Opinion  

Bank commits a first in attempt to prevent boom

Donia O’Loughlin

The big regulation news of the week is that the Bank of England announced it wanted lenders to crack down on high loan to income lending in a bid to cool the apparently overheating housing market.

Yesterday (26 June), the Financial Policy Committee recommended lenders should limit their LTI multiples to no more than four-and-a-half and that no more than 15 per cent of a lender’s book can account for such high loan-to-income multiples.

The FCA said, as a consequence, it will consult on how best to implement this.

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According to CML data, nationally, 9 per cent of new loans are at four-and-a-half times income or more, but the figure is 19 per cent in London.

So if lenders can still have 15 per cent of high income multiples on their books, won’t this simply be ‘saved’ for Londoners?

It seems that since the new Mortgage Market Review regulations came in on 26 March, not a day has gone by without stories regarding Help to Buy fuelling a housing bubble so it is no wonder regulators felt it had to step in.

I believe it is actually the first time that the Bank has attempted to prevent a new credit boom.

While it can only be praised for this, commentators were questioning yesterday (26 June) how effective the limits would be.

The FPC said various countries globally have used limits on loan to values, loan or debt to income ratios, debt-servicing ratios and loan tenors to stem their housing markets.

In fact, an IMF survey of 42 countries revealed that more than one third had implemented product tools on mortgages, including two thirds of EU countries.

Norway and South Korea both have debt or loan to income limits but it seems that the impact of these have varied.

According to the FPC, there is evidence that lending standards have tightened in Norway but household debt remains high.

South Korea’s tightening has “prevented defaults” as house prices fell from 2008 and expectations of housing as a “speculative asset are said to have decreased”.

Only time will tell as to how effective the new measures in the UK, once implemented, will be.

FCA long-stop approval

By far the story that garnered the most attention was the regulator’s seemingly u-turn on its decision to ban a reference to the long-stop clause in an adviser’s client contracts.

Phil Castle, managing director of Kent-based Financial Escape, has included, since 2008, a clause in client agreements that cites the Limitation Act 1980.

The then FSA said in 2009 the clause, which outlined the Act’s provision that complaints must be brought within six years or within three years of damages being recognised up to a maximum of 15 years, may not be applicable as complaints to the Financial Ombudsman Service are covered under the Financial Services and Markets Act 2000 (FSMA), which contains no long-stop.

However, the FCA has backed down by allowing Mr Castle to refer to an effective long-stop defence in his client contracts, following a meeting held this month.