Banks should know more about their customers says city regulators

Banks should know more about their mortgage customers' spending habits, says City regulator the FSA.

Outlining its proposals to crack down on ‘irresponsible’ home lending, FSA chief exec Hector Sants suggests that affordability tests – including questions on spending on alcohol,  tobacco and clothing – should be part of the mortgage approval process in future. This would help, says Sants  ‘to ensure that lending decisions are based on a consumer’s free disposable income.’

Now on the one hand this seems fair enough. We have all seen over the last 18 months or so what can happen when a lot of money is lent to people who can’t really afford to pay it back. Surely taking greater pains to make sure that customers do have the means to do so is just good business as far as lenders are concerned?

But on the other, is what you and I choose to spend our hard earned dosh on any business of anybody else’s, bank or otherwise, provided that we don’t break the law while we are at it? A lot of people would answer a very firm ‘no’ to that question.

And how much irresposible lending was there in the UK anyway? Not that much, to judge but the way that the vast majority of borrowers have been paying down their mortgages at record rates even in the midst or recession. We can't help thinking that it's the wholesale securitised debt market that really needs shaking up, but that's another story.

The FSA proposals also include a possible ban on self-certified mortgages – so called ‘liar’s loans’ – and the desire that it should also regulate buy to let mortgages. which do not currently fall under its purview.  The latter seems like a sensible move to us, the former less so. An outright ban on self-certified loans would certainly reduce the number of mortgage approvals, but largely by making it very hard for anyone self-employed to get a mortgage at all. Surely it’s unreasonable to brand everyone who works for themselves a loan-defaulter in the making? It certainly wouldn’t do much for the dynamic, entrepreneurial UK economy that the Government likes to make so much of. 

The whole shebang highlights very precisely the difficult position the regulator finds itself  in, now that the recession seems to have done its worst. Everyone can agree expansively that financial restraint, control and moderation are needed in greater abundance than they were before.  But when it comes to exactly what regulatory or legislative shape that moderation should take, it’s a very different matter.

And in finance, the stakes could hardly be higher, as the economy is so dependant in the sector. Too much regulation, or too inept an approach, and the UK’s competitive advantage is at stake.
 
(Excerpt from Managementtoday.co.uk)