The Liberal Democrat Shadow Chancellor warns that there must not be a repeat of the pension review where advisers bore the brunt of wrongdoing by big providers. He says: “It is not brokers who are responsible for the affordability problem, it is big lenders who lent much too carelessly in the upswing of the cycle. They were lending ridiculous multiples of incomes on loan to value ratios of 100 per cent or more which is not sustainable.”
He says banks must be more up front about their losses from the liquidity crisis and follow the example of Royal Bank of Scotland by going to shareholders to raise capital rather than expecting the taxpayer to cover it. He suspects that many banks are frightened to break cover because chief executives rarely survive big rights issues but says there is a danger that they will use the Bank of England’s £50bn liquidity injection to build up reserves against losses rather than to stimulate lending.
Cable says the Government must push lenders to be more responsible in their approach to arrears and repossessions. He says: “It is easy to envisage a situation where a serious slowdown in the economy results in large-scale arrears and, with some of the more aggressive lenders forcing borrowers into the court system, a fire sale of properties which aggravates the slump in house prices.
“The Government should make the good practice code for mortgage lenders, which requires them to use their best efforts to keep families in their homes, mandatory because there will always be free riders in the market who ignore it.”
Cable says it is “very worrying” that smaller building societies are not getting access to the £50bn liquidity injection. He says: “Smaller societies are victims of the credit crunch, they have not precipitated the problem. They are often more careful in their lending practices than big banks and yet they are going to be starved out of business. It would be unfortunate if lenders that have generally behaved more responsibly should be victims of this crisis.”
He considers it is sensible for Bank of England governor Mervyn King not to link the injection of funds to an increase in lending or support for the housing market which, according to the International Monetary Fund, is 25 to 30 per cent above what would be regarded as a sensible trend level.
He says: “There is no guarantee that liquidity will filter through to borrowers, it is an act of faith. It would be worrying if the Government was using the liquidity facility to prop up the housing market which is seriously overvalued.”
However, he warns that now the Government has begun this operation, it may find it very difficult to “turn off the tap”.
He says: “The problem in the UK is that we have not yet had the full force of the storm because the house price correction is only just starting. The problems in the markets are much more serious than the official indicators are suggesting and when that is crystalised in actual losses in companies as well as in households, we will see the full extent of the damage.”
Cable believes FSA regulation of the banking sector has been ineffective. He says the Government must ensure it is more proactive, such as adjusting capital adequacy ratios to allow for the financial cycle.
When it comes to regulating advice, Cable says the FSA has failed again and again. He says: “In many cases, regulation is very complicated, time-consuming and bureaucratic but it does not seem to have stopped a succession of disasters. Pension misselling, endowment mortgages, home reversion, share depreciation mortgages, Equitable Life, split-cap trusts – they have come thick and fast.
“Economists would say there is a fundamental market failure caused by the fact that people who sell financial products have much more information and understanding about the products than the people buying them and until you rectify that failure, you are always going to have a lack of equality in the market and misselling problems. The FSA regulatory system has not dealt with this satisfactorily. There are some very strange anomalies in the regulation of financial advice. I think we under-regulate lending and over-regulate savings which is why we have a chronic deficit in domestic savings.”
Cable welcomes the Thoresen report on generic advice but is not convinced that it will get off the ground. He says: “It is a very good framework but I see no sign that action is going to be taken to roll out the local advice network, particularly under the Citizens Advice Bureaux, that the report envisages. There does not seem to be any great political will in Government to make that happen and provide co-financing with the industry.”
He says most of Chancellor Alistair Darling’s controversial policies – the abolition of the 10p starting rate of income tax, capital gains tax reforms and taxes on non-doms – were clearly Gordon Brown’s doing, so he should not take the full blame. However, he criticises Darling for not being his own Chancellor.
Cable says his Conservative counterpart, George Osborne, has failed to provide a convincing answer to problems in the banking sector. He commends Osborne’s proposal that the inheritance tax nil-rate band be raised to £1m but claims that he will “struggle to bring new rabbits out the hat”.
If the next general election results in a hung Parliament, Cable very diplomatically says he could work with either party but adds: “I think in practice they have more in common with each other.”