At last night’s Mansion House dinner, the FSA’s chairman Lord Turner said that: “We need to strike a balance, recognising that any regulation which protects some customers from taking on mortgages they cannot afford will inevitably affect others seeking to make sensible, affordable choices.
“We cannot leave retail financial markets entirely to themselves and continue to accept the waves of mis-selling which have been such a feature of UK financial services for the last 20 years – personal pensions, endowment mortgages, split capital trusts.
“But nor should we swing to the other extreme and attempt to ensure that nobody ever exercises free choice to make decisions they subsequently regret.”
SWINGING TOO FAR
The CML agrees with this final point, and Michael Coogan’s speech outlined some of the areas in which he believes the regulatory pendulum is swinging too far.
Michael Coogan said today: “We do not want to sleepwalk into a housing finance market which is sustainable, but meets almost nobody’s aspirations because it is so risk averse”.
He said: “The signs are not good that FSA prudential regulation of lenders will encourage their participation in long-term risk positions such as funding different housing tenures. And new conduct rules for mortgage lenders will not help borrowers meet their aspirations to become home owners.
“Indeed, the unintended consequences of new mortgage regulation are likely to stifle innovation and opportunity, whether for first-time buyers, movers, borrowers who want to access their equity, those whose personal circumstances are different to the “norm”, private investors in residential property or funders of social housing.
“An intrusive, risk-averse regulator with unclear rules that introduce a higher risk of retrospective interpretation will simply discourage lenders from supporting markets in the future wherever they feel they cannot manage their regulatory risk.
“We have already seen that the mortgage market has shrunk to predominantly six lenders, as reported in the CML’s annual table of the largest 30 lenders (we struggled to find enough lenders active in the market to populate the table!).”
MMR NEEDS RE-EVALUATION
He went on to say that the MMR needs to be re-evaluated: “...from a narrow regulatory perspective, the FSA opines that [the MMR’s] aim is to promote a more sustainable market for all participants in the future, which is flexible for consumers.
“The one certainty is that it will achieve neither of these outcomes.
“On this basis, the MMR is fatally flawed, and should be re-evaluated.”
HOUSE PRICE FALLS
The CML has revealed that the FSA itself has already conceded in its impact assessment of its mortgage market review proposals that its new regime, if implemented, would cause house price falls.
“The FSA promise to look at transition issues in a future MMR consultation paper,” said Coogan. “However, we are talking about 11 million borrowers who will be directly or indirectly affected – and they do not know how or to what extent yet.
“Worse, on each modelling approach the FSA has used, it expects the MMR to cause house price falls.
“Now, I do not think it is the FSA’s job to undermine lenders’ security systemically in this way by precipitating house price falls, but if you reduce the number of transactions, create borrowers who have limited or no options to move their existing loan – so-called “mortgage prisoners”, and also increase negative equity in the market, is this delivering “flexibility” or “sustainability” for all market participants?”
INDEPENDENT RESEARCH
As the autumn progresses, the CML will be outlining the findings from a range of both internal analysis and externally commissioned independent research currently under way, designed to contribute to the “public debate” that Lord Turner has previously encouraged about what sort of mortgage market the UK wants to end up with.
Coogan concluded that the FSA “has developed an approach with significant unintended consequences, and it needs to think again”.
