Speaking today at the British Bankers’ Association annual conference, Lord Adair Turner, chairman of the Financial Services Authority, said that though “in a free society, there should be freedom to be foolish,” it is imperative that regulators find a way to improve consumer protection in the financial services market.
He said there has been a seismic shift in the emphasis the FSA places on regulating the mortgage market and that the “balance of lender and borrower responsibility” was markedly changed.
He said: “In the past our philosophy was that, as long as product terms were clear, then borrowers themselves would be well placed to assess affordability; and that lenders would rationally offer products which customers could afford – because it was in their self-interest to manage credit risks responsibly.
“Now, however – for consumer protection as well as prudential reasons – we are proposing to significantly strengthen the requirement for lenders to assess affordability, to ensure that the borrower is likely to be able to repay the loan.”
He acknowledged that this represented a “major shift” in the FSA’s “willingness to intervene in the free market relationships through which borrowers and lenders would otherwise make their own free choices about appropriateness, risk and return”.
Turner said the sea-change has resulted from an admission that the FSA failed to protect consumers in the past and that the regulator now plans to get “more involved at an earlier stage, to identify products with the potential for customer detriment before the complaints start to flood through to the FOS, and to intervene to prevent their inappropriate sale”.
The risk that this intervention could cost consumers their right to freedom of choice was necessary said Turner, though he did admit that the FSA must be careful not to restrict “consumer choice where we do not need to, and [impose] regulatory costs which are disproportionate to what we can realistically achieve”.
The cost of implementing the drastic changes outlined in today’s proposed consultation paper on responsible lending has caused much debate in the industry with concerns that lenders will have to pass on increased administrative costs to the consumer.
Turner said the FSA is open to debate on the level of regulation proposed and how it should be implemented, and added: “We need to strike a balance, and to get that balance right, we need to debate it openly and explicitly.”
He recognised that “almost all regulation brings unintended consequence” and that the FSA’s “judgments on what is in consumers’ interests could be faulty”.
On the future of mortgage market regulation he said: “Consumer responsibility, consumer freedom to choose, including freedom to choose products which they subsequently regret choosing, must remain part of the answer.”
Turner also offered further clarity on the regulator’s intentions for the future of interest-only mortgages.
He said: “In the Mortgage Market Review we have tried to strike a balance, for instance in relation to interest-only mortgage contracts where the proposed repayment method is through the sale of the house.
“For most mortgagees relying on future house sales to repay an interest-only mortgage is inappropriately risky – and the affordability assessments we require of lenders will in general focus on repayment of capital as well as interest.
“But there are some consumer categories where repayment out of house sale can make sense – particularly if the initial loan to value ratio is relatively low: this may be appropriate, for instance, for people in mid-life planning to repay a mortgage by trading down house size at retirement.
“But it is impossible to design regulation which allows freedom to make sensible choices without opening up the possibility that others will make foolish choices.”
Turner raised questions as well as giving some answers on how the regulator planned to interpret consumer protection, but he did not stipulate whether the FSA plans outright bans on certain products in the interest of protecting the consumer.
He said: “The very words ‘Consumer Protection’ indeed raise issues about what precisely we mean; they cannot mean that consumers will be protected from everything which might go wrong.
“But they clearly mean more than fair disclosure of terms. Should they, however, imply bans on specific products as inherently undesirable, or interventions driven solely by identification of apparently excessive profit margins, even if no other indicators of poor practice are present?”
The paper published by the FSA this morning has a consultation period ending on the 16th November during which the industry can raise concerns, propose amendments and suggestions to the FSA.
