George Osborne ordered that the UK's financial regulator be kept in the dark about his new scheme to underwrite billions of pounds of new mortgages, The Independent can reveal.
The Chancellor informed the Bank of England's Governor, Sir Mervyn King, who also serves as the chair of the Financial Policy Committee (FPC) super-regulator, about his Help to Buy scheme on 11 March. This was nine days before Mr Osborne officially unveiled the policy, designed to kick-start the housing market, in his Budget on 20 March.
But Mr Osborne also apparently instructed the Governor not to divulge the details of the unprecedented scheme to the FPC, which was due to meet on 19 March, despite the fact that the committee is explicitly charged with scanning the horizon for potential threats to the stability of the UK financial sector. When the FPC met, on the day before the Budget, its members were not informed of the Chancellor's imminent mortgage guarantee plan.
When told of this omission yesterday, one FPC participant at the meeting remarked: "It makes one wonder what other matters impacting on financial stability are withheld from the committee charged with guarding it. Perhaps the Chancellor doesn't believe that property prices were pertinent to the recent crash."
The revelation comes amid signs the Chancellor is chafing at the independence shown by the FPC, which has angered the financial lobby by pushing for UK banks to augment their capital buffers. Mr Osborne wrote to the FPC this week, instructing the committee to provide "focused and consistent messages" to financial markets and urging members to give "due weight" to the impact of their recommendations on near-term UK growth. Two of the most outspoken members of the FPC on the subject of bank capital, Robert Jenkins and Michael Cohrs, were not chosen by Mr Osborne to continue serving on the committee last month.
Details of when Sir Mervyn was told by Mr Osborne of the Help to Buy scheme emerged in written testimony submitted by the Governor to the Treasury Select Committee on 8 April following a request by the committee's chairman, Andrew Tyrie. The TSC published the Governor's words in its report on the Budget on 20 April. The committee raised doubts about the wisdom of the Chancellor's mortgage guarantee scheme but it did not draw attention to the fact that the FPC was deliberately kept out of the loop.
Sir Mervyn wrote: "The nature of the conversation was that the Chancellor was informing me of decisions that had been taken and, only a few days before the Budget, was not seeking views on the merits of the proposals… I was not invited to seek the views of the FPC."
This is not the first time Sir Mervyn has caused ructions by failing to keep fellow policymakers in the loop. Last June, the four external members of the Monetary Policy Committee wrote a letter to the Governor after they got wind he was working on the Funding for Lending Scheme with the Treasury. They said they should have been told about the plans because they had implications for the economic outlook.
Help to Buy will offer interest-free 20 per cent equity loans from the state to prospective buyers of new build homes who can muster a 5 per cent deposit. The state will also offer guarantees sufficient to support £130bn of new mortgages available between 2014 to 2017. The Chancellor said in the Budget that the FPC will be asked to decide in 2017 whether the scheme ought to continue.
In his TSC testimony, Sir Mervyn said this safeguard was "sensible" but nevertheless drew an analogy with the US Fannie Mae and Freddie Mac home loan guarantee scheme, which contributed to a large property boom and bust in 2008.