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FCA could impose loan-to-income limits

The Treasury has today released a consultation paper on the role of the Financial Conduct Authority, one of the bodies that will be replace the Financial Services Authority when it is disbanded in 2012.

In the paper it says introducing an LTV cap might not be realistic and it might be more worthwhile to look at introducing loan-to-income caps.

The paper says: “During periods of buoyancy in the housing market, rising property prices can facilitate additional borrowing and competitive pressures can encourage increases in LTV ratios on new mortgages.

“If commercial or residential property prices subsequently decline, balance sheets can become stretched and defaults can increase. Some jurisdictions such as Hong Kong have used maximum LTV ratios in an effort to discourage unsustainable mortgage lending and improve the resilience of their banking sectors.

“However, enforcing LTV limits in relation to commercial real estate could be undermined by cross-border lending.”

It says there might also be an alternative means of achieving the same effect on the property market.

The paper says: “ For example, by varying risk weights on certain types of mortgage lending and so the amount of capital banks must hold against their mortgage lending. Alternatively, loan-to-income limits could also be considered.”

The Treasury says the FCA will have a single strategic objective to protect and enhance confidence in the UK financial system.

It says this strategic objective will be complemented by three operational objectives to make clear how the FCA may go about protecting and enhancing confidence.

The FCA’s operational objectives are facilitating efficiency and choice in the market for financial services, securing an appropriate degree of protection for consumers; and protecting and enhancing the integrity of the UK financial system.

The Treasury says the FCA must, so far as is compatible with its strategic and operational objectives, discharge its general functions in a way which promotes competition.

The Treasury revealed today that the Consumer Protection and Markets Authority was to be re-named the Financial Conduct Authority.

Andrew Strange, director of policy at the Association of Independent Financial Advisers, says: “The renamed Financial Conduct Authority is a better description of the role of the financial services regulator. However, we are concerned about some of the proposed new powers, particularly publishing the names of firms under preliminary investigation.

“This is a worrying shift towards guilty until proved innocent.

“We are also concerned about the extent of wide ranging powers covering not only conduct of business, but also the ability to ban products and share competition powers with the Office of Fair Trading.

“The formal role for the National Audit Office to examine and report on the regulator is a welcome continuation, which AIFA campaigned for over a number of years. The cost of regulation has spiralled in recent years. This cost is borne by the industry and ultimately the consumer. We must ensure it is proportionate and provides value for money.

“One of the key outcomes from this reform must be the checks and balances placed on the regulator. One positive step in this area for the IFA profession is agreement to put the Smaller Businesses Practitioner Panel on a statutory footing.

“We look forward to detailed and positive engagement on these proposals during the pre-legislative process.”

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