'A regulatory pendulum swing too far'

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ePolitix.com speaks to Michael Coogan, director general of the Council of Mortgage Lenders, about the Financial Services Authority's (FSA) responsible lending proposals, and the effect they will have on the mortgage market.

Why do you think the current FSA proposals will sacrifice far too many borrowers?

The FSA's role in responding to the problems of the last few years is to try and minimise risk in the market. As a result it has taken an approach on affordability that we don't think matches either lenders' or consumers' views of what is responsible.

This will have an impact on the number of people who are able to get mortgages in the future on affordable terms.

We would like to see the FSA's approach challenged now, and a public policy debate supported by ministerial views on what sort of regulation we are trying to put in place to support housing policy in the UK.

You have looked back and found that if the FSA proposals were implemented from 2005-2009, as well as stopping arrears and repossessions, 3.8 million good loans would not have occurred – is this safeguarding too far?

What we have done is to replicate the analysis which the FSA did, but in fact we found that our analysis was more complete. They stopped at the end of the first layer of regulation; thus they didn't include a number of additional layers which are subject to consultation.

If these regulations were in place it would have stopped and protected somewhere in the region of 200,000 customers who have gone into arrears on their loans in the last five years, from taking out loans they could not afford.

In the same period some 3.8 million customers received loans and were able to pay them, and we don't think they would thank the FSA if they were subject to different conditions on those loans.

What we are seeing as a result of that analysis is that the affordability proposals individually and collectively go too far. That reflects the risk-aversion in the UK, which doesn't match an analysis of borrower attitudes undertaken by Policis, or our understanding of lenders' principles of responsible lending.

Does it go too far? Yes. What's the impact? It impacts on 11 million existing customers in different ways and it makes it much more difficult for first-time buyers to come into the market in the future.

Will this additional regulation adversely affect first-time buyers?

Well, there are different groups affected in different ways; the most affected will be those with past debt problems or missed payments, and of course there are more of those now, as we are going through a recession. The products sometimes called 'sub-prime', but not always given to customers who have a very serious credit history, have largely disappeared from the market. So these customers won't be able to get new loans on the terms they have been used to, whether they are existing or future borrowers.

The second group that is affected, some two-thirds are first-time buyers. If these new regulations were in place, they would not have been able to get loans from 2005-2009 on the terms that they got. They would have either had to take out a lower mortgage on a different property, or decide not to proceed with their borrowing.

The bottom line in terms of the actual experience of those first-time buyers is that only five per cent of them have actually had arrears difficulties in the last few years: 95 per cent of them are making their payments. What we see is a market where first-time buyers are coping, but what we are also seeing is a market where if first-time buyers are offered loans in the future, they won't be given them on similar terms.

You obviously agree with applying buffers and applying stress tests prior to lending?

The issue is approaching the same risk by additional layers of regulation. If you are trying to address a risk, you do it with one type of regulation, not a series of different rules, achieving the same outcome.

We are also very clear that income verification is very important and mainstream in the market. There will still be high-net-worth individuals who have good experience and a good credit score, who you don't need to go through paper chases in the way the FSA is going to require in the future.

On affordability, the FSA don't like borrowers stretching themselves. There hasn't been a borrower in the UK who hasn't had an aspiration to buy a house that they can grow into over time, and often that means in the first few years it is very tight on income, but they are expecting this to improve over time, and of course it has.

Basically this is now seen as irrational behaviour. The FSA's approach seems to be, you should only borrow what you can afford today, not what you aspire to own in the future.

Would you say no to further regulation, or does the Council of Mortgage Lenders have an alternative proposal?

I think the first thing to say is that we have accepted that there are problems in the market and that the status quo is not acceptable. We have also recognised that there are measures that need to be taken on responsible lending and improving interest-only mortgages. Measures also need to be taken to ensure that diversity of competition through non-bank capital requirements is introduced.

However, what we are now faced with is a question: what is the government's purpose in this regulation? We see the FSA acting as a consumer champion and preventing consumers from taking risks that they don't understand, stopping what those at the FSA view as irrational borrowing.

We don't think consumers share the view of the FSA as to what is rational or not. The effect of the approach is to reduce the size of the market and create real problems for people who are existing borrowers.

So in public policy terms the government has to come out with a view as to what sort of regulation will help them deliver their housing policy. And don't forget Grant Shapps is calling for an age of aspiration which gives opportunities for first-time buyers. That is not going to happen in this kind of environment!

We also need to ensure that the regulator understands how the Treasury ministers view future regulation as we move from the FSA to the Consumer Protection and Markets Authority (CPMA). Clearly the FSA positions the mortgage market review as a banner, depicting the way in which regulation will apply to all financial services. But I would suggest that this is the first test of their conduct risk strategy and it has failed. That is not a good design before we move into the CPMA.

What effect do you think these new regulations will have on the housing market?

Well, the FSA have themselves modelled the impact of their proposals as written in full in their consultation paper. They suggest significant house price falls will follow. They haven't actually published a view as to what they believe 'significant' means. But I don't think it is up to the FSA to introduce a set of rules which they know will disadvantage 11 million existing borrowers and, more particularly, will undermine the security of the lenders in those 11 million loans.

Are you calling the FSA interventionist?

Well, the FSA is responding to a series of events over a series of years, where they were accused of being asleep at the wheel. They have been asked to be a consumer champion. They also have to pre-position themselves for a new regulatory structure with the CPMA.

What the FSA is doing is a natural reaction to all of those events, but it is a regulatory pendulum swing too far. Adair Turner has highlighted this risk in recent speeches, as well as the importance of a public policy debate. That policy debate can only be led by ministers, and ministers' silence is clearly not helping us understand where we should all be going.

What would your key message to ministers be?

To give a clear indication of how they want the FSA to implement a regulatory structure for mortgages and housing finance generally, that will support housing policy in the UK.

Home ownership is still an aspiration for many. Buy-to-let will be necessary to fill the gap for those who can't become home-owners immediately, so we need a vibrant private rental sector. It has to be noted that the fiscal deficit impacts social housing as well. Housing finance can provide a solution to a number of the problems that government faces, but it can't if regulation stands in its way.

Ministers collectively have to give an indication of what they want regulation to achieve, so the FSA can draft rules to set out that structure.

We share the vision with the FSA, that what we want is a sustainable market for all participants, lenders, intermediaries, estate agents, builders and others in the market as well as consumers. And that market should have a choice of product and diversity of competition, to give consumers a choice of product that they had up until 2007.