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Turner Review: FSA says mortgage product cap plans are premature

The FSA has set out its plans for the future of financial regulation in the UK by demanding more capital for banks but it says talk of a cap on mortgage products is “premature”.

The Turner Review, penned by FSA chairman Lord Adair Turner, identifies three underlying causes of the current crisis – macro-economic imbalances, financial innovation of little social value and important deficiencies in key bank capital and liquidity regulations.

It says any regulation on retail products, particularly mortgages, would be “premature”, but that there still needs to be debate on the issue . Turner said in a briefing this morning that by putting a cap on mortgages the regulator may disadvantage those first-time buyers without family support. The regulator will publish a paper on the issue in September 2009.

The paper says the “rapid extension of mortgage credit” was a key factor to the financial crisis, so will carefully monitor mortgage products in the future. But it warns that with a cap on LTVs, useful tools like consolidation will be in jeopardy. It also says that by limiting income multiples the “democratisiation of home ownership” will be adversely affected.

But it did warn that without intervention, rising LTVs and income multiples may affect the solvency of the banks lending such mortgages. It also says that without mortgage caps, the “boom and bust” cycle may continue.

The FSA says to combat any future economic crises, supervision will now be based on a system-wide “macro-prudential” approach rather than focussing solely on specific firms.

The regulator has called for a fundamental change to bank capital and liquidity regulations and to bank published accounts. It wants to see more and higher quality bank capital, with several times as much capital required to support risky trading activity.

The report also details major changes in the FSA’s supervisory approach, building on the existing Supervisory Enhancement Programme, with a focus on business strategies and system wide risks, rather than internal processes and structures.

It will also demand a counter-cyclical capital buffers, similar to the system used in Spain. It says by building up capital in good economic times so that they can be drawn on in downturns, and reflected in published account estimates of future potential losses.

John Charcol senior technical manager Ray Boulger says the decision not to rush into mortgage capping is good news. However, he says if the FSA decides to cap income multiples and LTVs later down the line, it could have horrendous consequences.

He says: “From an individual point of view a large proportion of people would not be able to buy their first property or not be able to move or remortgage. As far the UK economy goes it would have a really negative effect because property transactions are such a crucial part of economic activity.”

There will also now be a focus on the regulation of credit rating agencies, which it says will limit the conflicts of interest and inappropriate application of rating techniques.

It will also be regulating of “shadow banking” activities by the likes of hedge funds.

There will also be major reforms in the regulation of the European banking market, combining a new European regulatory authority and increased national powers to constrain risky cross-border activity.

Turner says: “The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets. Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective.

“Major changes in regulation and in supervisory approach are required to deliver that. The approach has to build on a system-wide perspective: failure to look at the big picture was far more important to the origins of the crisis than any specific failures in supervising individual firms. And it must reflect the reality of a global financial system without a global government; we need both far more intense international cooperation and greater use of national powers.

“The changes recommended are profound, and the banking system of the future will be different from that of the last decade. The world’s economy will be better served as a result.”


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