The FSA must work with lenders and intermediaries to ensure its new rules for the mortgage market do not create ‘unintended and damaging side-effects' including forcing out good borrowers, CML chairman Matthew Wyles says.
In a speech to the CML conference, he said there was a balance to be struck between protecting consumers and casting lenders in an inappropriately paternalistic role.
“In our view the main purpose of regulation should be to ensure a sustainable risk management framework for financial businesses, and a sensible operating framework between businesses and their customers. It should not attempt to wrap consumers in cotton wool and make borrowing risk-free.”
He criticised regulators for a damaging view of lenders and intermediaries as “sweetshop owners” or “drug-dealers at the school gates” who are luring in innocent consumers for “profit driven purposes”.
Although the CML supports regulatory reform to strengthen the financial system, Wyles warns it could fail to deliver the right outcomes for lenders or the regulators.
He says the FSA must focus on several key areas in its consultation including income verification and affordability checking rules.
“Self-cert may have had its day if the FSA gets its way, but some consumers will be worse off as a result. Change is necessary, but plenty of self-cert borrowers are complicated rather than dishonest, and it is simply wrong to see all self-cert as 'liar loans'. A less blunt approach than an outright ban could still be adopted” he said.
Wyles agreed it is lenders’ responsibility to assess affordability but he had concerns about the FSA’s ‘onerous’ income verification requirements which could prove costly for consumers.
“Quite apart from the really big ticket items, it seems we’re not even going to be allowed to rely on the borrower’s assessment of what they spend on food, booze and fags – but the “feasibility” tests we’re going to have to apply sound pretty clunky, and costly for consumers.
“I rather doubt that most of those borrowers who found themselves unable to pay their mortgages in the past have ended up there because of an underestimate of their normal spending. Changes in circumstances, other credit commitments, and financial shocks are much more likely to be the causes – and even the best affordability models can’t prevent these from happening.”
“So what we hope the FSA will do as part of the consultation discussion is listen to our concerns, and to our ideas for how we can undertake affordability assessments that meet the regulator’s aspirations without completely asphyxiating the industry, layering in extra cost and time delays to mortgage applications, and frustrating and angering perfectly sensible consumers in the process.”
He said the FSA should also think hard about the transitional problems arising from its rule changes.
“For borrowers already in the mortgage market, who may be paying their mortgages perfectly well but whose combined risk factors look high, the ability to get a new mortgage will be significantly reduced in the future
“There will be a group of existing borrowers who will be prevented from taking out a new mortgage with a different lender, or possibly even with their existing lender, in the future.
“The FSA doesn’t seem to mind if these people drop out of the mortgage market, but if they have been paying their mortgages on time, is this outcome any more rational than the kind of behaviour that the FSA believes characterises mortgage borrowers (and lenders)?”
In conclusion, he expressed a hope the FSA will pause for thought and “not rush in to rules that could have serious unintended consequences”.
The FSA's mortgage Market Review paper is out for discussion until 30 January 2010 and a feedback statement will be published in March. Implementation will be phased, with the focus on speed for areas of high detriment, such as arrears.
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