Tory Prime Minister John Major got into all kinds of trouble when his government espoused a return to Victorian values. Ever since that time politicians have steered clear of extolling the virtues of some kind of golden age which may or may not have existed.
For example, imagine the furore there would have been had our current home secretary made such a moral pronouncement, given her husband’s supposed viewing habits.
And it should be remembered that while the Victorian era can boast many advances, those people also put children up chimneys and their idea of a state safety net was the workhouse.
Yet Lord Turner’s recently published letter to chancellor Alistair Darling detailing the problems at Dunfermline Building Society also smacks of a return to some kind of golden age of building societies.
Lord Turner makes it clear that Dunfermline’s problems stemmed almost entirely from its commercial property loans and mortgage books it acquired from elsewhere.
What a society can and cannot do is governed by primary legislation. The Financial Services Authority cannot change that – it is a matter for Parliament. But in his letter Lord Turner suggests that “tighter rule-driven or legislative constraints” could provide an important part of the solution.
So assuming that at some stage the economy will improve, what impact would such changes have on the market? I can’t help but think that a more cautious approach might inhibit societies’ ability to compete. After all, there was a reason they purchased sub-prime assets in the first place.
It should also be borne in mind that there are a large number of societies that have not failed. Contrast this outcome with the fate of demutualised former societies. Should the plight of the few cause a knee-jerk reaction which has adverse long-term consequences for the many?
In Lord Turner’s chronology of events I was interested to note that the FSA requested that societies ceased to purchase non-prime assets in 2007.
Am I alone in speculating about the extent to which the closure of this large part of the market for sub-prime assets hastened the demise of many organisations? Particularly given my previously stated opinion that a lot of societies seem to have been able to manage the portfolios they purchased without the kind of consequences that eventually did for Dunfermline.
Lord Turner says that in July we can expect a code of practice for societies. This is intended to “strongly guide building societies to be cautious over fully utilising their legal freedom with regard to non-residential assets unless they have appropriate risk controls and capabilities”.
He also suggests to the chancellor that legislative changes may be required. I think it is important that all lenders – not just societies – engage in a debate as to what the response of the sector should be, if debate is to be allowed. We all know that an FSA code of practice soon becomes a rule by any other name and sets the standards by which you will be judged.
I am not an economist, a fact to which my bank manager will testify. I’m not necessarily advocating a free market Milton Friedman-style approach of the type much loved by Margaret Thatcher but I cannot help but think the answer to the problems afflicting the sector will be market-driven and that danger lurks in reacting with more regulations and kerbs on innovation.
Was there really a golden age for societies? I can’t help but think that the emergence of other types of mortgage lenders was at least in part a result of the constraints under which societies once had to operate.
And do we want to return to the days of individuals having to go onto waiting lists for mortgages?
Problems in the financial markets have created a pent-up demand for mortgages and it seems to me that a better idea would be to find a way of satisfying that demand rather than looking to restrict it further.
Philip Tebbatt is principal of niche financial services law firm Slater Rhodes and can be contacted at email@example.com