FSA - Enders: live and unedited

Wednesday 17th February 2010

By Michael White, chief executive of online mortgage advisers, Email Mortgages

With the deadline for submissions to the Mortgage Market Review (MMR) now having passed, it has been interesting to see the public pronouncements from various bodies – CML, BSA, and AMI – about how they view the next step forward.  Almost to a man, the industry seems to be united about the need for some honest reflection from the FSA rather than the seemingly schizophrenic desire to motor forward with ever-increasing levels of unnecessary regulation regardless of the consequences.

This week sees the 25th anniversary of EastEnders and reading one article about the nature of the soap, I was struck by the similarities between it and the FSA.  Bear with me on this one.  Effectively, the article said that EastEnders exists in a sort of ‘hyper-reality bubble’ where it attempts to mirror ‘true life’ but only ever achieves a weird, unworldly-ness.  For example, no-one in Albert Square seems to own a washing machine so the launderette becomes a regular meeting place; everyone drinks at what seems like every single hour of the day allowing regular confrontation at the Queen Vic; no one watches TV; and when a character leaves they often don’t return for years at a time regardless of the fact that the rest of their family may live there.  Not forgetting the propensity for at least one murder a year, regular kidnappings and at least six new characters moving to Walford who are related to existing relatives but have never been mentioned prior to their turning up.

While I acknowledge it’s a drama it does purport to be ‘real’ in some sense but the faults listed above, and many more, make it seem particularly surreal.  Which is why I believe the FSA is the EastEnders of financial services.  It purports to be following real-life events and reacting to them with ‘real-life’ regulation but it is in fact regulating in a bubble where the theoretical is put into practice regardless of market realities.  For example, from the Credit Crunch, liquidity crisis and subsequent recession we now have proposals that seek to regulate everything deemed ‘risky’ in the hope that perfection and a risk-free environment can be achieved.

The prime example of this is the attempt to regulate self-certification mortgages out of existence regardless of the fact that, at a conservative estimate, we have approximately one million borrowers with self-cert products who will never have missed a mortgage payment but are now probably wondering what the hell is going to happen to them when their deal ends.  With this proposal the FSA seem to be saying that self-cert was the cause of the Credit Crunch and therefore we need to expunge the product from history.  This is quite patently nonsense and it shows a complete lack of knowledge and consideration for the current economic situation.

As we come out of recession, entrepreneurs will look at the climate and many will look for the opportunity that comes out of this adversity.  It will be this band of people who will start businesses, who will generate income, jobs and taxes to help haul UK plc out of this mess.  And yet, the regulator is saying that we will not allow these people, who are the prime self-cert borrower, to access mortgage finance on this basis.  Utterly ludicrous and completely self-defeating.

This is regulation to protect a small number of potential rogues from themselves while the vast majority can suffer along with them.  Similarly, the market is now crying out for credit-repair products – I dare not mention the words sub-prime – which will allow those who, perhaps through no fault of their own, missed a payment or got themselves into arrears in what has been the worst recession in living memory.  These people may already be back on their feet but now have a less than spotless credit record – what chance do they have on securing mortgage finance, or what if they have equity in their homes which they would like to access to help fund a business?  The answer is very little because regulation will have deemed them ‘too risky’ to lend to.

This is a very real dilemma because the intention seems to be to regulate risk completely out of the market.  In this world institutions are not allowed to make lending decisions themselves because they cannot be trusted; instead everyone must opt for vanilla because this is the only flavour allowed.  It is these practices which make a double-dip recession much more likely; those who want to innovate and create and help grow the economy will not have the chance because the risk involved in helping them has been deemed too great.

It is these sorts of obstacles placed in the way, along with proposals to regulate buy-to-let mortgages, which should make us all as an industry very nervous.  Clearly, the membership of our trade bodies has expressed this very point as the recent missives from the CML, BSA and AMI confirm.  They are calling for a halt to mortgage regulation this year and the view is that the FSA should review their MMR proposals much more rigorously before blundering on into even more restrictive and irrelevant legislation.  It should understand that perfection is not possible neither can it regulate risk out of the market. 

I await the next stage of the MMR with the same degree of trepidation that EastEnders actors must be feeling about this week’s completely live episode.  It is in real-time and anything can happen, mistakes in all likelihood will be made; however, with such risks come rewards, unique experiences and greater satisfactions.  We would not want the BBC to cancel the live show because someone may potentially forget their line, neither do we need the FSA to regulate in a manner which aims for perfection but ultimately causes the market collapse it was trying so hard to avoid.        

Michael White is both founder and chief executive of online mortgage advisers, Email Mortgages.com  Email Mortgages was established in 2008 and is a mortgage advisory practice providing consumers with tailored fee-free advice online via email.  Michael has been working in financial services for over 30 years and been involved in a number of new business start-ups including Chase Manhattan Homeloans, Legal & General Mortgage Services and Kensington Mortgage Company.  His last job prior to Email Mortgages was as founding director of the lender London Mortgage Company, established in 2001 and sold to Lehman Brothers in 2006.