I thought that this month I would try and write a column without mentioning Northern Rock. You can see how long that resolve lasted? I don’t want, in truth, to focus on Northern Rock but, rather, on one of the consequences of the whole debacle.
The Financial Services Authority has taken a kicking over the whole affair and is a bit like a wounded animal. And we all know that wounded animals have a tendency to lash out when cornered. What I see is a head of steam building up which might well cause the regulator to lash out.
Despite a game attempt to put a positive gloss on things (entitling the press release “10% fewer repossessions in 2007 than expected”) the Council of Mortgage Lenders’ repossessions statistics have been seized upon by the media as showing a dramatic increase.
What has not been picked up to the same extent is that this does not include second charges. In response, the Citizens Advice Bureau has called for tougher enforcement of the existing rules by the FSA. The press seems to be full of bad news stories about the mortgage market.
And the FSA’s response? It would be disingenuous to suggest that the increase in enforcement activity is a direct response. These things, after all, take some time before they reach the public domain. However, what you need to take account of is that lashing out with a bit of enforcement action is an easy win for the FSA in an attempt to claw back some of the credibility lost in the wake of the Northern Rock affair.
At a recent CML mortgage fraud seminar the audience was warned by the council’s financial crime & intelligence division director Philip Robinson that its work on mortgage fraud led it to conclude that “the problem looks bigger and more widespread” than it thought.
It will come as no surprise that this was accompanied by a reminder of firms’ obligations under SYSC 3.2.6 that “a firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime” and that “a firm must carry out regular assessments of the adequacy of these systems and controls”.
And so the question is what are you doing about fraud? The joint CML/FSA project, Information from Lenders, feeding back on brokers that have given cause for concern has, Robinson tells us, led to a third of reports going forward for enforcement action. Robinson alsopointedly commented that some lenders have not taken part. I am sure that cannot be because they have no problems. You may wish to consider, if you are such a lender, what is your justification for not taking part?
I have often had cause to bemoan the fact that the mortgage industry has a very short memory. This is one area where I suspect that ratherthan memories being short, they are selective.
As a lawyer, I made merry in the early 1990s dealing with the aftermath of the fall in the property market of the late 1980s. The falling market exposed horrendous problems right across the range of organisations and professionals involved in the market. By way of an example, we had a team of 17 dedicated solely to suing other solicitors for some of the most outrageous acts of negligence.
However, while it is clear that there have been improvements, it is folly to suggest that those problems went away. What happened is that the rising market covered them up again. No one was losing money as a result and everybody focused their energies on the front-end sales process and the regulation that went with it.
We also now have some extra factors in play to those we had in the 1980s – many more have traded portfolios, mortgages owned by banks with no link to the original lending. How are they going to respond to problem cases? Do they know which arrears case has the potential to go bad? Do they know which case needs to be fast-tracked into possession? Do they know what a problem case looks and feels like? Taking into account the experience in the United States, I bet their investors hope that they do.
If the market takes a turn for the worst the problems are going to be exposed once again. And it looks like the wounded animal that is the FSA might well lash out as a result. I’ll make money but what will happen to you?
Philip Tebbatt is principal of niche financial services law firm Slater Rhodes and can be contacted at firstname.lastname@example.org