These are arguably the most difficult times the UK mortgage industry has experienced in a generation – if not ever.
The impact of the credit crisis on individual firms varies widely but even the most comfortably placed deposit-based lender would agree, I think, that they are not insulated from it.
Intermediary Mortgage Lenders Association members, like the industry as a whole, have a diversity of business models and funding streams, but there are concerns about the response of the powers that be.
In our Q1 member survey, for which answers are currently being collected, every respondent so far has expressed reservations about how the tripartite authorities have dealt with the credit crisis. Their criticisms either suggest that the regulatory system was flawed or that the authorities failed to take the right action at the right time.
As regards the Financial Service Authority, the Treasury Select Committee was even more damning. It said the FSA “did not supervise Northern Rock properly” and the “failure of Northern Rock… was also a failure of its regulator”.
Even worse, the parliamentary committee accused the FSA of having “systematically failed in its duty as a regulator to ensure Northern Rock would not pose a… systemic risk, and this failure contributed significantly to the difficulties, and risks to the public purse, that have followed”.
Harsh words, indeed, but is this a case of sanctimonious politicians seeking to shift the blame away from themselves and onto a public body that has limited scope to bite back?
The FSA now recognises it should have done more and there is evidence that it is responding to this failing.
But many are asking whether the split of responsibilities between the Treasury, Bank of England and FSA implemented by Gordon Brown in 1997 was ill-judged and laid the foundations of a weaker regulatory framework. It made it fundamentally more difficult for the authorities to take timely action.
The main player in the initial drama – after the BBC broke the story and scared the living daylights out of many Northern Rock savers – was the Bank of England, with the backing and involvement of the Treasury.
At that point the FSA was disconcertingly invisible, and we saw news reporters speaking from outside the regulator’s North Colonnade offices on the assumption that it wouldn’t let them inside for an interview.
Since then, the FSA has been more active, but some of its interventions have been less than positive.
Two examples come to mind. One is the speech by Clive Briault, as managing director of the FSA’s retail business unit, at the CML conference in December 2007 which carried a strong health warning about the purchase of whole loan books. It was a time when some lenders were finding it difficult to raise funds in other ways and whole loan sales were core to their business model.
Likewise, in February 2008, the FSA’s chief executive Hector Sants offered listeners of Radio 4’s Today a pessimistic view of business models based on securitisation. And he appeared to suggest the mortgage market should move back to a traditional deposit-based system.
These could be viewed as cautionary comments from a regulator under some pressure. But coming from the FSA at a time when the UK financial system is under close global scrutiny, these statements do little to help the industry rebuild confidence and alleviate the impact of the ongoing credit squeeze.
Damned if you do, and damned if you don’t, might be applicable to the FSA’s situation – but surely, warnings to the industry should be relayed in more confidential tones to avoid unduly raising the temperature of the wider market ? There are also questions about content. We must ask whether some of the FSA’s current agendas are as pertinent today as they were when they were initiated before the credit crunch.
One example is the Retail Distribution Review. It advocates radical change in how investment products are sold, not least a move away from commission towards fee-based services.
The FSA recognises that there will be a knock-on effect on the mortgage market, but it is not forthcoming about the detail or the broader implications. But since we are in the midst of a serious and largely unanticipated re-structuring of the UK mortgage market, is this the right time for our regulator (which is also charged with helping to maintain financial stability) to implement further unplanned change?
These are testing times for us all – regulator, industry and trade bodies – and this article is not intended to be a rant at the FSA. There is much to commend in its work. Its highly professional staff have achieved a lot over the past decade.
But equally, the FSA, like firms, needs to recognise the importance of its role in helping the financial services industry to address issues so that the market can return to some kind of normality.
The FSA must remain part of the solution and not part of the problem. The seriousness of the current context cannot be overstated in terms of potential impacts upon consumers, firms and the wider economy.
It is essential that the FSA stays close to the industry and its agendas, and is not diverted by some of the more politicised manoeuvres that might emanate from Westminster and Whitehall.