The Chancellor of the Exchequer, Alistair Darling, recently unveiled plans to give the Financial Services Authority (FSA) extended powers to deal with failing banks and prevent repetition of a Northern Rock style crisis.
In an interview with the Financial Times, he stated: “What I want is to give the FSA the powers it needs.”
The three main new measures proposed include giving the FSA the power to gain access to the information it requires to assess a troubled bank’s liquidity position, to be able to seize and protect customers’ cash if their bank gets into difficulties and to ensure banks in trouble have enough cash to keep going.
Darling has emphasised the need for bank customers to know exactly how much cash is guaranteed and to ensure they can get their money out quickly. He is also seeking to introduce a more generous deposit guaranteed scheme (currently £35,000).
While he referred to the US approach, whereby a separate institution takes over in the event of trouble, he ruled this out, and said: “I don’t want to set up another institution.
One of the attractions of Britain is that we have far fewer regulatory institutions than other countries.” He does however want to introduce a new COBRA-style response unit.
The Tripartite arrangement, where the task of dealing with a crisis is shared between the Chancellor, Bank of England and the FSA, is under review.
This arrangement has attracted criticism for its handling of the Northern Rock crisis and Darling plans to make changes, although these are unlikely to be far-reaching. “There is nothing fundamentally wrong with the regulatory architecture,” he said.
The British Bankers’ Association welcomed Darling’s proposals. “We are pleased the Chancellor seems to have taken on board much of what the banking industry recommended,” said chief executive, Angela Knight.
“We support the Tripartite system of regulation, with the FSA in the lead.”
She added: “Changes are needed, but they have to be properly thought through and not a knee-jerk reaction. We are looking forward to seeing the detail of the proposals.”
A three-month consultation with industry stakeholders will begin at the end of January and Darling intends to introduce legislation in May.
While the proposed changes may be viewed as a step in the right direction by the banking industry, the question is, do mortgage intermediaries and advisers see them in the same light? Are they likely to impact on brokers’ day-to-day business operations, or make no difference at all?
More change needed
Ray Boulger, senior technical manager at John Charcol, believes the Tripartite arrangements could benefit from more substantial changes. “The system failed in its hour of need,” he says.
“It would be much more logical for just one of the three bodies to be given the responsibility for dealing with crises, whether the FSA or the Bank of England.”
Boulger also believes that there are more pressing issues for brokers. “The changes to the FSA’s powers will not affect mortgage brokers.
The credit crunch is having a much bigger impact on the market than the outcomes of the Northern Rock crisis. In the last few months lenders have been making frequent changes to criteria, as well as changing interest rates, which is restricting volumes.”
Wayne Unsworth, mortgage adviser at Hallmark-IFA, agrees this is a higher priority. “The credit crunch means that lenders are much less willing to lend at the moment, even on prime cases, and this is affecting our mortgage business.”
Fahim Antoniades, sales director at mortgage brokers Quantum, shares his view. “Liquidity just isn’t there. Lenders are tightening their lending criteria and product pricing is going up”.
Considering the proposed extension of the FSA’s powers, Unsworth proposes that it is the banks themselves that need to make changes, rather than the regulatory bodies.
“The Northern Rock crisis happened because it was borrowing on a three to six-month basis, but lending over 25 years,” he says.
“Its business model was flawed and any other banks which are operating on a similar basis should change their business model as a matter of urgency, to avoid any repeat of this situation.”
Concern over repercussions
However, some brokers are concerned that the proposals for change to the FSA’s powers could have repercussions for their day-to-day operations. “I have no problem with the FSA being given more powers,” says Cath Hearnden, director of My Mortgage Direct.
“But what I would like to know, as a small broker, is who is going to carry the costs? Is the government going to give more funding to the FSA, or are banks’ levies going to go up?”
Hearnden envisages potential implications for consumer confidence, and says: “If the changes create additional costs for the banks, they will then have to adjust the pricing of their products, making their offerings more expensive. In my estimation, banks’ charges have already quadrupled over the last few years.
My worry is that if they pass on more costs to consumers, this could result in a decrease in demand, which could have a negative effect on my business.”
Hearnden is not alone in having concerns about further damage being done to what are already fragile levels of consumer confidence, as Richard Morea, technical manager at mortgage brokers London & Country, explains: “While the proposed changes to the FSA’s powers are unlikely to have a direct impact on our day-to-day business, we would be concerned about any actions that could generate a knock-on effect on consumer confidence.
"We would hope that whatever measures are taken following the consultation, that there are no further situations like the Northern Rock crisis, which has affected the market as a whole.”
Adrian Childs, chief operations officer at specialist brokers blackandwhite.co.uk, agrees that the market as a whole has suffered. “The situation with Northern Rock has exacerbated the effects of the credit crunch.
Consumer confidence has been adversely affected and as a result the whole financial services industry has been tainted.”
He adds: “If these proposed powers are about the FSA putting the proper controls in place, that’s a good thing, but not if it’s just a way for the Chancellor to pass the buck.”
Restoring confidence
The restoration of consumer confidence is also a key concern for Martin Bamford, joint managing director at IFA Informed Choice, whose day-to-day business has felt the effects of the fallout from Northern Rock.
“The Northern Rock crisis exposed a gaping hole in the Tripartite system and its response mechanisms. It meant we got a lot of phone calls from clients who were worried that there would next be a run on other banks,” he recalls.
“This has quietened down a bit now, but the most important thing is for the government to take steps to restore customer confidence. We’re not averse to any changes to the system that could improve this and would like to see more preventative measures to make it less likely that banks go to the wall in the first place.”
IFA Keith Churchouse, director of Churchouse Financial Planning, had a similar experience. “We advised our clients not to panic, but there was a stampede mentality, created by the crisis and how it was handled, which meant that people were determined to get themselves out of what they perceived to be a bad financial position, when in some cases it might not have been.”
Churchouse is not convinced the new powers will get rid of problems. “Giving additional powers to the FSA is a sensible decision if it improves consumer confidence, but I do not believe it will make much difference,” he says.
Closing loopholes
While brokers and IFAs are concerned about any impact that the changes could have on their customers, there are other aspects of their day-to-day operations that could be affected.
“It’s inevitable that changes to the FSA’s powers will either mean more regulation or that current regulation will be exercised much more closely,” predicts Antoniades. “But this should not be a problem for good brokers, who will already be performing above the minimum regulatory requirements.”
He adds: “People complain there’s too much regulation already, but I believe it’s a good thing. There is, of course, a danger of over-regulation, but I don’t think we’ve reached that point yet. If rules are lax, people always find loopholes. The FSA plays a hugely important role and the more strict it is, the less likely that companies will go astray.”
All in all, there is an element of déjà vu within the market, as Alan Adam, IFA at Alan Steel Asset Management, suggests: “I don’t think the changes at the FSA are going to make much difference.
History will repeat itself and the same things will happen again, in a different guise, as they have done before.
Simon Tyler, managing director of Chase de Vere Mortgages, agrees: “We have already been through similar ups and downs over the last 20 years or so and no doubt will go through them again, regardless of any changes to the FSA’s powers.”
Try your luck in our latest quiz
get the daily news delivered to your inbox
find the latest industry jobs
