Regime change

28 June 2010 | By Christine Toner

In many respects it was the day brokers had been waiting for. After more than five years of it regulating the mortgage industry, chancellor George Osborne consigned the Financial Services Authority to the history books. After months of what polite intermediaries would call mishaps - and more outspoken brokers might deem almighty cock-ups - Osborne announced a changing of the regulatory guard and the dawn of a new regime.

But before the broker community cracks open the bubbly and starts the victory parade it should pause to think. In his Mansion House speech earlier this month Osborne declared that the financial services market would in future be governed by the Bank of England. And a familiar face will be overseeing proceedings as Hector Sants, current chief executive of the FSA, is to be appointed deputy chairman of the Bank.

Regulation is likely to be tighter, with Sants announcing that greater intervention is needed from regulators. In footballing terms it’s the equivalent of a team facing Argentina celebrating as Carlos Tevez is substituted, only to discover he is to be replaced with Lionel Messi.

The news of the FSA’s disbanding broke at 9pm on June 16. In his first major speech as chancellor Osborne thanked his predecessor Alastair Darling for his efforts.

“Alistair, you worked hard in difficult circumstances and, although we didn’t agree on everything, on behalf of everyone here I commend the service you gave this country,” he told attendees at Mansion House.

He also spoke of previous chancellors including Austen Chamberlain and Lord Randolph Churchill. But this speech was less about reminiscing and more focussed on the future. Announcing his proposal to scrap the FSA, Osborne called it “a narrow regulator, almost entirely focussed on rules-based regulation”.

He says nobody was controlling levels of debt before the credit crunch so when the crisis hit nobody knew who was in charge. Osborne claims the decision to eliminate the regulator is not a reflection on the quality or dedication of staff at the FSA, the Bank or the Treasury.

“It is instead a reflection on what has gone wrong and what may continue to go wrong unless there is change,” he told the audience.

Osborne says that at the heart of the crisis was a rapid and unsustainable increase in debt our macroeconomic and regulatory system failed to identify, let alone prevent.

He claims that inflation targeting succeeded in anchoring inflation expectations but the design of the policy framework meant that responding to an explosion in balance sheets, asset prices and macro imbalances was impossible.

“The Bank was mandated to focus on consumer price inflation to the exclusion of all else,” he adds. “The Treasury saw its financial policy division drift into a backwater.”

The chancellor says that because central banks are lenders of last resort the experience of the credit crunch has shown they need to be familiar with every aspect of the institutions they may be called upon to support.

So in Osborne’s view central banks must also be responsible for everyday microprudential regulation.

The Bank will carry out the prudential regulation of financial firms including banks, investment banks, building societies and insurance companies.

The government will create an independent Financial Policy Committee at the Bank which will be responsible for looking at macro issues that may threaten economic and financial stability, and it will have the tools to take effective action in response.

It will also establish a Consumer Protection and Markets Authority that will regulate the conduct of every authorised financial firm providing services to consumers.

In addition to this, the government intends to create a single agency to tackle serious economic crime.

“We take white collar crime as seriously as any other type of crime and are determined to simplify the confusing and overlapping responsibilities in this area to improve detection and enforcement,” the chancellor told his audience.

The government will also be establishing an independent commission on the banking industry. This will look at the structure of banking, the state of competition in the industry and how customers and taxpayers can be sure they get the best deal.

As expected, in his speech Osborne said the centrepiece of new global standards for bank regulation would involve higher capital and liquidity requirements, and that capital requirements should respond to the business cycle.

The government will also demand the highest levels of transparency from banks and encourage published stress tests where these have not taken place.

The FSA, which has been in existence since 1997, has been a thorn in brokers’ sides since it was given the job of regulating the mortgage sector back in 2004.

That year, then chancellor Gordon Brown announced plans to reform financial services regulation and in May he created the new regulator. His plan included merging banking supervision and investment services regulation into the Securities and Investments Board and formally changing the name of the SIB to the FSA.

There was then something of an extended roll-out as it took some time before all areas of the financial services industry were brought under the regulator’s supervision. In June 1998 it took responsibility for banking supervision - ironically taking this power from the Bank. In May 2000 the FSA was given authority over the London Stock Exchange.

Just over 18 months later on December 1 2001 the Financial Services and Markets Act was implemented, transferring the responsibilities of the Building Societies Commission, Friendly Societies Commission, Investment Management Regulatory Organisation, Personal Investment Authority, Register of Friendly Societies and Securities and Futures Authority to the new regulator.

Finally in October 2004 the FSA took responsibility for mortgage regulation. Prior to this the sector was governed by the Mortgage Code - a voluntary code of conduct brokers were expected to adhere to. It was overseen by the Mortgage Code Compliance Board.

Back then, the news that the industry would be formally regulated by the FSA sent shockwaves around the sector. So it’s hardly surprising that news of its abolition was marked with celebrations, and Mortgage Strategy Online was inundated with comments from brokers delighted at the news.

“Now where’s that fold-away table for the cake and my party hats?” wrote one. “I wonder how the FSA feels now it’s looking for a job instead of mortgage brokers. The sun has got its hat on, hip hip hooray.”

“A new regulatory regime is what we have been calling for since 2003,” wrote another. “Let’s look forward and hope it will be a brave new world.”

But the optimism didn’t last long. The news that Sants is to take up a role at the Bank has led many to believe this could be a case of more of the same rather than the drastic revamp they wanted.

Indeed, in a speech the day after Osborne’s Sants gave some clues about the tighter regulation the industry could expect. He told his audience that regulators should play a greater role in judging how culture drives firms’ behaviour and affects society as a whole.

“This move is irrelevant as far as I can tell,” says Rob Roberts, head of mortgages at Lift-Financial. “The people now employed by the FSA will be employed by the Bank. And the work the FSA does now will be done by the Bank. Of course, the nature of the new regime will be key but I haven’t heard anything from the Bank or the government to say that the method of regulation will be changing in any way. This is a move that looks like it’s accomplishing something great but in fact is simply dressing up an existing organisation in new clothing.”

Roberts’ view is echoed by many in the industry.

“The decision to abolish the FSA signals a change in regulator but not a dramatic shift in regulation,” says Eric Stoclet, managing director of Crown Mortgage Management. “It is likely that most of the FSA’s staff will be subsumed into the Bank and continue their supervisory function under a new moniker.”

Stoclet says the rationale seems to be that the FSA didn’t see the crisis coming, but it’s hard to find a regulator in the world that did.

“We’ll never know if a more centralised regulatory body would have done a better job, and given the irrational exuberance of the times it’s hard to believe the Northern Rock situation could have been avoided, or even a different approach taken to the Royal Bank of Scotland-ABN Amro deal,” he says. “Regulators have a difficult job finding a balance between protecting the public and stifling innovation and growth.”

Fahim Antoniades, group director at Mortgage Centre IFA, is of the same school of thought.

“The decision to abolish the FSA is clearly an attempt to change the regulatory culture,” he says. “Whether the government will be successful or not depends on whether the FSA’s disbandment is a paper exercise or a true changing of the guard. If the same people run the new entity we can expect more of the same.”

Rob Everett, managing director of Mortgage Options, also believes little will change.

“As we have to have regulation do we care who does it?” he asks. “It looks like the move to the Bank is just going to be the FSA in a different suit, although there should be a more joined-up strategy with a single organisation.

“One regulator must be better than the tripartite system and ideally we will have one that does not rule in retrospect.”

Everett says the FSA has policed brokers well and the decision to abolish it is due to its failure to regulate banks.

“I expect to see the regulation of brokers staying pretty much the way it is although checks may be more strict, while banks will be regulated much more closely,” he adds.

But others are more optimistic.

“This is a once-in-a-generation chance to refocus efforts to better protect consumers,” says Angus Stewart, chief executive officer of e-solutions. “The regulatory landscape is changing rapidly and consumers need a regulator they have confidence in, and one that gives them the protection they deserve.

“The Bank has an opportunity to manage the macroeconomic side of banking regulation and this is welcome news. It gives us clarity on where ultimate responsibility lies - something we didn’t have under the old tripartite system.”

Sole trader Danny Lovey says the FSA was not up to the job it was charged with, and it made no sense to have a tripartite system where nobody knew who was looking after what until it was too late.

“The Bank lost the control over lenders it had built up and understood for decades,” he says. “It’s clear the FSA was sleeping on its watch when it came to banks.

“What was happening with Northern Rock and its dependency on short-term wholesale funding was out of line with its balance sheet. Even those of us who are not regulators could see that.”

Lovey says prudential lending control is heading back to where it should have remained.

“The most important thing is for the Bank to be in charge of interest rates and effectively have the levers of control over banks to ensure we don’t see housing bubbles forming so easily in future,” he adds.

It remains to be seen how the Bank will approach regulation but Kevin Friend, strategic partnerships director at Mortgages.co.uk, says understanding the industry is vital.

“There’s a risk that all the brave rhetoric and good intentions will not result in a respected regulatory operation,” he says. “Time must be taken to consult with and understand the grass roots of the financial services sector. Our new regulators must take notice of those who understand what is needed. For example, break-ups such as that we are seeing with the Financial Ombudsman Service and Financial Services Compensation Scheme must be well structured and thought through.”

So after years of wishing and weeks of waiting the broker community has got what it wanted. The FSA will soon be no more and two years from now the mortgage market will be governed by a new regime. All brokers can do is cross their fingers and hope that any changes to regulation will take into account the needs of the market. But for now it’s business as usual until the new guard takes up the ground.

 

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