Mortgage Regulation

Robert Syms Excerpts

Monday 17th January 2011 Commons Chamber

[Mr Robert Syms (Poole) (Con)]

I intend to speak about the future of the mortgage market and, in particular, the current proposals by the Financial Services Authority in its “Mortgage Market Review”. When it was announced, Lord Turner said that it was a “major shift” in the FSA’s “willingness to intervene”. It is a serious review. If it listens to representations, as I hope it will, and is light touch, it will improve the market, but if it goes the way of some of the proposals that are being consulted on, it could have a profound and bad effect not only on the economy, but on the prospects for many of our constituents. I shall touch on those issues today and canter round some of the concerns.

The Council of Mortgage Lenders, the Building Societies Association and many other organisations are very worried about what the FSA is consulting on. We must therefore treat seriously the prospects and the proposals put forward. I support the objectives of the FSA, which are to create a mortgage market that is sustainable for all participants, and a flexible market that works better for consumers. However, it is crucial that the FSA recognises that in the context of the current financial crisis, problems in the European and UK economies today are primarily the result of liquidity and structural issues arising from global financial markets. They are not a result of a dysfunctional and widely irresponsible residential mortgage market. The FSA should be mindful not to focus its attention on fixing the wrong problem.

Despite the economic slowdown, FSA arrears statistics show that the overwhelming majority of mortgage borrowers in the UK are able to continue to make their mortgage repayments. The current low level of interest rates is a major help in this, but the statistics demonstrate that the vast majority of lenders have acted responsibly and have been positive and sympathetic to customers in difficulty. In a sense, the mortgage rescue scheme introduced by the previous Government towards the end of their term of office did not help many people, but it pointed many people with difficulties to their lender. That meant that their lender could deal with the problems. One of the good things emerging from the difficulties that we face is that a far more responsible attitude is being taken by many lenders.

I believe that it is desirable to have a market based on consistent, responsible lending and borrowing. However, the market failures that the MMR is designed to address affects only a small number of lenders that were in the market. Some of those are no longer active.

[John Woodcock (Barrow and Furness) (Lab/Co-op)]

Does the hon. Gentleman recognise that some of the smaller lenders, such as the Furness building society based in my constituency—lenders who were not rogues, did not play fast and loose, and were always responsible—feel disproportionately penalised by the proposals currently on the table?

[Mr Syms]

I agree. One of the important things about the proposals is not always to focus on the five big banks but to ensure that there is a diverse mortgage market that includes many smaller building societies. I shall touch on that issue in a moment.

A measured and well-considered response from the Government, the regulators and the lenders is necessary to prevent an inefficient and unsustainable mortgage market. The current proposals will have a far-reaching effect on the wider economy, but the FSA’s impact assessment does not consider those wider consequences. They should be considered, because housing is an important component of our economy.

There are also fundamental concerns about many proposals that transfer responsibility away from the consumer and to the lender. We appreciate the lender’s responsibilities to verify application information and to have appropriate controls in place, but that must be balanced with the capability of customers to make sound financial decisions for themselves. The proposals do not achieve a balance; they take the very patronising view that customers need protecting from themselves—a view that could be insulting to many mortgage borrowers. In my experience, the people who get most upset are those who are refused a mortgage, a loan or some help from a bank. People take that personally, and if we are not careful, we will exclude many people from gaining access to finance.

[Mr Marcus Jones (Nuneaton) (Con)]

I congratulate my hon. Friend on securing this debate. Does he agree that responsible lending should not exclude first-time buyers from accessing mortgages with loans-to-value ratios of up to 95%? The bigger issue is about lenders ensuring that they do not over-expose themselves to such loans. They should keep them proportionate within their mortgage book to ensure that first-time buyers gain that vital access to mortgage finance.

[Mr Syms]

It is good that we are moving away from 120% mortgages, which were clearly unsustainable, and it is probably good that people should have to put down a deposit, but I do not want to be too dogmatic, because all the surveys suggest that for first-time buyers the deposit is one of the biggest hurdles, so we ought to leave it to the market to make decisions, rather than being too dogmatic in terms of regulation.

Flexibility will be the key to delivering outcomes for customers, but if we are not careful, the proposed changes will undermine current flexibility. Setting prescriptive rules will inevitably lead to some creditworthy customers, with and without complex financial situations, being excluded from the market, and that is not an acceptable position in which to place borrowers. I also believe that the proposals will affect considerably more customers than the FSA expects. Tighter controls on affordability assessments will not weed out customers on the margins only; they could have a much wider impact on the market.

The MMR should aim to promote responsible borrowing by raising financial capability, empowering borrowers to take ownership of their personal finances, enabling them to make well-informed decisions, promoting best practice to raise standards across the industry and ensuring better outcomes for consumers through consumer choice, transparency and fair treatment.

The MMR should also promote competition in the mortgage market, so that lenders of all business structures, including those small building societies,which were mentioned earlier, can compete on a level playing field. It should further promote product innovation to meet the demands of a diverse and ever-evolving customer base. Innovation must stay with the market, because we should not have a regulator that stifles innovation, and the MMR should also ensure that lenders have the flexibility to provide support to their customers when they need it—for example, when they experience financial stress.

On the current direction of the MMR, however, there is considerable concern, first, about the wider impact on the economy and housing market, and how the proposals interact with wider Government ambitions and policy. There seems to have been a firm shift, apparently removing responsibility from borrowers and placing unreasonable responsibilities solely with lenders. Distortions in the market will sometimes affect large banks, and, as we have heard, building societies are concerned about that. If we want to have a diverse market, we have to have small as well as large lenders. The direction of the MMR might also have an adverse impact on social mobility. There are concerns about the interaction with existing and planned macro-prudential reforms, and about the potential conflict with regulatory reform initiated at European level.

Certain groups might be affected. First-time buyers could be expected to have higher deposits and to pay higher prices, because under the proposals they might have “risk” status, which would dampen their capacity and willingness to transact even more than we have seen to date. We know that there is a problem with first-time buyers. Those who have wealthier parents who can help them will get into the market; those who do not may be excluded. We have to bear in mind that important fact.

Existing homeowners with self-certification loans will have to prove their affordability next time around. For some of those with variable incomes from different sources that will not be straightforward, so some existing mortgage customers may find it difficult to remortgage, which could have a major impact on the housing industry. One of the industry’s responses may be that lenders become less willing to serve such complex prime cases because of extra administration and potential risk. There will be a major impact on the self-employed and contractor markets, as such people necessarily have difficulty in proving or certifying their earnings. There is also a group of prime mortgage customers who have become impaired owing to the impact of the recession on their finances. Recent short-term arrears will make it more difficult to refinance with their existing lender or to remortgage elsewhere; they are trapped until they can demonstrate that they are no longer “credit impaired” as defined by the FSA. We have to be very careful that reforms of any kind will not make it more difficult for those who have had short-term difficulties to stay within the market and to remortgage.

Many of the organisations that have contacted me are also concerned about shared ownership. In its sourcebook, the FSA specifies that as a high-risk area, and that could have a big impact. Shared ownership is one of the most under-exploited areas that we have. We could do a lot more in respect of that market, and we do not need restrictions or classifications that could make it much more difficult to help to grow it.

A large number of existing borrowers, the majority of whom are successfully meeting their mortgage repayments, will find it difficult under the proposed rules to remortgage in the future or to get new mortgages at all. This will have a major negative effects in terms of social mobility, particularly in the coming years. Restricting the ability of consumers to move home in order to take up new or improved employment will also have serious adverse consequences. The FSA should not consider implementing any changes to conduct of business rules until a full assessment of the impact of changes already made to prudential requirements and enhancements to the supervisory regime has been carried out. If there are still concerns once this has been undertaken, targeted action through rule changes can be undertaken. It is important not to go too fast in addressing this matter.

One important thing that is coming over the rainbow is European reform. In the first quarter of 2011, we expect a European directive focusing on responsible lending and borrowing. This directive may well have an impact on changes proposed in the consultation, and that might be an important factor.

I am concerned that if we are not careful, as a result of the excesses of a few lenders in the last property boom, we will have a set of rules that impairs some of those who are more marginal borrowers, makes it more difficult for people to get on the housing ladder, and penalises many lenders by putting up their costs, and that will not lead to a diverse, flexible market where there is innovation. The housing market is crucial to the future of our country and our economy. We all want people to be well housed and to have the ability to buy a home if they can afford it. We have to be very careful about the rules that are implemented.

I hope that this debate plus all the other representations being made to the FSA are listened to, because we have to get this right. If we get it wrong, it will be disastrous, and we will all find people in our surgeries who cannot understand why a few years ago they got a mortgage and now they cannot. This is a crucial issue. I know that there is still a consultation going on and we do not yet know the results, but I hope that the Minister takes on board the fact that there is genuine concern about this. We are not going to sit as late as the Lords, which I understand is going to sit through the whole night, but it is still quite late and there are a lot of Members in the Chamber for an Adjournment debate, several of whom take a special interest in housing issues and are well respected for it. That says something about the concerns that exist about these issues.