Ominous silence where vigorous debate should be

19 July 2010

The Financial Services Authority’s latest consultation paper on responsible lending will inevitably attract a lot of fire and fury, and it is no doubt prepared to weather the storm.

Lord Adair Turner, chairman of the FSA, has already gone on the offensive in his speech at the British Bankers’ Association conference last week.

In the speech he stressed “a major shift in our approach to the mortgage market” and the FSA’s intention to “intervene in free market relationships”.

This will ultimately involve the regulator taking a stricter view of the operating environment and paying closer attention to firms’ business models and product development processes. No doubt we can expect stronger responses from the FSA too.

But it has to strike a balance in this process, and Turner rightly argues that the shift is not a purely technical one - it is a fundamental social and political choice which merits extensive debate. I agree. But what is striking in all this is the absence of that debate.

The government is caught on the horns of a dilemma. On one hand it wants to clamp down on the financial services sector and volatility in the financial markets in a variety of ways.

Politicians have also been silent on the big mortgage issue not covered in the latest FSA paper - funding

But on the other it wants to sustain home ownership - not least because if it doesn’t do this the call on public expenditure could be even greater than it is now.

The consultation paper suggests that one outcome of the FSA’s proposals could be a smaller mortgage market, with fewer borrowers and brokers.

If the estimate of a market around 4% smaller is correct, this suggests some 500,000 borrowers will need to find an exit because the products they have will no longer be available in the non-prime sector.

Clearly, some will migrate to other products as their credit position recovers but others will not. Lenders will hold them on their SVRs or help them leave. Although transition is mentioned in the report it’s unclear how the FSA sees this working through the system. We are told it will provide further details on this later in the year.

Whatever happens, this will mean a smaller home ownership market, with fewer aspiring first-time buyers able to enter.

How does that mesh with housing minister Grant Shapps’ recent speech on the age of aspiration in which he talked about growing home ownership?

Moreover, the banning of self-cert, tighter affordability tests, a smaller sub-prime mortgage market and the as-yet unresolved status of interest-only have serious implications. These moves will exclude those with lower and less stable incomes, as well as those with shaky credit histories.

And rightly so, some might say. But then where do they go and what will be the wider consequences? Fewer business start-ups and greater regional inequalities for a start, along with more long-distance commuting as borrowers trade location for mortgage access.

None of this is the FSA’s problem but it certainly is the politicians’, and their silence has been striking. Then again, they’ve also been silent on the big issue not covered in the paper - funding.

This ultimately affects everything that might be dealt with by the Mortgage Market Review.

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat