Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Written evidence submitted by Shelter


  1.  Shelter welcomes the committee's decision to hold an inquiry into the government's plans to change the system of UK financial regulation. As a housing, welfare and debt advice provider, Shelter's expertise in this area lies in the regulation of mortgage lending and mortgage arrears management, in the context of consumer protection. Therefore this submission will set out Shelter's position on the principles for reform in this area.

  2.  Though levels of repossessions and mortgage arrears have dropped since last year, the number of homeowners in difficulty is still worryingly high and the risk of another rise in repossessions is acute. For this reason, and for the sake of long term economic and social sustainability, it is crucial that a strong and effective regulatory system is put in place to address the historical flaws in the existing consumer protection regime.

  3.  The new regime must:

    — Be based on clear, rules-based regulation that does not allow too much flexibility for interpretation.

    — Be tough on lenders, with enforcement action and public naming and shaming.

    — Promote responsible lending.

    — Incorporate a strong consumer voice and a system of consumer redress.

    — Be transparent so that consumers and lenders fully understand their rights and responsibilities.

    — Have systems in place to ensure that the new agencies work together effectively.

    — Bring second-charge and buy-to-let lending under the remit of the CPMA.


  4.  Shelter has considerable experience and expertise in the area of mortgage arrears and repossessions, both from a services and a policy perspective. Shelter staff provide practical advice, support and innovative services to over 170,000 people a year, helping people with housing, debt and welfare issues through face-to-face, online and telephone provision. Our services have seen a large increase in queries from clients in mortgage arrears since 2008. Between April 2009 and May 2010 Shelter provided mortgage debt advice to over 7,000 households, of which more than 4,700 households were helped under Shelter's Homeowner Mortgage Support (HMS) contract, funded by the Department of Communities and Local Government (CLG).

  5.  Though low interest rates and government safety nets such as Support for Mortgage Interest (SMI) have ensured that the rate of repossessions has not been as high as was initially feared, for many households the threat of repossession has not passed. At the end of June 2010, there were over 245,000 mortgages more than three months in arrears in the UK.[13] Shelter is concerned that a rise in interest rates, the effects of unemployment and the announced cuts to SMI will mean that arrears remain unusually high well into 2011. A YouGov survey commissioned by Shelter in May found that 29% of mortgage holders were unprepared for the increase in mortgage payments when interest rates inevitably rise.[14]

  6.  Even once the economy has fully recovered there will still be some households who find themselves in mortgage arrears and at risk of repossession, but it is in the UK's economic and social interest that the number of repossessions is minimised. In addition to the costs of re-housing families there are also many social costs associated with repossession, including poor educational attainment and poor health outcomes of children made homeless and living in temporary accommodation. NEF Consulting, in a report for the Law Centres Federation, calculated that preventing the eviction of a family of four can result in a saving to government (national and local) of £34,000.[15]

  7.  The importance of having a strong and effective regulatory regime cannot be underestimated. There remain a number of long-term regulatory issues that need to be addressed to ensure that the repossessions crisis does not deepen now, or reoccur later. Shelter welcomes the fact that the government is attempting to address these issues and that it appears to be taking a fundamental and long-term view. Broadly speaking, Shelter is not necessarily concerned about where exactly consumer protection sits within the regulatory regime, as long as there is tough regulation, proper enforcement of that regulation, and a strong consumer voice.

  8.  However, with three new agencies being introduced to replace the FSA, there are risks that the new regime could fail to operate as a coherent whole, and systems must be put in place to ensure that the new agencies work together effectively. Mortgage regulation is already too fragmented, with second charge lending being the responsibility of the Office of Fair Trading rather than the Financial Services Authority (FSA). Our recommendation is that all mortgage regulation should sit in the same place, to promote clarity and consistency of practice across the mortgage market, and minimise confusion for consumers. Having only one regulator would ultimately make compliance and associated costs more straightforward for lenders, which could result in lower costs to borrowers. Currently there is no regulation at all of buy-to-let lending or securitised mortgages, and these need to be brought into the new regulatory framework.

  9.  It is crucial that the new regime addresses the problems with consumer protection that have existed under the old system, though it must be emphasised that the FSA is now vastly improved, with a much better arrears management and enforcement regime. Shelter largely supports the measures proposed by the FSA in its recent consultation paper Mortgage Market Review: Irresponsible lending, and we urge the government to press ahead with these reforms alongside the proposed structural changes. The new system must build on the process of improvement that has already been initiated, rather than set it back.

  10.  In addition to this, Shelter calls on the government to ensure that the new regulatory regime incorporates:

    — Principles rather than rules-based regulation. The old MCOB (Mortgage Conduct of Business) left far too much flexibility for interpretation (for example in the use of terms such as "fairly" and "reasonably" without definition). More prescriptive, binding rules can promote consistent standards across the lending industry and give borrowers a much clearer idea of what to expect.

    — A rigorous approach towards lenders. In the past, the FSA has failed to take enforcement action against specific lenders, even when they have been found guilty of bad practice.

    — The willingness to name and shame. The FSA has in the past refused to publicly name firms that have been found guilty of bad practice, and therefore borrowers have not been sufficiently empowered with the knowledge to challenge their lenders directly.

    — Provisions for consumer redress. There must be appropriate systems in place to provide consumer redress for borrowers who have been mistreated by lenders and who may have suffered significant financial loss as a result.

22 September 2010

13   Council of Mortgage Lenders. Back

14   Shelter commissioned YouGov to conduct an online survey of 4,405 adults in Great Britain. Fieldwork was undertaken between 7-10 May 2010. The survey was carried out online. The figures have been weighted and are representative of all adults (aged 18+). Back

15   NEF Consulting/Law Centres Federation, The socio-economic value of law centres, 2008. Based on the cost of providing accommodation in London, as well as the cost of providing treatment for depression, the cost of school support for children and the loss of tax receipts resulting from loss of employment. Back

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