Here at Coreco Towers we have been enjoying the exploits of our “semi-official” world cup team. Never mind dismal England, what about the pride of New Zealand? Chosen before the competition in part because of our unhealthy obsession with the brilliant Flight of the Conchords and part because our corporate colours match, yesterdays heroics just shows what smaller teams / companies can achieve against the so called “big boys”.
It seems that there are many struggles of this type going on in all walks of life at present. The small business against the big boys, local shops battling supermarket giants and the average person trying to get loans from big banks. There are more battles to come no doubt with the emergency budget on Tuesday bringing the widely expected tax increases and cuts, meaning many local communities are gearing up for a big battle to save services that are important to them.
Meanwhile, there has been lots of talk about the changes to the FSA and how this will affect not only all of us in the finance industry, but the wider economy as well.
As with any proposal such as this the devil really is in the detail, but it is interesting that whilst these changes were made in order to try to simplify the much-maligned tri-partite system, there now seems to be more than 3 new bodies to be created! No doubt these will be filled with most of the current employees of the FSA and surely the creation of these new bodies will come at quite a cost.
Would it just have been simpler and cheaper to install Mervyn King as Hectors boss? The FSA has no doubt learnt painful lessons from the last few years and should in theory be well placed to move forward.
The fact that one person is now in charge and has clear responsibility is of course sensible and long overdue. Mervyn is quite right to ask how can he assist in bailing out banks in the future without a detailed knowledge of their day-to-day practices? The Bank of England is the right choice to ultimately regulate the banks themselves.
However, there is still the unknown question as to how far the new body is going to seek to “control” lending practices, as it is a dramatic move to set specific lending policies for banks that are, in effect, independent businesses. Ultimately this says that lenders cannot be trusted to operate as a commercial entity themselves which, unfortunately in some recent experience, seems to have been the case.
Although there was no specific mention in the Chancellors Mansion House speech of the new entity actively restricting for example, Loan-to-values, there are still whispers that this could be the case. Whilst I have no issue with sensible guidelines being set down which lenders can refer to, simply stating that you cannot borrow over 75% LTV, for example is perhaps too simplistic. Lenders did not get into trouble just because they were lending at high loan-to-values, but because many of the business models were flawed and relied on borrowing money from elsewhere without any Plan B.
The real issue of course, is around risk to the lender, whether they are pricing correctly for that risk, assessing the client’s ability to pay and setting aside enough capital to cover the risk. It does seem sensible however to look at an overall risk cap percentage for major lenders so not all of their lending is based in higher risk areas.
What would be more prudent is to look closely at the customer’s ability to pay the loan, with careful consideration given to self-certification and “fast-track” mortgages and ensuring that full and proper advice is given to all customers who walk into a branch to get a mortgage. There are still too many instances of borrowers being able to get large mortgage loans without any advice.
This “advice” issue is of paramount importance and there have been some encouraging signs from the FSA recently that a level playing field for mortgage advisers, whether independent brokers or in branch, should be in place.
It should be remembered that the Government also has to think carefully about the health of the housing market and first-time buyers already struggling to get on the housing ladder. Deposits in London especially are hard to raise as it is, and if these measure are too prescriptive and draconian the whole 1st-Time Buyer Market could be severely restricted for years to come.
The balancing act is for any new rules to effectively ensure that lending institutions are more secure and enable them to compete effectively, without ultimately punishing the borrowers themselves.
Of course we must give this fresh, new approach time to work and we can only hope that they take time to engage the industry, listen to the concerns of brokers, lenders and the public alike and come to some sensible conclusions for the benefit of us all.