My suspicion is there’s internecine warfare going on right now between the Government and the regulators. If true, it’s damaging for Britain and makes me wish I could bang their heads together.
On the one hand, the Chancellor and the Government are proposing a raft of ideas to liberalise the financial services market and attempting to stimulate action. Whereas the regulators – the Financial Conduct Authority (FCA) and the Bank of England – are trying to restrict risk.
That means as a nation, we are expending effort, energies and money to take two steps forward, then two steps back. All these conflicting policies do is leave us frothed up in a lather.
A few months ago, I blogged on the energy policy paradox. In that sector, both the Government and the opposition are trying to encourage switching. But their policies to decrease the differential between the costliest and cheapest tariff, and to effectively freeze prices, take away two of the main drivers for switching.
They need to make up their mind about what they want – fixed prices or a switching market.
Now we’re seeing a form of financial friction. I’m going to bash this out at speed, but hope you’ll get my point…
Help To Buy 2 vs Mortgage affordability
The Government is pumping money into Help To Buy 2, an insurance policy to encourage mortgage firms to lend to people who have limited deposits as part of its ‘Britain is a nation of home owners’ stance. While I personally have concerns about it pumping the housing market when mortgage margins are so high – SVRs are about 4% above base, compared to 1% pre-crunch – that isn’t my problem here (for more on that, see The UK’s mortgage ticking time bomb).
At the same time the Chancellor is trying to pump people to buy houses, we have the regulator, the FCA, introducing its MMR criteria, which is cutting down on the availability and size of mortgages. Its big focus is putting the burden on lenders to ensure their customers’ mortgages are affordable.
They want lenders to only lend to people who pass a stress test showing they could afford to borrow at 6% or 7%. The net result of this – both because many lenders’ systems were not set up to do it and they’re therefore not so good at it, and because they are much more stringent criteria – is we are seeing multiples cut and borrowing becoming more difficult.
So what exactly are we trying to do? Pump the mortgage market and encourage people to buy? Or are we trying to restrict it?
Pension liberalisation vs financial services accountability
The flagship announcement at the last Budget was the idea that from, 2015 anybody with a money purchase pension (a pension where you’ve built up a pot of cash) at the age of 55 will simply be able to take their money out (see my Pension changes are wonderful and horrid blog). The first 25% of the cash you take is a tax-free lump sum, the remainder will be taxed at your marginal income tax rate.
This is a radical change in pension policy and a real ‘freeing up’. It’s effectively the Chancellor saying it’s your money, you can do what you like with it so long as you pay tax on it.
Yet the regulator’s attitude says it’s all about responsibility, advice and information. Pension companies will come under a huge burden in order to make sure people are doing what’s right for them. The regulator, in a stance I have some sympathy with, wants to ensure that people don’t waste their cash, they don’t make bad decisions and they don’t leave themselves in the lurch.
One of the great concerns about this pension liberalisation isn’t the more highlighted fear that people will simply take their cash out and spend it on Porsches. It’s the concept that people will become so scared that they won’t have enough cash left in their later life that they will effectively live in penury in the early years – not being willing to spend anything, living a cold baked bean pension even though they’ve got the money sitting there.
To truly work out how much you should be spending on the new system, you really need to know how long you are going to live for, and that’s a difficult question to answer.
Funding for Lending vs increased capital requirements
For the last few years the Government has been pumping billions of pounds towards banks in order to try to get them to lend in the mortgage market and for small businesses. The scheme, called Funding for Lending, has slashed savings interest rates because banks haven’t needed to get cash from savers, they’ve simply been dragging it in from huge Government coffers instead.
At the same time, both the FCA and the Bank of England have been requiring banks to keep more and more capital. This is far off my usual beaten track, and I don’t purport to be an expert in macroeconomic prudentiality, but in a nutshell, bigger reserves mean they can’t lend out the same amounts.
So effectively we have Funding for Lending pumping money to the banks to lend out, but in reality, it’s just gone to help build their capital requirements.
It’s not about which policy is right, but the fact they conflict
In most cases my sympathies tend to lie more with the regulators’ stance than Government policy. Yet that’s irrelevant. What we need is a clear direction and the two to act in concert to make the market work.
Yet you can almost hear the silent seething going on from both parties about what the other is doing. This type of internecine policy making doesn’t help anyone.
That leaves a big question. What do we do? Do we get rid of independent regulators so that Government sets the policy (which is a rather scary thought)? Or, if not, do we have regulators that can control the policy being made by the Government? It’s a very difficult circle to square. Views welcome.