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FSA cop-out
Some of the comments and proposals in last month’s FSA paper on responsible lending, CP10/16, are entirely sensible but others are downright dangerous, with the potential for considerable consumer detriment.
Making proposals that it admits will hurt some consumers is an interesting way of fulfilling the FSA’s statutory responsibility for consumer protection. It claims that the number of consumers who will benefit from its proposals is greater than the number who will be hurt and concludes that the collateral damage to those who will suffer is an acceptable price to pay. I suspect that the millions of consumers who will be adversely affected may not see it that way.
The cost-benefit analysis that the FSA is required to produce before introducing new rules is a cop-out when it comes to assessing the degree of consumer detriment as a result of its proposed draconian affordability tests. For example, it says: “We have not estimated the loss of welfare to affected borrowers in having to settle for a less preferred property (be it a rental or more affordable purchase) due to difficulties in measuring these effects.”
The FSA is proposing to completely rewrite the existing MCOB chapter 11 and the new rule 11.3.12 R (1). It says: “For the purposes of this rule, the customer’s free disposable income is the amount (if any) remaining when the customer’s expenditure has been deducted from the customer’s income. A regulated mortgage contract or home purchase plan is not affordable for a customer if it is foreseeable that, at any time during the term of the regulated mortgage contract or home purchase plan, the payments to be made under it by the customer for a particular month (or other agreed payment interval) will be equal to or more than the customer’s free disposable income over the same interval.”
Unless lenders change their mortgage conditions to require a single annual payment, perhaps allowing borrowers to make monthly payments on account without incurring an ERC as a concession, which seems rather unlikely, this rule means that for the millions of borrowers with a fluctuating income, the FSA will only allow them to borrow what would be affordable from the income they receive in their worst month.
This would be extremely detrimental not only to virtually every family with at least one income earner who is self-employed but also to the many employed borrowers who earn a significant proportion of their income by way of bonus, commission or overtime.
An extreme example of a victim would be a top criminal lawyer who might earn over £500,000 a year from a small number of cases, receiving a cheque for six figures some months and nothing in others. According to the FSA, the maximum mortgage such a lawyer could afford is nil.
Ray Boulger is senior technical manager at John Charcol
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Readers' comments (17)
Bill Warren | 3 Sep 2010 9:23 am
Ray...is so right these proposals reach into the very heart of family life in the UK.The FSA are now dictating where people can live and in what type of housing-surely its the governments job to set housing policy or at least a framework.As someone who is self employed Ray hits the point spot on we are being excluded and discriminated against.Mortgage lenders may like the proposals as it returns them more power but for the consumers and mortgage brokers this as Ray has said dangerous to say the least.
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Marty Young | 3 Sep 2010 9:29 am
Does this not prove conclusively that the regulators are completely incompetent? Why are these people still allowed to watch over what this industry does? Its like having a non driver being a chief examiner for the driving schools. They just havent got a clue what they are doing. How in the name of all that is merciful are they supposed to regulate properly when this is the sort of crap they come off with. Its not rocket scinece. If this is the "highest quality and calibre of staff" they recruit for their £100K positions then God help us all.
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Tom IFA | 3 Sep 2010 9:52 am
The FSA is the single biggest threat to the UK housing market.
Budding entrepeneurs will see that becoming self employed will, unless they are mega successful quickly reduce them to second class status when trying to buy a decent property to live where they choose. First class status being restricted to overpaid public sector employees.
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Alan Lakey | 3 Sep 2010 10:05 am
I was at the FSA's MMR roadshow in December 2009 and was despondent due to the obvious lack of understanding emanating from the FSA speakers.
As with most things regulatory there is a vacuum of responsibility and an eagerness to design systems and tick-box processes. None of this reflects the world we inhabit and as with most of the FSA tinkerings it creates more detriment than it aims to resolve.
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Mike Fenwick | 3 Sep 2010 10:25 am
Quote: " An extreme example of a victim would be a top criminal lawyer who might earn over £500,000 a year from a small number of cases, receiving a cheque for six figures some months and nothing in others. According to the FSA, the maximum mortgage such a lawyer could afford is nil."
Leaving said criminal lawyer to rent a bed sit from his PA - but who is employed?
Wow, who ever thought the FSA were to be the catalyst of a socialist revolution?
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M J Winfield | 3 Sep 2010 10:30 am
Does the new rule mean that no graduate with a student loan can have a mortgage until the loan is repaid?
What about alternative wealth, tight cashflow but £500000, in Gilts, Equities, as just one example.
The other worry is over the time period of the mortgage, In the eyes of the FSA, no wealth appreciation is allowed, or changes in interest rates.
Joe and Fancy have income well in excess of the proposed FSA requirement, some short time after completion, Fancy becomes pregnant and Joe redundant. Some nasty Mortgage Broker lacking foresight must have missold the mortgage.
If the FSA was not so bl--dy dangerous they would be a great comody act.
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terry | 3 Sep 2010 10:45 am
I did not realise we lived in a communist state, where some idiot, who probably already has his nice house, mega salary, expenses etc. dictates to us poor minions what we can by, where we can buy if at all. Scenerio. House available with a 5% deposit, incentive to save, possibly achievable within reasonable space of time., 15%-25% not achievable in a reasonable space of time incentive disappears. Some idiot suggested previously that people take exams to be able to purchase their home. Where do these cretins come from. There is not a shortage of people wanting to buy their homes(despite the Press) it is the shortage of funding. The way the FSA are going will bring the demise of mortgages and the building industry. Its a bit like the government wanting to get people off benefits and into work and also wanting to cut costs, where are the jobs for these people, so the unemployment benefits costs go up. No change to expenditure
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M J Winfield | 3 Sep 2010 11:20 am
Is the FSA remit to protect the Public? Or to Control, Command, Constrain, Dictate, Dominate, or Manipulate the Public.into doing its bidding. There is a very important difference
usually refered to as 'Democracy'. Lest we forget,
'Government by the People for the People'
In the past the combined forces of the market have failed to bring the FSA, back within the terms of the Financial Services and Marketing Act/s constraints.
Accordingly they like the public will pay the price, until the current mind set is eliminated from the FSA and its bed follows.
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Anonymous | 3 Sep 2010 11:51 am
Complete despair!
The lunatics really have taken over the assylum!!
What a marvellous example of TCF by its authors.
They can't really quantify the adverse effect on millions of people because it's 'too difficult to measure'. Oh, that's alright then! just forge ahead.
But do beware FSA, in five or ten years time, you will have hundreds of thousands of retrospective complaints made against you. Citizens ( yes I did use the word citizens. May as well get into Orwellian/1984 speak now as later!) will, once the the claims companies and litigators find the right premise to pursue, be taking you to court in droves. The F.O.S will collapse under the strain, Solicitors and Barristers everywhere will use the TCF mantra to batter the FSA and extract millions in compensation...........Oh my God, oh no, a sickening thought. Our fees will increase 'exponentially' to pay for the FSA's stupidity.
Well, nothing new there then!
Unfortunately, those responsible will have retired on 'Mega Pensions' and associated benefits, sitting nicely in their country mansions.
Of course, whilst this is happening, the Banks will adopt a more pragmatic view and ignore the affordability guidelines with the blessing of their former colleagues who now work for the FSA!!
Scene: - The Natural History Museum - 2014
Extinct species section
1. Dodo
2. Niche lenders
3. Mortgage intermediary
How very sad. The ruination of an industry. The social deprivation of millions of hardworking people. The complete loss of freedom of choice.
Will the last Intermediary please turn out the lights.
Anon.
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Sean | 3 Sep 2010 12:14 pm
I think one of the main issues with most of the things proposed by the FSA is in the interpretation of the guidance:
'A regulated mortgage contract or home purchase plan is not affordable for a customer if it is foreseeable that....'
What is foreseeable. And does anyone have a crystal ball that can tell what will happen in a clients life over 25 years? Does this mean that anyone in the North East and North West etc cannot take out a mortgage as it is more likely that they will suffer redundancy at some point in their working life than someone in the South East?
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