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What Currently Present a Risk to Markets?

September 22, 2021 by Jacob Sensiba Leave a Comment

Where is the market going? What kind of risks do we need to be aware of? There are three or four things to pay attention to right now. The FED, interest rates, inflation, Covid, China, the government, and geopolitics. Do any of these present a risk to markets?

Okay, more than three or four things, but the first three can all be lumped together. Interest rate policy is enacted by the FED and what happens with interest rates has a direct impact on inflation. Furthermore, the government also has a chance to impact inflation.

And I apologize if we bounce around a little from topic to topic.

The FED, Interest Rates, Inflation

The government and the FED have a lot of control over what inflation is going to do. We had a lot of liquidity injected into the market because of the pandemic, and there’s a very good chance we’ll see more of that in the near future.

A $3.5 trillion bill is circulating through Congress right now. If this bill gets passed, we’ll have a lot more liquidity injected into the market. That’s likely to be a large tailwind for inflation (which is already running much hotter than expected). If the FED continues to provide an accommodative monetary policy, we’ll see inflation get out of control, and they’ll have to increase interest rates much sooner than they had planned.

Covid

Covid is still hanging around. 75% of the country has received at least one shot and now the administration is pushing booster shots. This is even after the CDC and the WHO have insisted on holding off on a third shot until less fortunate countries have a chance to get more of their first poke. The numbers need to level off soon or I fear lockdowns may rear their ugly head, and we all know how much the economy liked that the first time around.

China

China is a new story. Specifically, Evergrande. The ginormous real estate company is on the brink of bankruptcy. Comparisons have been made to the collapse of Lehman Brothers during the GFC (great financial crisis). We’ll see what happens and if the Chinese government decides to step in. Ripple effects through the global monetary system are possible.

Geopolitics

The last story is geopolitics. This has to do with the deal the US and Australia struck to help the Australian government build nuclear-capable submarines. It angered France because they already had a deal with Australia to help them build submarines (not nuclear-capable though). Britain feels pretty good because they helped broker the US/Aussie deal. Most likely, this will end up being only noise but could present a risk to markets. Something to keep your eye on.

Disclaimer:

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com

Investment Concerns and Opportunities

July 7, 2021 by Jacob Sensiba Leave a Comment

There are investment concerns and opportunities pretty much any way you turn. Healthcare looks great, but what about the costs associated with treatment? Technology is improving every day, but what’s going to happen with possible regulations? Is the FED going to pop our bubble?

Plenty can happen so let’s explore it together.

The FED

The FED doesn’t appear like it’ll stop its asset-buying program and accommodative monetary policy anytime soon, and it said just that in its most recent meeting.

That’s a good sign for the economy and for certain sectors. The industries that find the most favor are those that use heavy borrowing to facilitate growth efforts. These include construction, retail, information technology, transportation, and healthcare.

Commodity Prices

We continue to see a rise in commodity prices. Copper, oil, and lumber are all near record highs. I believe we’ll continue to see a steady increase in the price of copper. Copper is used in electronics, and with the further development of new technology, electric and autonomous vehicles, and green energy…the demand for the metal is just getting started.

Big Tech

Silicon Valley is bracing for possible regulatory troubles. There’s a new head of the FTC and she has her gloves on. Big tech has come under increased scrutiny in a few areas, including content, privacy, and antitrust. This causes investment concerns.

The federal government has a problem with social platforms and some of the content users post on their sites. There’s a thin line these companies walk because they can’t censor speech and they can’t promote speech. But some people post very harmful and hurtful things.

Also, antitrust cases are likely to come in full force because some of these companies are so gosh darn huge. They have so much pull, so much money, and too much market share (in a lot of cases).

What’s more, they no longer hide that they harness user data to make money. How much they sell to other parties and what they sell isn’t entirely known, but their privacy issues are also coming to head.

With all of that said, compliance costs are going to increase. What those companies look like and what they’re allowed to do will likely look different than what it is now. Only time will tell what happens to these companies.

Healthcare

I’m reading and hearing more and more excitement about the healthcare space and the investment opportunities that lie within. The speed at which the globe was able to produce three or four viable and useful vaccines for Covid is incredible. I heard today that it’s the first vaccine to be created in less than 5 years.

The global population is getting older by the day. Not only that, but the baby boomer generation is around retirement age, so they’re going to require more medical attention.

Prescriptions, medical devices, new and improved medical technologies are going to treat and possibly cure more and more illnesses.

Telemedicine looks to be a great investment opportunity. Last year, medical attention was quite high but 90% of that was done in person. Virtual visits, remote monitoring, and in-home testing will grow in popularity.

Investment concerns and opportunities abound, I’m excited for what’s to come in the tech and healthcare spaces.

Disclaimer:

What’s The Federal Reserve Going To Do?

June 23, 2021 by Jacob Sensiba Leave a Comment

There’s a lot going on in the world right now. Supply disruptions, stimulus payments, excess savings, labor shortages, and infrastructure are all playing a role in economic policy. In today’s post, I want to try and explain how they all play a factor with regard to how the FED determines policy.

Supply disruptions

Inherently, supply disruptions don’t have much to do with how the federal reserve coordinates monetary policy. The biggest supply disruption we have at the moment involves semiconductors.

The wide applicability of semiconductors makes them very important in product development and deployment. What’s more, the number of semiconductors needed just keeps growing.

The bad news is…there’s a supply shortage. That creates upward pressure on price. Not only for the semiconductors themselves but also for the products that use them.

Stimulus payments and excess savings

When Covid hit, the world shut down. People were out of work, so they didn’t spend money. People didn’t spend money, so businesses started losing revenue. In order to prevent total economic collapse, the government sent stimulus checks to qualifying individuals and boosted unemployment.

A lot of people saved this “extra” money and recently started to spend it. Jobs are starting to come back and the global economy is starting to look healthy. Confidence inspires spending. Increased consumer spending is good for the economy.

Labor shortages

Labor has become a big topic of conversation. Not only do we have more jobs available than we have people to take those jobs, but workers are quitting in large numbers. Both of those factors can have a large impact on wages.

Employers are having trouble filling roles. How can they attract applicants? Better wages and benefits? For those that can afford bigger payroll, that’s the avenue they’re using. That puts upward pressure on wages.

I also mentioned workers are quitting in droves. Employees are demanding to be fairly compensated and enough of them are banding together now. Improved benefits and increased wages are becoming more likely.

Wage inflation helps feed the price inflation narrative. The prices for products and services go up because of supply and demand factors. Wage inflation increases due to supply and demand dynamics.

These two inflationary pressures feed on each other. Wages go up so workers can afford more. Prices go up because workers can buy more, and so on.

Infrastructure

News broke about a new infrastructure bill (Source). On top of, already, record-breaking government spending, that’ll juice our GDP numbers for 2021.

I don’t have much else to say about this other than the spending involved will create inflationary pressures AND I’m proud there was bipartisan support for this bill. Not something we see very often anymore, so I’m happy it turned out this way.

The Federal Reserve

With all of that said, what’s the federal reserve going to do? If inflationary pressures are as hot as they seem, I fear the FED will have no option, but to end their accommodating stance on monetary policy.

They’ve already indicated that a rise in interest rates in Q3 or Q4 of 2023 is likely. They claim that they will let inflation run past their 2% target but by how much? At one point do they say enough is enough?

That’s a tough question to answer. I think in this situation, they’re talking bigger than what they’ll actually deliver. It’s all well and good if they say they’re going to let inflation run, but we’ll see what actually happens when that gets here.

Disclaimer

What’s Up With Oil?

May 12, 2021 by Jacob Sensiba Leave a Comment

Oil is in the news a lot right now because of what’s currently happening on the East Coast of the United States. There was a hack of an oil pipeline, and the hackers have since been identified, but the consequences of that hack are being felt by the company and by consumers.

Due to the hack, the pipeline shut down. This pipeline provides the East Coast with nearly half of its gasoline and jet fuel. As a result, gas, and oil prices have gone up, there are gasoline shortages, and consumers are behaving erratically. Some are hoarding gasoline. Others are chasing down supply trucks and are behaving in a way, akin to when an animal’s food supply is threatened.

With all that said, I do want to talk about oil today. Not just the recent news about the hack, but also the price of oil, the supply and demand dynamics, and what my thoughts on the future of the precious fossil fuel are.

Oil Price, Supply and Demand

The price of oil is back to pre-pandemic levels. Back in the early days of the pandemic, however, there was a tremendous shock to the system. Oil prices dove into negative territory because demand projections dropped.

Everyone started staying home due to Covid and mandatory quarantines, so demand dried up. A lot of analysts said that pre-Covid was peak oil demand. More people are going to work remotely, which means less commuting and less consumption. More businesses are going to conduct meetings via Zoom instead of flying to different locations, which also means less consumption.

Do I think the “pre-Covid era” was peak oil demand? I think so, but it’s difficult to say with certainty.

The future of oil

I do believe, however, that the overall demand for oil will trend down going forward. With that said, oil producers are focused on their bottom line. If they see demand trending down, they’ll be inclined to reduce production to protect the price per barrel from plummeting.

There’s another force at play here – clean energy. We will continue to see start-ups and agile new companies bring new technology to market. I think the runway for clean energy, in terms of growth and return potential, is very large. However, don’t count out the big energy companies quite yet.

These companies (Exxon, BP, Chevron, and the like) have been investing a lot of money in green/clean energy. They see the forces at play and they see the direction in which the market is going. It’s in their best interest to plan for an energy market dominated by renewables.

How should we invest?

That’s a good question and due to regulatory constraints, I can’t tell you specifically. Do I think there’s a place for oil in your portfolio? Maybe in the short-term, but not for long.

Investing in energy will be more nuanced than it has in the past. Big oil companies, as I mentioned, are investing in clean energy, but I believe renewable startups and green energy companies will attract the majority of investment.

Keep up to date with what’s happening in the energy market and do your due diligence when it comes to selecting investments.

Inflation

Inflation will most likely increase. Many projections estimate the FED will meet/beat their target of 2%.

I do believe that an increase in goods and services will not affect demand as it would have in the past. Stimulus payments to consumers created enough excess cash that people didn’t mind, or even notice, an increase in prices.

I do realize I’m painting with a broad brush here, and undoubtedly there will be some that will notice the difference. I’m simply stating that demand will not suffer from price creep as it used to, at least while the government continues writing checks.

Gold

We could see another uptrend in gold. There’s a certain recipe that makes the case for a bullish perspective on gold – inflation pressures, increased money supply, and low-interest rates.

The FED continues to supply the market with liquidity with its asset-buying program. An increase in the money supply dilutes the value of the dollar (USD). When the USD decreases in value, typically gold does well.

There is a caveat to that, however. Demand for US Treasury securities is weakening, specifically from foreign investors. To double down on that, foreign investors are net sellers of Treasuries. There have to be enough buyers to meet Treasury issuance, otherwise, the FED won’t have enough “reserves” to inject liquidity into the system.

With regard to low rates, that is a good sign for gold, but it’s also a good sign for equities (companies) with a high tendency to borrow. I’m mainly looking at the technology sector. Especially these unicorns that have high valuations, but low (or negative) profits.

Semiconductors

There’s also a current market disruption at play here…semiconductor shortage. Demand across many applications are at multi-year, sometimes multi-decade, highs. Personal computers, electric vehicles, autonomous vehicles, AI, and the like all use semiconductors.

A semiconductor shortage has many implications:

Decrease in production
Price increase
Nationalist mentality
R&D disruption

A decrease in production can hurt the bottom line. It all depends on when the shortage ends. If production reduces enough for a sustained period, adjustments will have to be made by corporations.

A price increase is likely because of supply and demand dynamics. The price of semiconductors will go up, so the price of the products they’re used in will also go up. This could hurt demand for those products and could hurt consumers.

There are a select few companies that supply the majority of the world’s semiconductors. This could have a similar effect as Covid had with regard to supply chain management. Companies relied on global trade and cooperation to sustain their supply chain operations. When countries shut down due to the pandemic, global trade suffered as a result. Countries might shift to manufacturing their own semiconductors instead of relying on supply from trading partners.

Semiconductors are only getting less expensive and more efficient. With a shortage, and possibly less money coming into the manufacturers, it’s possible that this dynamic of cheaper and better plateaus…at least temporarily. It’s also possible that the shortage improves operations and makes the manufacturers more agile. Some countries have a very unique ability to progress, strengthen, and adapt when a roadblock presents itself.

With that said, I believe semiconductors will be a great investment opportunity. Their demand is only going to increase because of the push to provide the world with electric vehicles and clean energy. I would, however, pay attention to the shortage and I might wait until that shortage ends and prices stabilize.

Dealing with Market Fluctuations

May 6, 2020 by Jacob Sensiba Leave a Comment

Over the past couple of months, we’ve seen increased volatility. Put simply, volatility is periodic market fluctuations.

In a month, from the end of February to the end of March, we saw the S&P 500 drop nearly 35%. Obviously, it wasn’t a straight drop. There were several up days and a few relief rallies.

Since then, we have seen the S&P come back to the tune of 22%.

In this article, I want to give a little information about how I deal with market fluctuations, where I look for opportunities, and how retirement savers navigate these difficult times.

What I Learned

At the beginning of my career, I always dreaded experiencing a bear market. What do I do? Do I sell out of everything to avoid the decline? What do I tell my clients? How will they react?

As I gained more experience and read more, I learned what to do.

Keep in mind that I started my career in 2014, still in the middle of a long bull market, and since then I’ve read everything I could get my hands on about finances, markets, and economics. I’ve listened to podcasts and watched YouTube videos.

A lot of the people that I learned from attributed their success to when they got started. Two gentlemen really stick out.

One began his career in 1987 and lost his shirt on Black Monday (20% decline in one day, October 1987). This taught him about diversification and the importance of a long-term strategy.

The other got started in the early 80s but had a much different experience. He did some research and analysis and found a lot of risk in the credit market. He stuck his neck out on this trade and what he predicted came to fruition.

However, the markets didn’t react how he thought. What he learned was that fundamentals are important, yes, but what [almost] matters more is investor behavior.

Market Fluctuations

In periods of heightened market volatility, I pretty much hold my ground. I help my clients plan accordingly and coach them about what to do when stocks fall.

We put together the parachute before we jump out of the plane, not on the way down. That’s where people get into trouble. That’s why asset allocation is so important.

When building a portfolio, it’s vital to take your age (time horizon) and risk tolerance into account.

What may even be more important is the investor’s behavior. They might have a long time horizon and be fairly tolerant of risk, but if they’re going to lose sleep over a 10% correction, you need to position their portfolio accordingly.

Because my clients and I plan ahead, generally, I don’t do anything and I advise them to sit tight. What you don’t want to do is sell out of fear. At that point, you have probably experienced enough of the decline that it doesn’t make sense.

Exceptions

That said, I did some broad selling during the month of March. There were two positions that I used specifically to serve as a shock absorber during declines, and those did not perform as I’d hoped. So I sold them.

I realized they weren’t doing what I wanted them to and I cut my losses. Good traders and investors have an incredibly short leash when it comes to limiting their losses.

Opportunities

Generally speaking, I’m not a stock picker. I’m an asset allocator. Stock picking is not an efficient use of my time. However, sometimes it’s necessary and market fluctuations often create opportunities.

There are two positions, in particular, that I’ve been buying over the last month or two. I found enough of a disconnect between the price and what I thought the value would be over the long term, that I slowly invested into these two positions.

By the way, this slow investing is called averaging in, or dollar-cost averaging. Ideally, you invest at lower and lower prices, reducing your overall cost basis. My method is to take advantage of that disconnect I mentioned, but also leave enough on the side in case it goes lower so I can buy more.

How to Plan

Planning for market fluctuations isn’t something you do when you think it’s coming, it should be part of your plan all along.

Age is a big factor when determining the time horizon. The other items to consider, as I mentioned, are goals, risk tolerance, and investor behavior.

As an advisor, you have to be acutely aware and familiar with your clients, their risk appetite, and their personality. Only then are you able to plan with them, then guide them during trying times.

That’s probably one of the biggest things I’ve taken away from these market fluctuations. I’ve received two phone calls. That tells me that I’ve trained them well. That I’ve done a good job planning with them and that they are comfortable with how their portfolios are positioned.

Impeachment And The Stock Market

October 2, 2019 by Jacob Sensiba Leave a Comment

The talk of impeachment is flooding the headlines, so we’re going to explore it, how impeachment proceedings took place in the past, what happened to the market with each instance, and what you should do with your money/investments while these events transpire.

What’s the process?

The first step in any impeachment proceeding begins with a formal inquiry. This is done by the House of Representatives, and that’s where we are at this point in time.

During the inquiry, the evidence is gathered by the house to help make their case. Once they’ve gathered everything they needed, they take a vote.

If that vote passes, it goes to the Senate. They, like the House, review the evidence and take a vote. If the Senate’s vote doesn’t pass, then the President may be acquitted, and things end there.

What history tells us

There have been three impeachment inquiries, with only one actual impeachment.

The first was Andrew Johnson in 1868. The second was Richard Nixon in 1973. The third was Bill Clinton in 1998.

Which one was impeached? Bill Clinton. However, the Senate acquitted him and he was not removed from office.

When Andrew Johnson went through the impeachment process, the stock market (yes there was a stock market back then) really didn’t do anything, finishing that year up 1.5%.

During the impeachment proceedings with Nixon, the United States was in the middle of a recession. From the initial inquiry to the day he resigned from office, the S&P 500 fell about 30%.

With Clinton, however, the economy and the stock market were in the middle of an expansion. From beginning to end, the S&P 500 gained about 28% during his impeachment process.

What history tells us is that the period surrounding the impeachment will lead to greater volatility, but the long-term direction of the market is determined by fundamentals.

Be mindful of the headlines

The current impeachment inquiry with President Trump is dramatically different from the other three.

The internet makes updating the public instantaneous
Algorithmic trading can be programmed to execute orders when publications mention Trump, impeachment, etc.
We’re in the middle of a trade war with China, so uncertainty at home (U.S.) puts Trump in a weaker position to negotiate. What’s more, if impeachment looks more and more likely, Trump may be inclined to make a deal to help his case…even if it’s a bad one.

What should you do?

That depends. If you have 15+ years until you need to access your investments, I would tell you to do nothing. If you’re in retirement or it’s right around the corner, however, I would think about being a little more conservative.

When you grow more reliant on your retirement savings, your primary objective must move from capital appreciation to capital preservation.

I’ll link to several resources that should give you more guidance about retirement planning by age, investing in volatility, and more information about what’s been discussed here.

My Thoughts On The Market

July 10, 2019 by Jacob Sensiba

Let me start by saying that I have no clue what is going to happen in the stock market in the next 12 to 18 months, what I do know are several of the factors that have a say in what happens.

If you guessed that at least one of those factors has to do with President Trump, then you’re right.

Trade

The big elephant in the room. Honestly, I have no idea how this is going to pan out. Obviously, it behooves both parties to get this rectified as soon as possible, but it makes sense for China to hold out until the 2020 elections.

If they make a deal now, the US has more leverage at the moment and will probably be on the winning side of things.

If they wait until 2020, they have a chance of getting a Democratic president elected, and more than likely, they’ll reverse course on trade.

I think the odds increase that a Democratic president will win because if a trade deal isn’t reached, the market will negatively react and if the market tanks while Trump is president, he’ll be in trouble.

The US also decided to slap tariffs on European goods. This matters because if a deal is made with Europe, that gives the US that much more leverage. They won’t need China as much, and it’s clear that China needs us. We’ll see what happens.

Interest Rates

You may have caught wind of the most recent jobs report. We added over 200,000 jobs last month, which was much stronger than expected.

You’d think that kind of surprise would be good for the market, wouldn’t you? Unfortunately, the strong jobs report signaled a stronger economy than previously forecasted.

A stronger economy gives the FED less of a reason to cut rates this month. Where it stands now, I don’t know what they will do at the next meeting.

I was certain they would cut, but that was before the jobs number. I think it will benefit us down the road if they don’t. The reasons I think that have been explained before, but I’ll give you a synopsis real quick.

Typically, in the normal business cycle, rates will start [generally] low and consistently rise in tandem with economic expansion. Once the expansion peaks, the FED will cut rates to promote borrowing, which translates into spending.

Here’s the kicker. The prime rate (the rate the FED controls and the rate that affects all other rates) needs to be at a certain level when the FED cuts. If the prime rate isn’t high enough, then the FED won’t be able to cut enough to stimulate the economy.

What does this mean?

The current economic and political environment in the US is like nothing we’ve ever seen before. Our respective parties are at each other’s throats, which doesn’t make cooperation easy.

The unemployment rate is as low as it’s been in 50 years, inflation is crawling, rates are still ridiculously low, and the market is making new highs.

The FEDs impetus for raising or not raising rates is the level of inflation. It’s lower than their 2% target so they took their foot off the gas.

We are at the end of an expansion, which means a recession is most likely on its way, if not in the works already.

If you have less than 15 years until retirement and reallocate your accounts to be a little more conservative than usual. If you have over 15 years until retirement, I wouldn’t make any adjustments (allocate according to risk tolerance, time horizon, and goals).

Keep in mind that if you shift to more conservative and the market continues to rise, you’ll lose out on some gains, but if the market tanks, that conservative tilt should help minimize the damage.

What’s a Tariff and How Will it Affect Me?

July 18, 2018 by Jacob Sensiba Leave a Comment

Tariff. It’s a word that you’ve probably hear a lot lately, but do you know what it means, how it’s applied, and how it’ll affect you?

What is a tariff?

In its most basic form, a tariff is a tax on goods imported from other countries

Why are they used?

There could be several reasons why a country would impose tariffs on certain goods and/or certain countries. Here are several of them:

Protecting employment – This is the one you are hearing about right now. President Trump wants to place tariffs on Chinese made goods. This will increase the cost of goods, which could make employers manufacture the goods themselves, which could warrant more hiring and more working Americans.
Protecting consumers – Countries levy tariffs for this reason if they feel a product coming from another country could danger domestic consumers. For example, if we import chicken and find out this chicken could be tainted or harmful, a tariff could be assessed to this, and force U.S. citizens to buy domestically.
Infant industries – If a country has an industry or sector that’s just getting started, a country could impose tariffs on similar products in order to limit competition and help that new industry grow.
National Security – More often than not, this has to do with defense. Most countries will manufacture and supply it’s defenses with their own products for obvious reasons.
Retaliation – Like what we’re seeing right now. Countries will impose tariffs in response to tariffs being imposed on them.

How do they affect U.S. consumers?

Tariffs affect consumers in a few ways. The first and biggest impact is that goods and services could cost more.

For example, President Trump put a tariff on steel and aluminum. You know what uses a lot of steel and aluminum? Vehicles. The makers of those vehicles will then pass the increased cost down to the consumer.

Personal cars, farming equipment, etc. will now cost more as a result of those tariffs.

The other effect it could have is employment. As mentioned before, if imported goods cost as much or more as domestic products (post-tariffs) it makes U.S. employers manufacture those goods in The States.

With the rapid increase in product creation, these employers will need to hire workers to create these products.

On the flip side, it could also negatively affect employment. With the increased cost of goods, companies could lay off workers in order to reduce the impact of that increase in expenses.

How do they affect the stock market?

We are already seeing an impact on the market. People hear that their costs will go up, or they hear the phrase “trade war,” and they start to worry. We’ve seen an increase in volatility this year, and a lot of that is due to these talks.

Here’s the thing, a healthy majority of investing is psychological. So any news that frightens investors will have an impact on the stock market. Scared people sell, and level-headed and/or institutional investors buy at lower prices, hence the dramatic up and down movements.

Companies that import a lot of goods will see an increase in cost, which could hurt their bottom line. Also, companies that export a lot of goods could see decreased demand due to the retaliatory tariffs put on by China and other countries. Again, bottom line.

A lot of investors look at that bottom line to make investment decisions. If they see a decrease in revenues, they could sell.

Additionally, the tariffs placed by other countries on U.S. products could have a negative impact on entire industries/sectors, which could hurt the companies in those industries and their stocks as a result.

Conclusion

No matter your opinion of President Trump, these tariffs are a net negative for the consumer. The increase in costs to consumers could be much greater than the increase in domestic employment, which is one of the goals with these tariffs.

Whatever happens with this mess, it’s important to know what the tariffs will impact and how consumers, industries, and the economy will be affected.

For more information on how to plan for these tariffs, and for our disclosure visit www.crgfinancialservices.com.

More Changes for Payday Loans?

July 30, 2014 by Average Joe 2 Comments

I’ve written previously about some of the changes to payday loan practices in the UK. Maybe this is a harbinger of things to come in the USA?

Here’s the latest:

Payday loan sector members agree: Charter governing good practice but government regulation continues to loom in 2014

Businesses within the payday loan sector have taken many steps towards self-regulation since 2012, yet as continued government intervention in the industry looms, the topic of self regulation continues to be hotly debated.

Let’s focus on the self regulation charter agreed to by much of the UK payday loan sector in 2012. This will help us examine the impact this has had on the payday lending industry after 2012, so we can debate the issue. Here’s the key question: has the government has gone too far in the regulation of the payday loan industry? Maybe even better: is government intervention necessary?

A cynical take on the self regulation stance taken by the payday lending sector since 2012

A cynic might argue that as with any voluntary assumption of a self regulatory framework, the measures were designed to stave off government intervention in the regulation of the industry. It is just as easy to take the opposing stance and argue that self regulation creates enough protection for customers, thus dispensing with the need for further government regulation. However, whatever your stance on the self regulation assumed by much of the payday loan sector in 2012, there is no disputing that the self regulatory framework adopted has improved standards within the payday loan sector as a whole and made the experience of obtaining a payday loan a fairer, more transparent and easier process.

Self regulation within the payday lending sector: a new consumer – focused Charter

In 2012 much of the payday loan sector in England took significant steps towards agreeing a self regulatory framework. At the center of the framework was a consumer – focused charter which made voluntary commitments to fairness, transparency and responsible lending.

Specifically the Charter established commitments towards fairness, reasonableness and responsible lending that are agreed to by all governed by the Charter. The Charter specifically outlines a commitment not to encourage irresponsible borrowing, and imposes an obligation on lenders to inform customers of the suitability of payday lending, only for short- term lending requirements.

Other rights created by the Charter include a right to have payment arrangements explicitly explained and a right to have the implications of the loan fully explained before the loan is entered into. The Charter also provides customers protections in the form of notifications relating to any payments taken, and a notice period of three days is nominated as the minimum notice period required.

Other areas governed by the Charter include the freezing of charges and interest in circumstances where a consumer has agreed a reasonable repayment plan, and a commitment to deal with issues of financial difficulties sympathetically.

Your views

What are your views of the regulation of the payday loan industry? Have you used Wonga – the current top competitor in the payday industry? Do you have thought on where this industry is headed with the new regulations coming in or do you have you any experience of loan sharks? Please comment or reply so you can share you opinion on these hotly debated issues. Payday lending has been a controversial matter for some time, but given the recent regulatory changes affecting the industry the debates surrounding the regulation of the industry have intensified. Let us know what you think, and don’t be afraid to tell us what your view is!

Self regulation of the payday lending industry: is it enough and is it effective?

Clearly government intervention within the regulation of the payday lending industry in the form of the Financial Conduct Authority oversight policy shows that the government believes the industry should not be allowed to self – regulate. Perhaps, central to the new proposals for regulation of the industry is the rise in the number of people using payday lending services. In 2008 the payday lending industry in the UK alone was worth 900 million, and this has sky – rocketed to an estimated 2.2 billion in 2012.

Some may argue that too much regulation of any service industry is a bad thing and results in unfair outcomes for consumers, whose access to a full range of services is typically limited by strict regulation. People who can’t access services legitimately inevitably go looking for the same service elsewhere. Enter the illegal money – lender, and the pressure to resort to their services.

On the other hand it can be argued that the industry will contribute to debt problems and create other long term social problems, if left unfettered. Despite the commitments made across the board in the payday lending sector, many commentators argue that the measures have not been effective in tackling spiralling debt within the UK as a whole.

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