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Out of the shadows

Governments respond to crises with measures aimed at preventing similar fiascos from recurring. But then they often assume that the next crisis will be just like the last one. This trend is evident in the Chartered Insurance Institute’s Future Risk: Learning from History report in which we looked at economic and political progress in past 100 years.

The history of financial regulation is about governments wanting to realise a sustainable market that instils public trust and confidence. This is achieved by ensuring that the blights of the past that damaged that confidence cannot be repeated. This seems like an interesting mix between that desire to do something and chasing shadows.

The rash of mortgage possessions following the 1992 market collapse led to the sustainable home ownership initiatives in the late 1990s, of which mortgage payment protection insurance was the backbone. But by the late 1990s, the dot-com crash and the mortgage endowment crisis led to moves by the FSA to impose mortgage conduct of business rules, which began in 2004. These rules centred on written disclosures and risk warnings to customers. With the ink barely dry on the Mcobs, we had the mortgage market meltdown in 2007/08.

Today, there is a deluge of state intervention, not just in the UK, but at the European and global levels. In the UK, the Treasury has been busy twiddling the regulatory furniture in the form of the new Financial Conduct and Prudential Regulatory Authorities.

Whether or not this reform will avert the next crisis, it has huge implications on firms of all sizes.

Meanwhile, the FSA’s mortgage market review is culminating with drastic changes to the Mcobs. These extend into new areas, such as product intervention, definition of advice and customer stress-testing the implementation. Like the FSA conduct of business reforms of the early 2000s, these rules might prevent another 2007-style crisis, but will they avert the next one?

Also, since the 2008 banking crisis and EU regulation, the UK must look to Brussels for the lead. After three years’ work to establish national supervisors, a debate has started over whether a single European banking regulator should be created. Meanwhile, European Parliament is debating a new mortgage directive, which will for the first time create EU-wide standards on transparency and disclosure rules, and possibly a ban on linking mortgages with savings products that are not entirely repayment vehicles. Appealing to the Treasury on the coming juggernaut will not be enough.

Will all these activities be adequate preparation to a sustainable mortgage market that instils trust and confidence? Will they instil a professional culture? That remains to be seen. Perhaps after a few more crises, financial regulation will be prepared for every eventuality. Either that or the shadow will again be upon us.

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