For my own situation I go back to 2006 when I wanted to purchase a second Care Home. I approached the Bank, RBS, who approved the loan and in fact they fought hard to secure the deal as there were others interested parties (my relationship manager spoke with the sellers and secured the deal. The previous owner was an ex bank manager). One wanted to turn the property into a school while another would make an offer to purchase both the land and the property. Indeed that remained on the table with the full knowledge of my relationship manager. To make a little more of this point, I could have sold the property for a reasonable profit on day one.
When was I approached regarding the IRHP? When my RM reminded me he had saved my dreams and mentioned IRHP in a passing conversation. Over time I was introduced to the treasury advisor and classified as a private customer see http://www.mondaq.com/x/43030/Financial+Services/Client+Categorisation+FSA+Proposals+For+implementation
Without being specific on dates I had a meeting with the RM, The Treasury and an assistant who took minutes. I was asked to sign an FCA document and I was also asked my opinion on Interest Rate Movements at the initial meeting. I did not have a fixed opinion but promised to complete some research via Bloomberg. My research confirmed one facet from the meeting I.e I had not understood the purpose of an IRHP, and I decided I didn’t want or need one. I conferred with the RM who stated I had no choice if I wanted to pursue the purchase. But I had formed my opinion on interest rates based on my reluctance to enter into a product I did not understand. As far as I could see they were going down and I premised this on the sub-prime bust in the U.S.A. which I knew to be a logical argument given that, whatever the USA catches we get a dose. I then formed the opinion of interest Rates of 0% taking into account the Japanese experience of deflation. I had no idea if it was logical commentary but I did not care as I did not want the product. I also informed the advisor that I would cancel out within the 14 day cooling off period. Interestingly, he advised me I couldn’t.
Why was I so afraid of the product? You tell me? After what I'd been told I came away believing that it would protect me from rising rates, yet I would benefit from falling. I could sell the product and make money? It would not impede on my borrowing and I could move it to another bank. A super product which I did not trust. Yes of Course I now know that those terms related to differing types of products.
OCT 2007 I completed the purchase and entered into the hedge.
Why have I titled this post as a perfect Storm?
Again I revisit my own experiences. 1st payment to the swap 02/01/2008 was £255.17 per quarter but by October 2009 that payment, as interest rates fell away, became £10,722.37. The RM then approached me with a new mortgage, a LIBOR Loan, in a scenario best explained by using his words “you scratch your bank we scratch yours.” I was still too trusting. I re-mortgaged and novated the swap, both to LIBOR. The swap payments moved between £3010 pcm to a high of £4010pcm
Whilst all this was going on for me we had the Market crash and an election in May 2010. The Tories and the Lib Dems united and a few short weeks later we had the austerity budget. While this did little to the care industry directly, the council budgets were, let’s just say, pared back. The first significant event I had was a letter from one of the London councils asking for a reduction in fee levels for one service user. To date that same council has not raised fee levels since. Another council despite all of its clients having been approved via their own fair pricing tool, sought to reduce their fees. This happened in 2012 – 2013 and it personally hit my business by £3,000 per month. I know of one area of the UK Nursing homes which were paid in arrears instead of the usual practice of 2 weeks advance 2 weeks in arrears. Many homes have not been offered fee increases during this time frame and despite contracts being effectively written for cost of living increases. Domiciliary Care contracts in some areas have gone from £17 per hour to £12 per hour. Other councils have started the terrible situation of bidding for service users and usually the lowest price wins. I have heard of care hours being bid for under £10 per hour. Just look at that for a moment - Living wage outside of London £7.65 (per hour?), London £8.80, fuel costs, back office, training, PAYE, pension?
Again going back to the time frame 2010 – today we have seen a rise in the cost of living, food, heating, fuel. Business wise we have seen increases in the minimum wage, the introduction of pension schemes (great news) hopefully the introduction of the living wage. At one fee meeting arranged by a local care association, within the aforementioned time period, I mentioned the living wage knowing full well that the council had a policy of paying the living wage. When I asked if that living wage was reflected in the pricing tools for care, there was silence in the room. Now I am unsure if it is accounted for, as I do not have access to their modern pricing tool but if the silence was to be the judge I really do not think it was thought of or genuinely they did not know the answer at that time.
Now go back to that Care business which has the IRHP. It's not benefiting from falling interest rates and it's income is being squeezed. The costs are going through the roof and what will suffer? You could reduce staffing - I had a minimum staffing requirement negotiated through individual contracts with clients, so no go for me although possibly others could reduce staff. Another major cost is maintenance and many operators I have spoken to have cut back. This means the homes look tired. Then the CQC inspector looks at it and puts conditions on you – you have to maintain the property and if you fail some authorities restrict/stop placements. Then there's cash flow management, you don’t pay the electricity bill or the gas bill. I've heard of homes who do this being reported straight to CQC. The pressure on numerous businesses across all sectors is immense but in Care it’s the vulnerable who suffer and not just the business. How did I cope? By borrowing from HMRC and utilising their time to pay arrangement.
As a side issue, how big is the problem within care? Without spending fortunes or hours on research I investigated via the phone and email and this is what I discovered. I have taken everyone I spoke to on trust as they had nothing to gain by exaggerating
I am talking about pure care home sales on the open market at the peak. I am not speaking about corporate sales and, after speaking to a number of agencies, from the smallest to some of the largest, the average guestimate was of 300 sales per annum, from 2006 – 2010. So in just 5 years, 1500 care homes have been put at risk from these products. This figure of course covers just sales not re financing, refurbishments, new builds, extensions etc etc. How many vulnerable people within those care homes? How many staff? How many families have been affected? Another guide given was from a specialised broker fighting against IRHP’s. He had 34 care groups fighting mis selling of IRHPs with a total of 150 care homes at risk!
A final thought - if we in the Care Industry are found to have committed a financial irregularity against a service user, it is rightly considered to be abuse. Staff members could lose their jobs as it is deemed to be gross misconduct and the business could lose its registration. Yet when financial abuse is committed against the owners and operators of care businesses by the banks what is done? Seemingly a long drawn out redress scheme and a slap on the wrist. Examples of this - IRHP FX LIBOR.