An Introduction to Quantitative Easing - When It’s Used

The Bank of England in Threadneedle Street, London. Deutsch: Sitz der Bank von England in der Londoner Threadneedle Street. (Photo credit: Wikipedia)

Since the dawn of the financial crisis in 2008 - a crisis that continues to effect the health of our economy, and therefore the prosperity of each one of us today - there has been much discussion as to the best ways to minimise government debt whilst, at the same time, encouraging as much growth in the economy as possible. One tactic that has been used in a few countries including the UK and US is that of quantitative easing.

Typical Monetary Policy
A central bank’s primary and most effective tool when influencing or controlling the speed at which the economy is growing is the base interest rate. In the UK the central bank, the Bank of England (BoE), defines this rate as the rate at which they will lend to other banks. In short, by lowering this base rate, other banks are able to borrow at a lower rate and consequently offer lower interest rates in turn on both loans and savings accounts to their customers. These customers therefore have access to more affordable (due to the lower loan repayments) money with which to grow their businesses or to spend on goods and services. Meanwhile, the lower interest rates on savings accounts reduce these potential returns and so there are less incentives for customers to deposit their money as savings. All these factors make investment opportunities more attractive and spending more likely; thus increasing the flow of money through the economy.

When Quantitative Easing Is Used
This system works well as long as the base rate has room to be lowered. However, when it is too low to be reduced any further the central bank must look to other solutions to encourage further spending and investment. What’s more, when a base rate is lowered in response to a lack of liquidity and growth in the economy, there is a point at which banks can become more reluctant to lend. This is caused by the twin effects of lower yields for the bank on their loans, due to the tendency for the interest rates across the market to be lower, and the increased uncertainty surrounding whether individuals and businesses will be able to make their repayments. All of which reduces the money reaching invdividual’s and businesses and subsequently their spend and investment on goods and services within the economy, slowing down growth.

When the central bank encounters a situation such as this, as has been the case in a number of economies in the last few years, they can utilise a secondary tactic of quantitative easing. The basic principle behind quantitative easing is to introduce more money (i.e., more liquidity) into the economy to spur spending and growth, by using newly created money (colloquially referred to as ‘newly printed’ although in truth it is all done electronically). This new money is injected by the central bank when they purchase government bonds (i.e., government debt) from private companies, as explained further in the second installment of this article, with the aim of there being a trickle down effect throughout economic markets to other businesses and individuals.


Managing Growth
The level of spending in the economy can be intimated by the inflation rate - the percentage rate at which the value of goods and services are changing, usually increasing, in price. A high inflation rate reflects the fact that there is high demand for these goods and services within the economy, although the higher it becomes, the greater the chances of a rebound effect that then reduces demand and slows spending - high inflation means high prices and these prices can reduce the affordability of goods and/or money will start to lose its value (particularly in the case of hyperinflation such as was seen in Germany in the inter-war period). Therefore, countries tend to aim towards a stable rate of inflation which reflects growth with a sustainable momentum.

In the UK, a committee within the Bank of England called the Monetary Policy Committee (MPC) has the remit of attempting to maintain a stable rate of inflation at 2%. To that end the committee is responsible for a number of monetary policies. including setting the base interest rate and overseeing the BoE’s quantitative easing policy.

The second installment of this article looks at how quantitative works and achieves this aim.

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Divorce and Financial Resolutions - The Process

With divorce rates on the rise again, most likely due to the financial pressures that most of us now live under, more and more people are not only facing the prospect of being divorced but the convoluted machinations of the divorce process itself. Often the two messiest and most contentious issues that couples need to resolve in any divorce case are the custody of the children and the division of finances. This article looks more closely at the second of these but of course all issues are intertwined.

To understand how financial disputes can be resolved it is useful to begin by looking at the broader divorce procedures. Despite the fact that divorce is far more socially acceptable these days, the judicial process still requires that one party in a marriage is deemed ‘at fault’ for the breakdown in the marriage and so to instigate a divorce an individual must complete a petition to the courts on the basis that their partner has committed adultery or unreasonable behaviour, or has deserted them for two years. Other grounds for divorce include a separation of over two years where both parties agree to it or five years of living apart. This petition is not only filed to the courts but forwarded to the other partner to sign and if all parties are in agreement, and if there are sufficient grounds for divorce, a judge will first grant a decree nisi . The decree nisi allows a 6 week window for objections to be raised, after which the prospective divorcees can apply for a decree absolute which confirms the divorce.

The granting of a divorce can be contested by either party involved but it is unusual for it to be overturned and therefore the majority of disputes that occur during the process are likely to be a result of conflict surrounding the distribution of finances and the arrangements and responsibilities towards children (often referred to colloquially as ‘access’). Where there are very few reasons for conflict, dispute or disagreement - in other words, there are no financial assets to split, there are no children involved or these issues have been resolved and agreed in advance of the case reaching court - then the case can be resolved as a summary divorce.

Where there are financial and custodial disputes to be resolved there are a number of different approaches that can be taken to reach (preferably) an agreement or a (at least) a decision on the issues. These approaches include legal negotiations, court rulings, family mediation and the new tactic of collaboration. Which route a couple takes needs to be decided early on in the proceedings so it is important to fully consider all of them at the outset.

Negotiations/Court Ruling
The traditional path that most people still take however is to pursue the case in court and then negotiate through their legal teams whilst the court proceedings are ongoing in an attempt to find a resolution which can be presented to the court, rather than relying on the judge to reach a conclusion. Each party’s lawyers correspond with each other’s on their behalf, representing their best interests, so that the two parties do not have to physically meet. If an agreement cannot be reached, the family court will make a discretionary decision based upon the evidence that they hear in regard to the financial aspects of each party and the marriage.

The framework for the judicial process involves:

• an initial application to the courts and subsequent provision of all relevant financial details and documents
• a First Directions Appointment (FDA) 12 weeks later to define the disputed issues and what needs to be done to resolve them
• a Financial Dispute Resolution appointment (FDR) where all parties attend to negotiate a resolution with suggestions from the judge
• a Final Hearing where a new judge will rule on the case if no agreements have been reached

An agreement through negotiation can be reached at or between any of these stages and presented to the court as a ‘consent order’.

Where agreements really are not feasible the full court process may be the only option but even when agreements can be presented to court the financial burden of communicated and operating through lawyers can be severe.

© Stuart Mitchell 2012
If you want to find out more about the most effective ways of resolving financial disputes during divorce proceedings then visit Family Law Solicitors London.

A Comparison of Direct Debits and Standing Orders

Most people who have bills, rent or mortgages to pay will likely either have Direct Debits and/or Standing Orders set up to meet their payments. However, they may not have ever taken the time to actually familiarise themselves with what each payment method is, how they work and what the differences are between them. The following article therefore aims to cover these aspects and highlight the uses of each.

What is a Direct Debit
In short a Direct Debit is a payment made from one bank account to another where the payee’s bank is authorised to pull the money from the payer’s account.

The mandate to take the money can be supplied by the payer in the form of a pro-forma completed by the payee, a record of a telephone instruction or an online form. This instruction must be passed to the payee to pass to their bank in turn and needs to contain the payee’s bank details - sort code, account number and bank name - as well as the frequency of the payments (e.g., monthly, quarterly, annually) and their timing. As an example, it could instruct that a mortgage payment can be taken from account 123456789 at Best Bank plc, sort code 11-22-33 on 1st of every month. The payer must however be notified of each payment, how much will be taken and when, before it is taken out of their account and can instruct their own bank to withdraw the authority at any time.

As further safeguards, each bank involved (payer’s and payee’s) must offer the Direct Debit facility and the payee must be an organisation that is approved by the bank before it can use the facility. The process is then backed up by the Direct Debit Guarantee which all banks must sign up to and which ensures that the payee is notified of any changes to how much payments and when the payments are going to be taken and that they are entitled to a full refund straight away if a mistake is made.

The two key characteristics of a Direct Debit are therefore that each payment is requested by the payee rather than sent by the payer, and that, in the case of regular payments the amount of each payment can vary. These characteristics mean that the payment method is ideal for making regular bill payments that are set to vary but which are due at on a schedule, such as utility bills. The payee organisation benefits from the fact that the payment is less likely to be delayed that if they were relying on the payee to initiate the payment. The payer can sometimes benefit from discounts passed to them from the payee as a result, plus they avoid the hassle of arranging each payment themselves.

The actual Direct Debit payments are underpinned by the Bacs money transfer mechanisms which are an inter bank transfer system. First set up back in the 1960s Bacs was until recently the primary method of making any free inter bank transfer.

What is a Standing Order
A Standing Oder is an instruction to make a scheduled payment on a set date for a fixed amount, usually on a repeating basis. Essentially, it is no different to a one off payment except that it is scheduled.

Once set up, it is therefore similar in nature to a direct debit in that it offers a scheduled payment system, however it does differ on its two fundamental characteristics. Firstly, that it can only be used where the payment amount does not change, and secondly, that the instruction must be made by the payer to their bank to send the specified payments to the payee’s account (rather than requested by the payee).

These differences remove a number of the complexities and restrictions of Direct Debits. For example, the payments can be made to any bank account because the payee’s bank does not need to facilitate and approve the process as would be the case with a Direct Debit. As a result it opens up the possibility for payments to also be scheduled to go to an individual’s account not just that of an organisation; in turn allowing Standing Orders to be set up between friends and family and even between one’s own separate accounts.

However, as the instruction comes from the payer, Standing Orders do place more importance on the payer ensuring that the payee’s details are correct. If the money is paid to the wrong account there is less recourse for the money to be reclaimed (in contrast to Direct Debits where the request is made from the payee’s bank anyway and is backed by the Direct Debit Guarantee).

As it schedules the payment of a fixed amount a Standing Order is ideal for paying bills which do not fluctuate, e.g., fixed rate mortgage payments, or for making regular transfers where the payer specifies the sum, such as charity donations or transfers to savings accounts. As an example a standing order could be used to transfer £20 on the 20th of every month to a particular charity’s account, or to put £100 into a savings account the day after the payer’s salary hits their account.

By becoming familiar with the answers to "what is a direct debit" and "what is a standing order", these two payment options and their respective mechanisms and benefits when making regular scheduled payments, people and organisations can make sure that they cover their payments using the most appropriate method; make the best use of their money, reducing the risk of missed or incorrect payments and minimising the effort required to do so.

© Stuart Mitchell 2012

The Advantages of a Family Office

The vast majority of us will never be fortunate enough to find ourselves in a situation where we need to call upon the services of a family office. However, for those at the wealthier end of the spectrum and who may own significant assets a family office can provide a vital service to both the individual and their family. The following article highlights a few of the benefits they can offer by looking at what they are, the varying purposes that they serve and the features that they can offer their clients.

In short, a family office is a private company that takes on the responsibility for running or advising on the running of finances and/or assets on behalf of a family. They are generally employed by very wealthy families that have the combined financial clout to make it worthwhile bearing mind that they can cost up to and around £1m a year. Their overarching purpose can range from more modest sustainability aspirations for the family, keeping the wealth and assets of a family intact, to more ambitious wealth building which may include aggressive investment strategies.

To these ends the services that a family office can provide include the fundamental administration of all financial matters - accounting, tax handling, savings and investments - as well advice on these matters and/or actual hands management, such as the placing of investments on a discretionary basis. As an extension of their remit managing the above finances, a family office can also take on the responsibility of managing many other aspects of the family’s lives including the legal matters and the day-to-day running of the family’s estate.

Indeed the term is used to refer to a variety of organisations that supply these services rather than a set company type and therefore some providers may be individual companies established with the sole purpose of fulfilling the role for a particular family, but others may be specialist companies serving multiple families or even financial sector organisations who provide families with just a few of the financial elements.

Family offices can sometimes can be divided into three classes (A-C) depending on the level of service that they offer and the nature of the company providing the service.

More traditional family offices that act as a distinct private company and take on responsibility for the management everything, i.e., of all financial and non financial elements of a family’s estate on a day to day basis, would fall into Class A. Effectively these act as a one stop shop for all matters and would be paid on a retainer. Often they would be established as a distinct private company in the first place. They are therefore completely impartial with no affiliations to a particular financial service provider and are usually fairly autonomous, operating on a discretionary basis making day to day decisions on behalf of family. Their services are ideal for families without the time or availability to run their estate themselves.

Families that do have the time and will to manage their own estates but perhaps need guidance in their financial dealings can access a Class B service, usually provided by a financial sector firm or a legal firm. Where they run particular financial products, or have affiliations with those that do, these can be made available to the family.

Alternatively, where a family is looking for estate management and on-site administration services, but do not require financial advice or guidance, they can access a Class C service. As the service is primarily management based and administrative, and therefore does not require extensive financial expertise, it can often be supplied by individuals employed on-site and in turn managed by the family themselves.

© Stuart Mitchell 2012

Divorce and Financial Resolutions - The Finances

Divorce (Photo credit: Wikipedia)

The previous articles in this series looked at the procedures and processes involved in reaching financial resolutions during divorce proceedings, as well the ways in which divorcing couples can work together to make the negotiations smoother, more productive and most importantly, more amicable. Having done so, the following article outlines the actual financial issues that need to be resolved and some of the decisions and agreements that can be arrived at.

Before taking any course of action both parties must fully disclose all of their financial details. to the court if necessary or to the other party during collaborative processes. Obtaining this information may involve the arrangement of valuations and some level of input from financial experts with the most obvious example of this being the need to value properties. The actions that will need to be taken to fully detail each party’s financial position will be determined either at the outset of mediation or collaboration or by the judge at the first court hearing.

The financial elements that have to be distributed at divorce are not just limited to shared assets such as property, possessions, investments and savings, but also shared debts, individual assets that have been accumulated during the relationship and even future earnings or income that have been impacted by the relationship and the input of the other party.

For financial disputes that end in court, judges will therefore, consider a myriad of different factors in order to achieve a fair distribution of assets, which will not necessarily equate to a fifty-fifty split. These factors can include not just the financial contributions and position of each party during and after the marriage but their physical inputs into the maintenance of the family unit and their responsibilities towards children and family going forward. In considering all of these factors courts and judges consequently have a large amount of discretion and so leaving financial disputes to the courts can introduce a significant degree of uncertainty for the couple. The best way of achieving a resolution in which the couple feel they have a degree of control is to follow either the of the mediation or collaboration routes.

When a decision or agreement is reached there are a number of ways in which individual assets can be distributed, whether they are liquidated (sold) with the proceeds split, assigned to one individual (maybe counterbalanced by another asset) or left in shared ownership. For example, a family home can be sold (with the sale monies distributed), assigned to one party if it is deemed that party has a need for a stable home in the immediate future (where children are involved especially) or can even remain in shared ownership with one partner keeping a silent share (again if there is a particular need to keep a child’s home life stable). Pensions, on the other hand, can be split with the partner being apportioned a slice of the pension fund, a lump sum payment or a share of its income payments.

Partners can even be ordered to make regular cash transfers from their income to reflect the contributions of the other party to their wealth (maintenance payments). For example a wife who made career sacrifices to support a family and her partner whilst her partner continued to progress in his career may be entitled to continue receiving a slice of the proceeds of that career progression. These payments can be set to run up until certain criteria are met such as until the receiver remarries, gets a job or their children leave home. Conversely, a decision or agreement which frees both parties from any such financial responsibility to each other, regardless of their future wealth and changes in circumstances, is called a clean break.

As mentioned above the most important factor to consider in divorce resolutions is the welfare of children and ultimately the best way of ensuring that they receive the most advantageous outcome from a distressing process is usually to take the more empowered, collaborative and amicable routes of mediation or collaboration. Doing so can encourage couples to reach agreements, as opposed to enforced decisions, and get there with more of their wealth intact to invest in their children’s futures.

© Stuart Mitchell 2012
If you want to find out more about the most effective ways of resolving financial disputes during divorce proceedings then visit Solicitors London or if you are interested in how to better spend your money on your child’s future visit Junior ISA.