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Let’s burn the rule book and start again

When defending our system of mortgage regulation against the threat of even more red tape courtesy of the European Union, Michael Coogan, director-general of the Council of Mortgage Lenders, used to argue that the UK had one of the most competitive and innovative markets in the world.

No-one called his bluff and with good reason. Given Brussels’ propensity for minutiae and our ignorance of what’s happening in the rest of the world, we had a vested interest in defending our way of doing things and no reason to embrace change.

Part of Coogan’s argument was predicated on the fact that competition had generated product innovation. We had buy-to-let, sub-prime, equity release and shared equity mortgages, to say nothing of self-cert and former Prime Minister Tony Blair’s future earnings mortgages.

The big surprise was that buyers in mainland Europe weren’t riddled with envy and running to the barricades demanding mortgages d’Anglais. But like us they were happy with the way they’d always done things. Change makes people feel uncomfortable.

Of course, Coogan was almost right – we did have an innovative mortgage market although we all wish it could have been more sustainable. Now it is stuck in limbo and competition has locked into reverse. Having a Ferrari stuck in the garage is no consolation when you want to pop to the shops.

The Bank of England proposal to allow lenders to swap mortgage books for government bonds may improve liquidity but in the longer term we have to recognise that our regulatory system has failed to keep up with events.

That’s why we have the Financial Services Authority putting pressure on lenders to hold onto their cash and the BoE reluctantly pumping billions of pounds into the system.

It’s also ironic that under Basle II banks like Northern Rock have been allowed to slash their capital. The framework is being revised so that banks will have an adequate financial cushion if they deal in vehicles such as collateralised debt obligations – the vector of contagion for the US sub-prime crisis.

In the same vein the FSA will publish a report on liquidity next month, with a full consultation paper promised for the summer.

By that time the patient may be on the way to curing itself or its condition could have worsened. The timescales that the authorities have allocated to tackle the crisis seem wholly inappropriate.

And crisis has been the hallmark of our regulatory regime since the NR debacle began. Perhaps it’s time to throw the rule book on the fire and start again.


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