James Moore: City watchdog must look again at the mortgage market before it's muzzled

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The Independent Online

Outlook It's obviously quiet at the Treasury right now with not much going on to trouble ministers and mandarins. That's why it's such an ideal time to shake up Britain's system of financial regulation (again). This is naturally not something you'd want to do when times are difficult. The Financial Services Authority proved that, dropping the ball on Equitable Life (cost to the tax payer: lots) while it was distracted by other things, such as bringing together nine regulatory bodies and getting the staff to talk to each other (they didn't) in the midst of the dot com collapse.

But that's not a problem today because things are so much calmer now than they were at the end of the 1990s, aren't they? That little problem across the Irish Sea? Nothing to worry about. Yawning deficits? Cutbacks? Tish tosh.

Anyway, giving all the prudential stuff to the Bank of England while creating a Consumer Protection & Markets Authority will make everything better, once we get through all the inevitable pain created by the shake up, such as losing all your best staff (Dan Waters was another director-level departure announced yesterday) and being unable to effectively make policy when you're trying to work out who will sit at what desk.

That was the gloss put on the situation by Lord Turner when appearing before the Treasury Select Committee yesterday. Actually, curtailing the FSA's power to make policy and rules – a consequence of George Osborne's shake-up – might not be such a bad idea. Having sat on its hands in the run up to the financial crisis the pendulum has swung violently in the opposite direction. On far too many issues it seems, the FSA feels it has to be seen to be doing something, regardless of whether that something is a good idea or not.

The whole organisation appears to have become infected by its chairman's hyperactivity and fondness for grand gestures and bold "initiatives".

Not all of this is bad news: The fact that the watchdog has actually brought some of the City's miscreants – those involved in insider trading and other similarly nefarious activities – to book in recent months is no bad thing.

But the flipside is a vast over-reaction on issues such as mortgages, where the FSA appears hellbent on preventing thousands of people who would be perfectly able to afford home loans from getting them. Lord Turner addressed the issue yesterday, opining that easy credit was no good thing. And he's not wrong on that point.

The problem is that having sat back and all but said fill yer boots while lenders threw money around like confetti and borrowers rushed into the debt collectors' arms, the regulator is proposing to go far too far in the opposite direction.

The FSA might view the howls of protest being raised by lenders, and increasingly, housebuilders who can't sell their product because their customers can't secure financing, as predictable, and self interested. But they might also have a point.

While a runaway housing market is not something to be welcomed, the FSA's Mortgage Market Review threatens to gum the whole thing up. What's worrying is that the FSA's reaction to the criticism it has faced has been almost entirely defensive. The regulator has hit back at its critics, told them they are wrong and completely failed to effectively address their points.

There probably aren't many who will regret the passing of the City watchdog. Its record is less than impressive – just look at the string of internal reports filled with embarrassing self-criticism over the likes of Equitable, Northern Rock, Old Uncle Tom Company and all. But there's still a chance to finish on a (relative) high note by looking again at its plans for the mortgage market. Before policymaking is completely suspended ahead of Mr Osborne's tinkering.

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