The CML has stated that it shares the FSA’s vision to "deliver a sustainable market for all participants and which is flexible for consumers", but believes the policy and rules as drafted in CP 10/16 on responsible lending will not deliver this.
In its response to the consultation paper (CP 10/16) on responsible lending, the CML has called on the government to ensure a proper policy debate, and also called on the FSA to take greater account of the market environment and to reconsult on a more proportionate set of rules after a thorough and complete impact analysis.
In summary, the CML believes that:
• This is not simply a narrow consultation on an issue of parochial interest to the mortgage industry and mortgage borrowers. It reflects a financial regulatory approach and philosophy based on reducing “conduct risk” which has broader social, economic, housing, political and regulatory implications, as identified by FSA chairman Lord Turner. The CML believes this approach is flawed and should be urgently reviewed by Treasury Ministers.
• The regulation of housing finance (across all tenures) should support the government’s central and local government housing policies. CP 10/16 does not address the question of where consumers will live if they are unable to become home-owners in the future. The CML believes that Communities and Local Government Ministers should explain clearly what kind of regulation will best support their housing policies.
• The cost benefit analysis in CP 10/16 falls well short of what should be expected to support such a major market intervention. The CML called on the FSA to re-consult on all its responsible lending rules with a complete cost benefit analysis.
• The FSA’s proposals do not take due account of the correction in the market that has already occurred. The CML has previously suggested that rule changes should be deferred, reflecting that the market risks that the FSA is seeking to address in future lending are absent from today’s mortgage market. A debate about the future shape of regulation should still continue, but the FSA is already achieving its short term regulatory objectives by intensive supervision targeted at particular firms under the existing rules.
• The FSA has not taken due account of lenders’ likely behavioural response to heightened regulatory risks. The CML asked research consultancy Oxera to look at this, as it was the organisation which the FSA relied on in support of CP 10/16. Its report confirmed the CML's views that there is a high risk of behavioural change by lenders, caused by the regulator and its new approach, and which would go further than commercial responses in recent years which have shrunk the market.
• The FSA has not taken due account of the new prudential requirements on firms’ capital and liquidity levels, and their knock on impact on future capacity to lend. It seems unlikely that the market will see any swift return to the environment of excess capital which characterised the lead up to the credit crunch in 2007, and which fed the lending and borrowing excesses by a small minority.
• The FSA has not taken due account of consumer behaviour. It has treated consumers collectively as a homogeneous group which may act “irrationally” unless protected from irresponsible borrowing. The CML has funded a substantial new review of the current situation for borrowers, how they are coping in the current environment, what they would do if the situation became more difficult, and what they think of the FSA’s proposals. This independent research confirmed the CML's concerns about potential negative consumer impacts, and that consumers (particularly existing borrowers) have mixed views about the proposed changes, and many of those views are negative.
Commenting on the response, CML director general Michael Coogan said: "Our response puts paid to the myth that lenders simply want to retain the status quo. We fully recognise that regulatory change can help to embed a better mortgage market for the long term - but this particular set of proposals would end up doing more harm than good.
“We strongly urge both the FSA itself and relevant government Ministers to take stock of all the evidence before proceeding.
"If implemented as drafted, these rules would likely have the effect of creating significant financial exclusion among perfectly creditworthy borrowers. In turn, this has wider consequences for housing and wider society, and would exacerbate the generational wealth divide that already exists. We urgently need a proper public policy debate on how housing finance can help the government deliver its housing policy, and to review whether the risk-averse approach which the FSA has adopted would serve mortgage borrowers or undermine their reasonable aspirations to become home owners."
