The Financial Services Authority (FSA) chairman, Lord Turner, has said there needs to be a fundamental debate in this country, both about how much easy credit should be available in the mortgage market, and how much capital and liquidity banks should be required to hold, without holding back the economic growth necessary for recovery.
Lord Turner will make his remarks in two speeches: one, today, to the British Bankers’ Association (BBA) on the FSA’s new consultation document on responsible mortgage lending; the other, tomorrow, at the London School of Economics’ Future of Finance conference.
At the BBA Lord Turner will say:
“The approach to mortgage market regulation, which pertained in the years before the crisis, reflected numerous different decisions including those which the FSA and its predecessor bodies had made over the preceding years. And those decisions carried, embedded within them, a set of trade-offs and balances between consumer choice and consumer protection and consumer and producer responsibility.
“At the time, in the years of the credit boom, the net effect of all those decisions – a dynamic, competitive market in mortgages, with maximum freedom of choice and easily available credit - was one with which most of society seemed happy. We are signalling today a significant shift away from that approach; but how much we shift is not a purely technical issue which can be left to technicians; it is a social and political choice which should merit extensive debate.”
Lord Turner will also say there are fundamental questions the government will have to resolve as it establishes the new Consumer Protection and Markets Authority (CPMA), which is due to be formed in 2012.
“The very words ‘Consumer Protection’ indeed raise issues about what precisely we mean. They cannot mean that consumers will be protected from everything which might go wrong. But they clearly mean more than just fair disclosure of terms. Should they, however, imply bans on specific products as inherently undesirable, or interventions driven solely by identification of apparently excessive profit margins, even if no other indicators of poor practice are present? The establishment of the CPMA focused on consumer protection gives us a major opportunity to debate these choices.”
In his speech to the Future of Finance conference tomorrow, Lord Turner will say that the debate about reforming global finance has to go beyond addressing the symptoms of the financial crisis and address the need for radical structural reform.
“Large bank bonuses for selling over-complex and risky products of little real use to humanity were a major problem, and we need remuneration practices and regulations which make excessive risk taking less likely in future.
“But that regulatory reform also needs to address more fundamental issues. If we only address banker bonuses and not the fundamental drivers of credit supply instability, we will not adequately reduce the probability of a repeat performance. The central issue is volatility in the availability of credit, first too easily available at too low a cost, then constrained in a credit crunch.”
And it is that issue of too much credit, available at too low a price that we must address, Lord Turner will say:
“Our regulatory response will not be effective unless, in the long run, it reduces leverage in the financial system, and constrains it in the real economy, and unless it puts in place new policy tools to take away the punchbowl of excessive credit and property prices before the party gets out of hand. The transition to that sounder system needs to be managed with care – too rapid a progress to higher capital and liquidity standards could slow recovery – but we need to be clear that long term reform of the financial system will have at its core changes that mean credit is not as easily available as in the pre-crisis years.”
Lord Turner will underline that this transition will have to be handled with care, but say we have to strike the right balance:
“Society faces a trade-off: we can make the finance system more stable via significantly higher capital and liquidity requirements, without hitting long-term growth, but at the expense of less easy access to credit. We need to strike a balance, honestly recognising that the benefits of financial stability have a cost in terms of customer choice. In the light of the severe economic harm caused by the financial crisis, a significant shift in the balance towards stability and resilience makes sense.”
Background
- Lord Turner’s speech.
- His speech at the LSE's Future of Finance event will be delivered on Wednesday 14 July.
- The FSA regulates the financial services industry and has five objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
