Each day until the end of the week each our experts will be looking back over the last 12 months and pondering what 2011 might bring.
Today Paul Broadhead, head of mortgage policy at the BSA, shares his thoughts and opinions.
“Forget the fact that in the Chinese calendar 2010 is the year of the Tiger; it could more appropriately be named the year of the regulator.
The number of consultations from the FSA alone is bewildering.
The mortgage market review consultation published in July was already the sixteenth consultation from the FSA this year. At the time of writing we are up to number twenty seven!
In the spring after much to-ing and fro-ing we had the formation of a coalition government. It was interesting to read in the coalition agreement that the government would bring forward detailed proposals to foster diversity and promote mutuals.
But what does this mean in practice?
Well, as we know, mutuals have a huge advantage over plcs in that they are focused entirely on their customer-members, not on shareholders.
Mutuals offer the choice, diversity, customer service, efficiency, and democracy that the coalition is looking for in a new banking world. How best can the coalition’s commitment be delivered?
Well, looking at the background of the basel III proposals, it is more difficult for mutuals to raise additional capital. The bulk of mutuals’ capital is high quality - retained earnings built up over the period of a mutual’s existence. Over the last 20 years this has been supplemented by permanent interest bearing shares. However, these will not meet the authorities’ latest, more demanding, definitions of the highest quality of capital.
Bearing in mind the significant advantages offered by mutuals to the market, the European institutions (Commission and Parliament) are already clear that the new criteria for core capital cannot be based exclusively on the plc model but must cater for mutuals too. It would be helpful if the UK government could give a strong pro-mutual lead in the European discussions that are taking place on this subject.
Much focus in the mortgage industry in 2010 has been on the FSA’s mortgage market review. I have significant concerns over both the direction of the changes and also the potential consequences for the market and consumers.
My main concern with the current proposals is the risk of unintended consequences and the cumulative impact of rapid regulatory change. The FSA has already enhanced its supervisory process, it is too early to assess whether this has addressed the risks to consumers.
We have also seen increased prudential regulation, it is also too early to assess whether this has fixed the perceived problems. Against this backdrop, the European Commission are also expected to publish legislative proposals on responsible lending early in 2011 that have the potential to conflict with, and override those proposed by the FSA.
It is worrying that UK lenders are subject to parallel regulatory development at both national and European level. It is likely that the Commission’s proposals, together with the FSA’s plans, will reduce the size of the market, making mortgages both scarcer and more expensive.
Finally, it seems ironic at a time when regulators’ are so focused on affordability for consumers, there does not seem to be the same focus on the affordability of the industry to bear the costs of the many layers of regulation being imposed.”
