The conference, on 6 July, takes place at a crucial period in the continuing debate about regulation of the lending industry. And it coincides with a major consultation exercise we have already begun with our own members on the future shape of regulation.
The debate about regulating the financial sector more widely was effectively launched by publication of the Turner review in March. We welcomed the review as a thoughtful analysis of the global banking crisis and the breadth of issues that need to be addressed in the UK and internationally. It set out many of the key issues and arguments, which the Financial Services Authority (FSA) is now considering more fully as it deliberates on the future regulation of the financial sector.
How the UK mortgage market is regulated is a small but crucial part of that much wider debate. Only a small portion of the Turner review focused on mortgages, with the FSA promising a much more detailed paper on regulating housing finance in September.
The FSA’s approach
In May, key members of the FSA’s staff, including Lord Turner, expanded some of the arguments set out in the review at a conference hosted by the regulator. Otherwise, the FSA has said little about mortgage regulation and looks likely to add little more publicly before publishing its paper in September.
In the meantime, however, the regulator is consulting widely with stakeholders as it develops its views, and we have held a series of meetings with key FSA staff. We have also been pursuing a hectic schedule of consultation meetings and discussions with our own members to give them a chance to express their views and to ensure that their concerns, individually and collectively, are reflected in our continuing talks with the FSA.
The CML conference
The conference in July represents another opportunity for lenders to express their views in the continuing debate about mortgage regulation. It will feature a mix of plenary and break-out sessions covering all aspect of the FSA’s agenda.
Around 100 senior mortgage professionals are expected to attend. CML staff will set out their views, alongside speakers including Lesley Titcomb, the mortgage sector leader of the FSA, Annik Lambert, the secretary general of the European Mortgage Federation, and Adam Phillips, the acting chairman of the Financial Services Consumer Panel. Conference debates and presentations already finalised include sessions on:
Expanding the scope of regulation. With some commentators uneasy about giving more scope to the FSA, the conference will consider the extent to which this could happen. Our consultation exercise confirms that most lenders are in favour of regulating secured lending. But what about buy-to-let?
Affordability and suitability. How can the need to assess affordability be effectively regulated? And is there a case for the FSA to specify what an affordability check should consist of?
Product regulation. Can any form of product regulation work, or would it be better for the FSA to require lenders’ capital holdings to reflect the risks associated with their business profile and product range?
Regulating the intermediary market. The conference will look at what changes are needed to the regulation of intermediaries, and how reform might be implemented. Is it inevitable that there will be a move to fewer, larger firms, which the FSA may be able to supervise more effectively? And how should we resolve the continuing debate about how intermediaries are paid?
Our consultation exercise has been seeking the views of members on these – and many other – topics. So, what has emerged from it so far?
Lenders’ views
Many firms have endorsed our initial view that the Turner review provided a helpful analysis of the global banking crisis, and the broader regulatory failings that need to be addressed, both in the UK and internationally. But many also agree that the detailed mortgage conduct of business rules, only introduced in 2004, have largely fulfilled their purpose and do not need to be substantially re-written. We have acknowledged, however, that we now need a fuller debate about how the FSA applies and supervises its rules and principles in future.
Exposure to risk as a result of mortgage lending decisions is sure to be a key issue for the regulator. In particular, the FSA is concerned about the risks presented by cases in which there is not a clear understanding – either by the lender or the customer or both – of the borrower’s continuing ability to fulfil their financial commitments.
Verifying income
The FSA’s September paper may therefore present a case for doing more in some cases to verify the income of mortgage customers and assess more rigorously their ability to afford their ongoing commitments.
We know that the FSA has been concerned about problems associated with self-certified lending, for example. Some borrowers have experienced repayment problems with this type of loan – as they have with other mortgage products. There has also been some fraudulent abuse of self-certified mortgages, with applications based on inflated income claims.
But while the industry must, of course, acknowledge – and work on solving – the problems, it is equally important that the FSA does not take too narrow a view of the potential for consumer detriment. Concern about financial inclusion may not be as high on the political agenda as it was formerly, but it has not slipped off the radar completely. So, it is important not to forget that numerous legitimate borrowers with irregular sources of income that cannot easily be verified have successfully become home-owners through access to self-certified mortgages.
Product regulation?
Calls for strict product regulation must therefore be considered very carefully. But if we want to avoid the inflexibility associated with strict product rules, what other modifications to the regulation of mortgages might be necessary?
Would it be reasonable, for example, to accept a narrower, clearer understanding of the circumstances in which a self-certified mortgage might be an acceptable option? And the type of borrower for whom it is appropriate? Are the risks of self-certified borrowing more acceptable with tighter rules for judging the plausibility of an application, and a higher capital weighting to offset the greater risk?
Those in favour of strict product regulation might argue that a ban on self-certified mortgages would also close a source of potential fraud. In our view, however, it is much more important to maintain a proactive approach to combating fraud in all its guises, with, for example, a strong commitment to sharing information about suspected criminal activity with industry professionals, the regulator and other enforcement agencies. We believe that that will be a much more effective weapon against fraud than simply banning products.
Would a ban on self-certified mortgages really deter fraud, or would it simply lead criminals to try other options like, for example, submitting fraudulent mortgage claims backed by bogus documentation supporting false income claims? There is, in fact, some evidence that this is already happening – perhaps partly in response to the sharply reduced availability of self-certified mortgages for fraudsters to target.
Products and processing
Would new statutory requirements for more robust checks on income also affect the ability of lenders to fast-track mortgage applications? If so, would it be appropriate for the regulator, in effect, to outlaw fast-tracking, which is, after all, not a product feature but a process that some lenders choose to apply to the least risky mortgage applications?
If the industry wants to avoid a ban on fast-tracking, might lenders have to accept that there should be limits on when it can be used and measures to prevent it being targeted by applicants seeking to exploit a lower level of scrutiny of their application for the wrong reasons?
Arguments in favour of a simplistic approach to product regulation – for example, with strict limits on borrowing relative to the value of a property or the income of the borrower – have already been widely debated as commentators consider appropriate responses to the problems of the past.
Product regulation was even mooted in the Turner review, which noted that some countries have adopted this approach but questioned whether it would be appropriate in the UK.
The consultation exercise we are conducting suggests that most firms favour alternatives to strict product regulation. Requirements for firms to have appropriate levels of protection against riskier business models are a preferred option. We will continue to seek the views of members and ensure they are represented in our ongoing discussions with the FSA as it prepares its crucial September paper on the future of mortgage regulation.
