A short, sharp Tory shock

Lending Strategy March 2010

In the not too distant future the good folk of this nation will head to polling stations to cast their votes in the general election. And the 2010 election looks set to be one of the most interesting we have seen for some time.

Since the last time round in 2005 there have been various changes. Tony Blair, the darling of the Labour Party has been replaced as Prime Minister by Gordon Brown, a notably less showbiz leader.

And the Iraq conflict that drew criticism even as the first troops were deployed has since resulted in worldwide scandal and an official UK inquiry into the legality of the operation.

Meanwhile, the UK - and indeed the world - has been gripped by the worst economic crisis in a generation.

Unsurprisingly, Labour is under fire. But while solidarity and strength in numbers are the traditional bolt holes of a party under attack Labour has instead employed an altogether more innovative tactic - in-fighting and failed coups against leadership. Each to their own.

Of course, all of this has played into the hands of the Conservatives. After all, who needs a devilish spin doctor to launch a cunning smear campaign when your opponent is doing it all by itself?

It’s not only Labour that has had a change of leader since the last election. In 2005 the Tories were led by Michael Howard, then 64 years old and having held various cabinet posts under Margaret That- cher and John Major, synonymous with the traditional Tory values.

Fast-forward five years and the party is led by David Cameron, considerably younger than Howard at 46 and with an altogether different approach to politics. Hug a hoody anyone?

’Call me Dave’, with green credentials flying high and a down with the kids attitude, looks like the party’s best hope of winning an election for years.

But a charismatic front man is only part of the battle. If the Conservatives are to wrest power from Labour this year they will have to offer more than media-friendly sound bites and dapper suits.

So what is the party proposing in terms of the economy?

Well, it’s pretty obvious that whoever is in power when the votes are counted will have a huge task on their hands to rebuild the economy and lead us solidly out of recession as opposed to the paltry 0.1% growth we saw in Q4 2009.

’Call me Dave’ Cameron, with environmental credentials flying and a down with the kids attitude, looks like the party’s best hope of winning for years but he’ll have to offer more than savvy sound bites

The Tories were handed much of their manifesto on a plate once the recession hit. It’s not surprising then that the party’s proposition begins with a stark reminder that “under Labour, Britain is stuck in the longest and deepest recession on record, and remains the only G20 country still in recession” - just in case you’d forgotten.

“We face the largest budget deficit of any major economy, and national debt soaring to £1.5trillion,” it continues. “We have had the largest bank bailout in the world and one in five young people can’t find work”.

So now we know where we are, where does the party plan to take us?

Well, the Tories say they would take three steps to fix the economy, the first of which will be met by a resonating hallelujah from the industry.
“We need to get banks lending again,” the Conservatives state. “For over a year we have been calling for a national loan guarantee scheme to underwrite bank lending to businesses and protect jobs. And we think that instead of pay- ing out significant cash bonuses banks should be rebuilding their balance sheets so they can start lending to businesses again.”

Taking FTBs out of Stamp Duty
The party’s second step concerns the breathtaking £178bn deficit the country faces. To take this on the Conservatives claim that tough choices in public spending must be made - including a one-year public sector pay freeze except for the lowest-paid.

The third step addresses the jobs crisis. Similar to Labour the party plans to introduce a scheme to get Britain working again including creating 100,000 apprenticeships and funding 10,000 extra university places - a bit of a coup given that the present government is considering raising university fees.

The Tories also plan to freeze Council Tax for two years, abolish taxes on new jobs in the first two years, reduce Corporation Tax from 28p to 25p and cut tax on small businesses from 22p to 20p.

But the biggest headline-grabbers in terms of the mortgage and housing markets are the party’s plans to take some 90% of first-time buyers out of Stamp Duty and increase the Inheritance Tax threshold to £1m.

John Rowland, an analyst at Cicero Consulting - a political lobbying firm that specialises in representing financial services firms - says the decision to take first-time buyers out of Stamp Duty was made back at the party’s national conference in 2007 but believes the Conservatives will stand by their pledge.

“Since first-time buyer activity is pretty low at the moment this wouldn’t represent an enormous loss of revenue,” he says. “Tax changes are easy to make and can be implemented quickly but defining ’first-time buyer’ could be a headache for Treasury officials.”

The biggest bone of contention between the Tories and Labour is public spending.

The Conservatives say a public sector pay freeze along with cutting the cost of Whitehall and quangos, capping public sector pensions, stopping Child Trust Funds except for the poorest families and disabled children, and stopping tax credits to high earners will be necessary.
The party also plans to review the state pension age and create an Office for Budget Responsibility.

The Tories argue that some short-term pain would be better than the long-term damage that could result if interest rates rocket or there is a run on the pound if the public debt is not brought under control

But it’s not so much whether cuts are necessary but the timing of them that the parties disagree on.

The Tories say they would start making spending cuts as soon as possible but Brown argues this would cause a second dip.

And it’s not just the two parties at odds. In recent times, Tory shadow chancellor George Osborne and party leader Cameron have taken somewhat differing lines on how to address the deficit.

But Rowland says the row between the parties is more subtle than the political fireworks would lead you to believe.

“As ever, political rhetoric obscures a more subtle situation,” he says. “A big retrenchment of government spending will affect economic growth in the short term - I don’t think anyone disputes that.

“The main plank of the Tory argument is that short-term pain will be better than the long-term damage done if the bottom falls out of the gilts market, interest rates rocket or there is a run on the pound if public debt is not brought under control.

“Many Labour MPs accept that cuts are inevitable too - tax receipts are down, more transfer payments are being made to the unemployed and the cost of servicing debt is up,” he adds. “It’s just a matter of where cuts are made and how big they are.”

Rowland says Labour election strategists know that even if voters say that they recognise the need for spending cuts, privately they will be thinking about what it means for their household.

“The Tory message will make middle-income families who consume a lot of public services and may well be employed in the public sector nervous,” he says. “This explains why Cameron has been on television trying to explain the Conservative position. It’s a tough sell even if it is principled.”

The Tory plan to scrap Home Information Packs has received little press coverage of late, with Labour not even both- ering to come up with a retort. But one Conservative idea has certainly grabbed headlines - the decision to abolish the Financial Services Authority.

“Scrapping the FSA and creating a conduct of business regulator - at the moment called the Consumer Protection Agency - is a solid commitment,” says Rowland. “It’s a question of when and how different the new outfit will be rather than if.

“On the ’when’ question I don’t expect a big bang implementation with everything changing on day one but logistical changes could happen quite quickly, even if changes to legislation follow a bit later.

“On the ’how different’ question the personnel will be much the same - they’ll just be employed by either the CPA or Bank of England depending on their current roles,” he adds.

Rowland also points out that shadow Treasury financial secretary Mark Hoban has suggested that the FSA’s Retail Distribution Review should continue.

“It’s likely that the FSA’s Mortgage Market Review will also fall into that category as it seems pretty well aligned with noises the Tories have made about financial services in general,” says Rowland.

“As for more substantial changes, consumer credit regulation will be moved from the Office of Fair Trading to the CPA which could help create a more coherent regulatory regime. “We might also reasonably speculate that the new organisation will move towards product regulation,” he adds.

Of course, trade bodies are lobbying all the parties to ensure the correct issues are addressed.

The Council of Mortgage Lenders has expressed its concern that in the run-up to the election necessary actions could be delayed.

“A potential threat to the mortgage market is a hiatus in policy and decision-making as a result of the election, and the uncertainty this brings,” says a CML spokeswoman.

“While regulatory reform is high on the agenda of all the political parties the crucial issue for the mortgage sector is to ensure a stable and functioning funding market that is resilient. This should be a high priority both in the run-up to and after the election.”

Mortgage market share in the spotlight
The CML has produced a document to brief candidates hoping to become MPs. This includes facts and figures about the mortgage market, and highlights what does and does not work.

It includes details of the government Support for Mortgage Interest scheme which it claims only provides modest, short-term help for a small number of customers and is nowhere near ambitious enough to have a significant impact on repossessions.

The CML says the scheme must be made more widely available and should calculate payment based on the rate charged on a claimant’s mortgage rather than at a standard rate.

On the topic of regulation the CML calls on the next government to avoid knee-jerk reactions to global and UK problems in the banking system and keep the reform of mortgage regulation simple. It says politicians should not attempt to “fix what is not broken”.

And on the topic of funding - possibly the single biggest cloud over the market in the past two years - the trade body says those in power need to increase the range of lenders and funding capacity in the market to meet consumer needs and enable a return to a normal functioning market.

It is clear that whichever party gets into power will have a big job on their hands. A 0.1% growth in the economy is hardly cause to pop the champagne corks. And regardless of their manifestos there are several issues that all would be foolish to ignore.

“Regulatory reform along with liquidity and capital requirements rules are key areas,” says Rowland. “But US President Barack Obama’s proposals on the treatment of big, vertically integrated banks will be an issue too.

“Osborne says he supports the Obama proposals so the future of UK Financial Investments as well as the concentration of market share in the hands of a few high-street banks - especially in the mortgage sector - will be on the agenda.”

The Tories are clearly ready to rumble. The question is - are Labour and the LibLSeral Democrats up to the challenge?