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ECU IN THE MEDIA

FT Adviser - August 2007

Loneliness of the cross currency runner

Borrowing against currencies can result in reduced mortgage debt says Stefanie Ives.

But due to the high level of risks involved it may only suit a small section of consumers.

The ECU Group manages large mortgage debt by trading in foreign currencies, though borrowers must not be risk averse as the potential fluctuations are huge. It claims vigorous client screening helps prevent any notion of another mis-selling scandal like endowment mortgages occuring.

Reducing debt capital on a mortgage is the priority of many a homeowner, but ask most how they would reduce the amount they must pay back to their lenders and they think of equity investment.

But the ECU Group, a multi-currency debt management scheme, claims ploughing your cash into a mortgage endowment or similar investment vehicle is no longer the only option to reduce debt capital on your mortgage.

Instead, the business claims clients can potentially reduce capital by using a system often used by fund managers – they can borrow in currencies that fall in value against sterling.

In operation since 1988, ECU Group's scheme currently has about 800 clients on its books with an average loan of £1 m each.

Along with reducing the size of the debt capital, borrowing is done in currencies offering a lower interest rate than sterling.

This may all sound like a win-win situation but there is a sobering side to what is, fundamentally, an exercise in risk management. Cormac Naughten, head of private clients for the ECU Group, explains the product has potentially huge savings for borrowers long-term, but warns it should not be viewed as a method to avoid rising interest rates. He said: “The aim of the programme is to reduce the overall debt.

"If a client just wishes to get a lower interest rate then we advise them to go through an adviser to get the best domestic deal.

“There are risks involved in this whole enterprise and we are very honest with our clients. They must be prepared to have a minimum negative fluctuation of 5 per cent annually. As this is a risk managed product, we also have a conversion limit in place. which is 15 per cent above the original loan.

"If this is ever reached, the lender reserves the right, but not the obligation, to convert the loan back into sterling. The 15 per cent limit has only been hit once in 1995 but this is not to say that it will not happen again."

Technology

The technology used by the group has evolved over the years and much work has been done in the last 12 years to improve risk management.

Trading systems have been upgraded so it is possible to trade currency 24 hours a day.

Fund managers can also execute foreign exchange with whoever is the most competitive in the FX market, not just the lending bank.

Although these are all great strides forward for the scheme, this does not negate the potential for ending up with a bigger debt than you started with. Borrowers are carefully screened so if a 15 per cent increase signals disaster, they will be turned away on the grounds of unsuitability. The importance of knowing your client is one of the reasons why the group likes to work through mortgage intermediaries.

Mr Naughten said: "Our mortgage advisers know their customers so they are aware of who they should talk this option through with and who they should not.

"When these potential borrowers get to us, they have already been pre-screened and made fully aware of the downsides.

"Of course, we explain everything again along with the lender but it is something that we make each person sit through. We want them to be totally aware about the product and all its implications.”

Prime candidates for this debt management scheme are, unsurprisingly, traders, high-f1ying professionals, entrepreneurs and property investors. Apart from the obvious wealth connection, there are also similarities in the levels of education and attitudes to risk.

Robert Guy, director of London-based IFA Timothy James & Partners, has been involved with the programme since 1988 and has seen it evolve during the years.

He said: "At the moment. I would say the take-up is split between 50 per cent City traders, 30 per cent lawyers and 20 per cent property professionals.

“There has been a massive increase in the last five years as it has only been comparatively recently that the group has started to market itself. ECU has about £750m on its books and roughly £650m of that has been added in the last five years. Clients receive lots of advice and I am particularly careful to show both sides of the coin.

“I always recommend a repayment vehicle to be in place and customers should always look to the worst case scenario when organising their finances,” he concluded.

Scandal

For those who think this all sounds a bit like another mortgage endowment scandal in the making – the combination of investment and mortgage unsettles some stomachs – it would be worth bearing in mind the customer profile is totally different.

Unlike endowments, which were very much aimed at the general population, this is a niche market product for customers in professions that already involve an understanding of risk.

It is very much a case of “obsessive Teletext checkers need not apply”. While this scheme will not lead to people beating a path to the door of their local mortgage adviser, it is an interesting development in the mortgage market and one advisers with high net worth clients should weigh up.

It is unlikely this will ever be a product open to the general public partly due to its complicated nature and partly due to the sheer size of debt that needs to be owed in the lirst place.

This is not a programme for the faint-hearted but it Can have big pay offs, which for a growing number of clients, seems to make the risk a worthwhile one.

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ECU IN THE MEDIA

"Some $1.9 trillion is traded daily in FX - a volume which dwarfs that of equity and bond markets combined."

Mortgage Finance Gazette
August 2006

READ ARTICLE

I have read and understand Risk Warnings.

Foreign exchange movements can be sudden and substantial. At no stage should you expose yourself to the high risks of foreign currency exposures if you are not able to afford the potential losses that could result from sizeable adverse currency movements and the higher interest rate servicing costs that would be required of you in the event of your having a larger debt.

Denominating debt in foreign currencies may not be suitable for you. Changes in the exchange rate may increase the sterling equivalent of your debt. Your lender will not tolerate too great an increase in the sterling equivalent of your debt as a result of currency losses and may opt to convert your debt back into sterling at a predetermined level. This may result in a permanent increase in the sterling equivalent of your debt which is not fully compensated for by any other benefits derived during the course of The ECU Group plc's discretionary currency debt management services. In this event, you could be left paying UK interest rates on a larger amount of sterling debt than that you originally borrowed. Your home may be repossessed if you do not keep up repayments on your mortgage.

Your lending bank sets a 'Conversion Limit' at which level they have the right to convert your managed multi-currency mortgage back into sterling to prevent further currency losses. It is important to understand that this is a right of your lending bank and not an obligation and that if they do not act promptly to convert your loan back into sterling when your Conversion Limit is reached, your loan could increase by more than that specified by your Conversion Limit.

ECU may from time to time transfer your loan into foreign currencies with higher interest rates than sterling with the objective of achieving a debt reduction in that currency.

Sterling interest rates are subject to change and the differential between sterling interest rates and the interest rates of other foreign currencies will fluctuate.

Suitability
The markets or financial instruments discussed herein may not be suitable for all investors and investors must make their own investment or participation decisions using their own independent advisors as they believe necessary and based upon their specific financial situation and investment objectives. Past performance is not a reliable indicator of future performance, and should not therefore form the basis of a decision whether or not to buy or sell any investments or financial instruments or to participate in any particular trading strategy mentioned herein.

The UK Regulatory System
The ECU Group plc ("ECU") is authorised and regulated by the Financial Services Authority.

In respect of managing physical liabilities in foreign currencies, ECU trades the foreign exchange markets on a spot basis and issues switch instructions to lending banks on a spot basis. Neither of these activities is currently regulated by the Financial Services & Markets Act 2000 as they meet the "Commercial Purposes" test. Therefore you will not benefit from the protection of the Financial Services and Markets Act 2000.

However, if ECU instructs the Lender, or any prime broker or counterparty with whom ECU effects foreign exchange transactions, to conduct a switch by way of effecting an “option” or “futures” transaction for the Client’s account, such transactions may be considered to be an “investment of a specified kind” under the Financial Services and Markets Act 2000. Consequently, both the execution process provided by the Lender, or any prime broker or counterparty with whom ECU effects foreign exchange transactions, and the currency management services provided by ECU, as envisaged under this Agreement, may be considered to be regulated activities. In such instances, the Client may be required to sign additional risk warnings and the rules for the protection of investors under the Financial Services and Markets Act 2000 will apply.

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