FSA unveils tough guidelines for societies looking at risky business
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ADRIAN COLES: SOCIETIES AT A DISADVANTAGE
The Financial Services Authority has beefed up its guidance for building societies to stop them taking unnecessary risks.
Last week the FSA introduced additional guidance to ensure that any society diversifying from its traditional business model has the risk management systems and skills necessary to operate safely.
In its guidance the FSA says: “We confirm that societies are free to select any business model and offer any mortgage products that their senior management choose as long as they implement appropriate risk management processes to manage the associated credit, interest rate, basis and treasury risks.”
It suggests that if societies want to offer high LTV products they should use mortgage indemnity guarantees. And where societies do not have the risk capabilities to self-insure, it says they should not offer riskier products.
Adrian Coles, director-general of the Building Societies Association, says it is concerned the guidance may disadvantage societies by imposing a tougher and more pres-criptive regime on them compared with banks.
He say that the new rules in the Sourcebook are premature and do not take account of the detailed research and analysis that was undertaken for the Mortgage Market Review.
He adds: “The regulator should commit to undertaking a post-implementation review of the Sourcebook within 12 to 18 months of it coming into force.
The FSA says it might be possible for societies to re-classify historic sub-prime lending as prime once the loans have been per-forming for five
years.
The guidance says: “It would be reasonable for seasoned sub-prime lending to be recategorised as prime after a number of years if affordability has been demonstrated, as in the case of such lending it is affordability not loss-given default that is the main risk.”
The changes will come into effect on April 1 and societies have until September 30 to implement them.
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