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Tuesday, October 09, 2007

The FSA's Light Touch

The BBC's Panorama programme last night exposed the precarious foundations of Britain's housing price bubble and credit boom, as it highlighted a number of "criminally" negligent cases of mortgages being provided to people who had no hope of ever affording them.

One such case being that of Emmanuel Blango, a psychiatric nurse who earns around £25K per annum. He was awarded a a sub-prime mortgage from the Alliance and Leicester for £300K, and another mortgage for £200K from Platform which is part of the Britannia Building Society.

Unsurprisingly Mr Blango is having trouble paying the interest, and has had his second flat repossessed.

Panorama noted that around 70% of the 7000 repossessions over the last 3 months are down to sub prime lending.

The reasons for this boom in "risky" (for want of a better word) lending are as follows:
  • The commissions earned by the mortgage salesmen, who target the financially naive, are distorting their "ethical" principles when they advise their clients.


  • The lax checks performed by banks and building societies on mortgage applications.


  • The bundling of the debt by City institutions for immediate resale, thus paying off the first lender and eliminating the original lender's risk.


  • The light touch of the FSA in regulating the market and enforcing its rules.
The extent of sub prime mis-selling is reminiscent of the endowment scandal of the 1980's.

It is regrettable that despite the lessons that the FSA should have learned over the endowment mis-selling scandal, it appears not to have taken them on board in its regulation of the sub prime mortgage market.

The UK faces the very real threat of a housing price collapse, and economic chaos, as the number of defaulting sub prime mortgages increases.

Why has the FSA allowed this to happen?

Clearly the FSA, in its current form, is not fit for purpose.

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