002 s.123 Back
For example, Clavis Securities were sold GMAC mortgages under
an absolute assignment with full title guarantee on or around
15 June 2006 and after some 2½ years have failed to register
its ownership at the Land Registry. Back
Granite Master Issuer plc. Prospectus Supplement dated 23 May
2005 at page 108 under the heading "The mortgage sale agreement". Back
Id. See at page 113 under the heading "Assignment of new
mortgage loans and their related security". Back
Id. See at page 11 under the heading "The Seller, the administrator,
the cash manager, the issuer cash manager and the bank account". Back
Granite Finance Trustees Limited is a Jersey incorporated company. Back
Pursuant to the mortgagee's power as the legal owner under the
Land Registration Act 2002 s.23(1). Back
See eg Clavis Securities plc (Reg. No.05778179) Form 395 filing
at Companies House on 22 June 2006. Back
Although it is conceded that the banks may hold the SPV issued
Notes in their Treasury Departments which means: the debts are
not trading losses from the bank's loan book of advances to its
customers, but rather the (allegedly) poor investments of its
Treasury Department in the banks proprietary trading as an investor. Back
Northern Rock plc Annual Report and Accounts 2007 at page 55 para.
j). Para. "j)" is essentially a concise summary of the
three main scenarios of the IAS39 derecognition accountancy standard. Back
IAS 39 Technical Summary prepared by IASC Foundation staff (which
has not been approved by the IASB). Source http://www.iasb.org/NR/rdonlyres/1D9CBD62-F0A8-4401-A90D-483C63800CAA/0/IAS39.pdf Back
Special Purpose Entity ("SPE") is synonymous with Special
Purpose Vehicle ("SPV") Back
Granite Master Issuer plc, Prospectus Supplement dated 23 May
2005 at page 56. See also, page 60: Northern Rock "does not
own directly or indirectly any of the share capital of Holdings
or the mortgages trustee". See also page 62: Northern Rock
"does not own directly or indirectly any of the share capital
of Holdings or the post-enforcement call option holder [namely,
GPCH Limited]". Back
Northern Rock Report and Accounts 2007. See page 45 and see in
particular note 22 on page 73 Back
To correct the balance sheet, the "loans and advances to
customers" asset figure should be derecognised and reverse
from the asset figure against the securitised notes figure. See
also note 22 on page Back
Northern Rock Report and Accounts 2007 at page 45 Back
Id. at page 73 note 22. Back
It is probable that tax considerations are also behind this manoeuvre,
ie, tax efficient to minimise/avoid tax liability particularly
with respect to the possibility that interest income earned in
the UK would be subject to withholding tax prior to payment to
the foreign owned SPV. Back
"The FSA has been describing itself as `not enforcement
led' which we have challenged" Quoted from the Financial
Services Consumer Panel, Annual Report 2007/8 at page 21 para.
The FSA's Mortgage Conduct of Business Rules (MCOB). Back
The Financial Services Practitioner Panel, Annual Report 2007/8
at page 19 Back
Which non-compliance is standard practice and ubiquitous and it
is submitted there exists and abundance of evidence of non-compliance.
See examples of consumer discussions on consumer help forums at:
Another legal issue arises here. Strictly speaking the claimant
should be the SPV, however, the administrator bank will make the
claim in its own name. However, at law, the bank has no locus
standi to bring the claim in its own name without informing the
court that it is claiming in a representative capacity. The court
therefore erroneously assumes the bank's legal standing and is
wilfully mislead by the legal ruse to conceal the SPV. At law,
the bank has no legal right to bring the claim in its own name
and no legal right to obtain a possession order against the borrower. Back
In similar terms in which the government reminded the courts to
enforce the pre-action protocols Back
See Mr Tutton's answer to Q135. It is noted that Mr Tutton made
these comments in the context of store-cards credit, however,
it is averred that these principles apply to any and all credit
"|the interest rate payable on those Mortgage Loans is a
variable rate set by the mortgage lender|but|the Issuer [Clavis]
has undertaken|to set such variable rate at a specified marging
or margins in excess of the Bank of England Repo Rate|Accordingly,
such Mortgage Loans are treated for all purposes as being Mortgage
Tracker Rate Loans". Quoted from: Clavis Securities plc Asset
Backed Note Programme Series 2006-1 Note Issue Supplement dated
8 June 2006 at page S-64 under the heading "Interest rate
setting in relation to certain Series Portfolio Mortgages"<para>See
also eg, without the consent or knowledge of the borrowers, the
lenders vary the terms of the mortgages: "Most mortgage lenders
in the residential mortgage market vary and extend the Standard
Conditions by way of a "Deed of Variation" the terms
of which are imported into each Scottish Mortgage|each |Series
Portfolio Originator has executed a Deed of Variations of Standard
Conditions". Quoted from: Clavis Securities plc Asset Backed
Note Programme Series 2006-1 Note Programme Memorandum dated 8
June 2006 at page 40 at section (f)(1). Back
See eg, the numerous examples of actual experiences of consumers
discussed consumer help forums at: http://www.consumeractiongroup.co.uk/forum/mortgages-secured-loans/ Back
There is also an issue here with respect to the advise that a
consumer received (or, as is more likely, does not receive) from
the solicitor acting in respect of the mortgage. Solicitors should
advise their client's on the risks and obligations they are undertaking
in the mortgage contract. It is noted that the legal profession
are not listed in the Committee's terms of reference which means,
that the lawyers have escaped scrutiny for their part in the banking
crisis. This is not just limited to the lack of advice to their
consumer's clients in the context of mortgage advice, but also
the conduct of the City's securitisation lawyers in condoning
and sanctioning their client's wilful breaches of contracts against
the mortgagors. Back
"First Transparency! All transactions should be transparent
and never hidden" Gordon Brown P.M., speech at the Labour
Party Conference, September 2008. Back
Financial Services Practitioners Panel, Annual Report 2007/8 at
page 14 Back
Banking Crisis-Consumer Issuers, Uncorrected Transcript of Oral
Evidence 14 January 2009, Q122 Nick Ainger Back
The colossal numbers of various entities that receive on-going
administration fees are astounding. See for example Clavis Securities
plc 2006-1 securitisation, Note Programme Memorandum dated 8 June
2006 and the Prospectus Supplement dated 8 June 2006, both of
which informs that many different financial institutions acting
in capacities will each charge at least 24 various different administration
fees and expenses. Back
This is the inevitable as the only source of the SPV's income
is the cash flows it receives from the borrowers. Back
Angela Knight on behalf of the BBA in answer to Q189"|but
actually there is a huge amount of remortgaging going on|Northern
Rock, for example, and specialist lenders, as they come up for
renewal at the end of whatever their [fixed] term was, they [the
borrowers] are seeing rates which they consider to be far too
high and they are coming back to the major providers." Quoted
from Treasury Committee, Banking Crisis, Uncorrected Transcript
of Oral Evidence 14 January 2009 to be published as HC 144-ii. Back
Observe the difference of some £12 million between the amount
of notes issued and the amount of assets that backed the Note
issue. The aggregate amount of outstanding principal balances
on the mortgages was £588 million (which sum was also the
sale/purchase price of the asset), leaving a bonanza of some 12
million extra in cash Back
Clavis issued 11 Classes of Notes in the 2006-1 Series. The first
5 Classes of Notes matured in 2031 and the remaining 6 Classes
of Notes matured in 2039. Back
This remortgaging is another facet of the securitisation industry
profitability. Firstly, the remortgaged properties will be securitised
which means the consumers are back in the vicious circle. Secondly,
the banking industry may charge another set of application fees,
arrangement fees etc. Thirdly, the investment banks have a further
ready source of new mortgages to securitise which yield further
substantial fees and infamous City bonuses. The consumer is the
ultimate source of all these cost of all these fees, profits and
City bonuses. Back
On the balance of probabilities, it is unlikely that Clavis will
perform its 25-year obligation to any of its remaining borrowers. Back
See footnote 21 Angela Knight: "at the end of whatever their
[fixed] term was, they [the borrowers] are seeing rates which
they consider to be far too high and they are coming back to the
major providers" (underline emphasis added). Back
See eg, consumer comment posted on the web 27 November 2008 "They
[Southern Pacific Mortgages Limited] have recently started badgering
me for arrears that they claim come from DEC 2006!" Source:
See eg, consumer comments on Southern Pacific Mortgages Limited
(a Lehman Bros. securitisation) posted on the web 19 February
2009 "Well I have just been through all bank statements &
there is only 6 payments missing unlike the 12 spml mentioned,these
total to £4955.74. Also received an upto date statement of
spml today stating arrears now stand at £16,101.18 so that
£11,145.44 in unfair charges." Source: http://www.consumeractiongroup.co.uk/forum/mortgages-secured-loans/170607-spml-london-mortgage-company-9.html£post1990917. Back
Id. "Yeserday [sic] when they phoned me I spoke to 2 people
and got quoted £850 as arrears and then £615 and when
I said that it didn't tally|I was also told it was not a FSA requirement
to NOT add fees etc to the arrears amount and so they would continue
to do so!" Back
No one gives who does not possess. Black's Law Dictionary, 8th
This case was concluded with a dismissal order on 30 January 2007,
and then, following inappropriate interventions by the Claimant's
solicitors and errors by the court service, the claim was finally
dismissed by court order in February 2008. Back
A county court judge often has between 20-30 repossession cases
in his/her daily cause list. The court sits for only 5 hours per
day, which means that the judge has little time to assess the
integrity of the Claimant's claim form and the consumer is rarely
legally represented. Therefore acting as litigant-in-person the
consumer is considerably disadvantaged, often emotionally distressed
and intimidated by the court process. Back
Compare the FSA's definition of "arrears" "(a)
a shortfall (equivalent to two or more regular payments) in the
accumulated total payments actually made by the customer measured
against the accumulated total amount of payments due to be received
from the customer;" See the Glossary in the FSA Handbook.
See also FSA Handbook, MCOB 13.3.1 Back
The overcharging was admitted on or around September 2008, albeit
that they maintained the argument that they had power and liberty
to charge and apply their SVR (in excess of GMAC's SVR) at their
sole discretion. Back
Whilst on this occasion, the case concluded in favour of the consumer
(a rare occurrence). The vast majority of consumers as litigant-in-person
may not have the knowledge or skills to defeat such claim. Therefore,
the Treasury Committee are requested to be mindful that these
SPV strategies for claiming repossession would ordinarily result
in a possession order against the consumer. Back
See the Granite Master Issuer plc Prospectus Supplement dated
23 May 2005, page 101 and the schematic on page 8. Back
Id at page 101, "On March 26, 2001, each of the mortgages
trustee, Funding and the seller appointed Northern Rock [plc]
under the administration agreement to be their agent to exercise
their respective rights, powers and discretions in relation to
the mortgage loans and their related security and to perform their
respective duties in relation to the mortgage loans and their
related security|Except as otherwise specified in the transaction
documents, the administrator has agreed to comply with any reasonable
directions, orders and instructions which the mortgages trustee
may, from time to time, give to it in accordance with the provisions
of the administration agreement." (Underline emphasis added). Back
Granite Master Issuer investor reports 2008 Back
Angela Knight of the BBA confirms the implementation of the new
Basel Accords. See answer to Q171-172 "We went from, overnight,
a situation where as a banking industry we held 8% total capital
as a regulatory requirement, of which 2% was core tier one which
is the expensive one, if you like, to a situation where we had
to hold 8% tier one capital of which 6% was core-a big jump".
Quoted from Treasury Committee, Banking Crisis, Uncorrected Transcript
of Oral Evidence to be published as HC 144-ii. Back
£8.8 billion is understated because it does not take account
of the amount of the Notes that may have been redeemed through
2008 in anticipation that the Basel Accord would be triggered.
The £8.8 billion aggregate amount outstanding on the Notes
as of 31 December 2008. The total figure is calculated from: £2,618,244,672
outstanding Notes denominated in Sterling; $3,373,079,787 Notes
outstanding denominated in US Dollars (exchange rate £1 =
$ 0.69096 as at 31-12-08); and 2,832,243,408 Notes outstanding
denominated in Euros (exchange rate £1 = 0.97404 as at 31-12-08).
Source: Granite Finance Trustees Limited's Investor Report available
at: http://companyinfo.northernrock.co.uk/downloads/securitisation/ Back
See Q431 in particular and Q425 to Q434 generally and answers
thereto. Treasury Committee, Banking Crisis, 18 November 2008,
Uncorrected Transcript of Oral Evidence, to be published as HC
Id. See Q425 and answer thereto. Back
See FSA Handbook MCOB 12.3. Back
See Global Legal Group Ltd, The International Comparative Legal
Guide to: Securitisation 2007, Sanja Warna- kula-suriya and Laurence
Rickard of Slaughter and May at page 117: "|under UK GAAP
(as it is from 1 January 2005), significant unrealised profits
and losses would have had to be recognised in the accounts of
securitisation companies and, if tax had to be paid on any such
profits, there would have been a risk of securitisation companies
becoming unviable. In order to avoid this, and the effect that
that would have had on the securitisation market, certain statutory
measures were introduced to allow an interim relief for securitisation
companies|", (underline emphasis added). Source: http://www.iclg.co.uk/khadmin/Publications/pdf/1321.pdf Back
H.M. Revenue & Customs Budget 2007 BN13 available at: http://www.hmrc.gov.uk/budget2007/bn13.pdf Back
See above, footnote no. 67 Back
It is observed that the legal profession have escaped all scrutiny
for their role in the banking crisis. Without the City law firms
support, bankers and SPVs may not have so confidently violated
statutory obligations nor violated borrowers' contractual rights. Back
Contrast the U.K.'s rating of A1 with Germany and U.S.A. rated
A2 and France rated B. Source: Standard and Poor's: http://www2.standardandpoors.com/spf/pdf/events/blr200714.pdf Back