Like December, July is one of those months in which more deadlines are set than others. Public officials in particular work overtime to get documents published before getting the buckets and spades out and heading off for
The Long and
Those not suffering from acute attention deficit disorder will recall the Chancellor announced at the Mansion House on 16 June that the FSA would be abolished. By rather sophisticated drafting he gave the impression that this would take two years to complete. On 12 July Mark Hoban announced to another rapt Mansion House audience that the legislation would take two years and an interim consultation document would be published before the summer recess. The adjective “interim” was new on 12 July. By 26 July the “interim” consultation document was published and further timetable clues were bled into the public domain. There will be a further consultation early next year containing draft legislation “on core parts of the proposed Bill”, so not all of it. That Bill will be published by the middle of next year which means we shall be sitting here this time next year studying the Bill. Passage of both Houses is expected to take two years so Royal Assent may be expected in summer 2013. Thus, in six weeks, the Government has succeeded in revealing a delay in its timetable of a whole year so that few would notice.
Of course, it is better to get any change of this magnitude right rather than quick. But, in practice, there is another two years of slippage to be revealed and a five year time scale adds considerably to the risks of doing this at all. What, for instance, would happen if the Coalition were to collapse two and a half years in? Shadow bodies will be beavering away but relying on FSA powers with new tailored ones no longer in the pipeline. This is a recipe for the very loss of confidence the measures seek to avoid. The best one can make of this is that an incoming administration mindful of the risk would set ideological preferences aside, do the pragmatic thing and implement the break up as planned.
Even if that is true, the proposals contain significant risk that questions the value. Even now, the FSA is embarked on an internal restructure so that it can assume the shape of the shadow successor bodies early in 2011. Those who have gone through this process will know how easy it is to take the eye off the ball. All three managing directors will leave the FSA by the time the shadow bodies get going. Although very capable replacements exist within the FSA, an army losing all three of its key field commanders as a difficult manoeuvre is underway is carelessness as Lady Bracknell might have said. The Consultation Document does specifically express the need for clarity and certainty for FSA staff but whilst words are helpful, staff will naturally be uneasy until their futures are clear.
Many aspects of the proposals remain unclear. The Economic Crime Agency (“ECA”) proposal is delayed. The CPMA (only a working title we discover) will remain responsible for its own enforcement, so reducing the compass of any ECA. The FOS receives something of a put down. It is to concentrate on being unbiased so it must not have a consumer champion role. It must be independent of the CPMA because it will be a consumer champion. This is loose talk which needs attention. The CPMA should be nothing of the sort. In practice the document has been hurriedly assembled and clues and loose ends are to be found in several places. At paragraph 4.25 it says “The establishment of a new, focused body presents a key opportunity for a frank and open debate about achieving the appropriate balance between the regulation and supervision of firms, consumer responsibilities, consumer financial capability and the role of the state. These issues will be addressed as the CPMA is established.” To paraphrase: “we are making it up as we go along”.
To be clear. Both the PRA and the CPMA should deliver good and effective regulation and supervision. They should be champions of a market that works as well as laws and regulatory intervention can make it. What paragraph 4.25 means is anybody’s guess but if the CPMA is to be biased then there will need to be a countervailing force somewhere in Government that “sponsors” the interests of the supply side of the market. This would be in the interests of consumers too if a moment’s thought were applied to it. As an example, developing contingent capital solutions for small mutuals instead of putting them to sleep would widen choice.
Paragraph 4.24 gives authority to the FSA to press ahead with the RDR and the Mortgage Market Review. The market is threatened with “a strong approach to enforcement”. The Government therefore nails its colours to the mast and declares the RDR and MMR good things. Odd that it is juxtaposed to paragraph 4.25!
Overall the consultation document is a mess. Much detail is missing. There is no proof of concept and no real reasoning is given for change. Execution risk is evident at several points but not acknowledged. If the Government is unhappy with the FSA it could have achieved what it apparently wants by far simpler means and improved the FSA where it stood. The document can be seen at: http://www.hm-treasury.gov.uk/d/consult_financial_regulation_condoc.pdf
When the road runs out
The FSA consulted during the month on mortgage selling as a further installment of the MMR. In many ways the CP proposals are common sense. It can be summarized succinctly as a call to lenders to “please underwrite loans properly”. Not very difficult one might think. However, two very difficult issues lie beneath the proposals, one practical and one a serious example of what regulation might look like under the Government’s plans.
The simpler aspect is that the CP consults on trying to squeeze out interest only and self-certification mortgages as far as possible. In fact the headlines were misleading, the CP proposes to leave the lenders with some discretion and there is no outright ban. It remains to be seen whether there is a de facto ban because no lender will risk enforcement if a well-judged lending decision nevertheless goes wrong. The problems however are that in an era when the economy is experiencing a massive withdrawal of the State there will be many new self-employed people whom the FSA propose simply to disenfranchise and there is confusion about interest and rent. People who cannot get a mortgage have to live somewhere. They pay rent. Mortgage interest is economic rent. An interest only mortgage is no different to rent save that the mortgagee is betting on the residential property market. There is a limit to how far regulation can go. Turfing some people out of the property market does not necessarily protect them. Interest only mortgages and genuine self-certification are fine in the right hands.
The FSA’s real concerns appear to be systemic risk to the banking system and asset price bubbles. They are worried that consumers believe that the residential property market can only go up. (On an island and given that land isn’t made any more who is to say that they are wrong?) However, they may be using their new financial stability objective (contained in the Financial Services Act 2010) to reduce residential property prices to what the Bank of England considers a more sustainable level be restricting financing. If so, this is a very different type of regulation. The CP can be viewed at:
http://www.fsa.gov.uk/pubs/cp/cp10_16.pdf
Who pays the piper
Lloyds Banking Group are the first big player to blink and announce that they are pulling out of selling payment protection insurance (“PPI”). So the consumer lobby has got its way. A brilliant result in which the authorities are complicit. As a consequence many people will suffer hardship when things go wrong for them.
No one can condone the egregious behaviour of banks squeezing every last penny out of PPI so that a claims ratio of 20% became the norm. But as too often happens, poorly calibrated regulatory intervention results in the other type of consumer detriment and another piece of financial services dies. In the early days of the PPI saga, the FSA was careful to point out that a properly priced and sold PPI policy could be a good thing. But the calibration was lost and now one major player is pulling out. The regulatory system lacks balance.
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