The Financial Services Authority’s cost/benefit analysis into the Mortgage Market Review is seriously flawed, the Financial Services Consumer Panel claims.
In its response to the final consultation paper on the MMR, the FSCP has expressed reservations as to whether the cost/benefit analysis could be relied on to guide policy.
Its concerns include an inadequate assessment of the knock-on effect of the MMR into other sectors such as private renting and house building.
It also criticises the lack of consideration of future market changes such as the introduction of capital requirements, interest rate rises and changing attitudes to housing.
The FSCP commissioned two independent peer reviews by economist Jon Stern and Europe Economics to assess the robustness of the FSA’s analysis. Both found major flaws and concluded it was not robust.
Europe Economics criticises the validity of the FSA focussing its analysis on 2009 and 2010 when there was huge market volatility.
Its review states: “The well-being analysis fails to be adequate, even in its own terms, in a key respect – namely that it does not involve a proper counterfactual evolution analysis. It does not consider how the world might change even in the absence of the regulation.”
Stern agrees the analysis is not robust and says the FSA ignored Treasury guidelines for impact assessments.
His report states: “It does not provide a robust and well-founded set of estimates of the impact of the proposed MMR responsible lending requirements on the retail housing market or on its participants.”
Richard Farr, director at Telos Solutions, says FSA analyses have become a joke.
He says: “It has lost credibility but complaining about it will only delay the MMR. A cost-benefit analysis on the impact for the housing market would be bigger than the MMR itself.”
Ray Boulger, senior technical manager at John Charcol, says it is difficult to assess the future market because of the unprecedented changes it has gone through.
He says: “If you ask five economists what will happen in the next few years you will get 10 different answers so it is hard to make judgements.”
The FSCP also called on the FSA for rules to help mortgage prisoners. It urges it to strengthen transition arrangements as it says many borrowers whose mortgages fall foul of the proposed rules will need help if they try to remortgage.