Leader: Financial rule-tightening is welcome but timing may be off

After the financial crisis, and several official reports inquiring into its causes, plus much debate, finally the hand of the regulator is tightening around the financial industry and the excesses which contributed to the crisis.

Today the Financial Services Authority (FSA) is announcing how it plans to tighten the rules around the mortgage market to prevent a return to the irresponsible lending which helped housing prices to boom and then bust, putting hundreds of thousands of families into real difficulties. The UK government is also announcing its plans to put a leash on the banks, intending to proceed with dividing their real economy retail banking work from the “casino” investment banking which got them into trouble.

It all has the sound of stable doors being closed after horses have bolted. Nothing that is announced today will ease the economic crisis now gripping world economies. The question is, rather, whether the new measures will make recovery more or less difficult. The new mortgage rules appear to be going back to the future. Much is obviously essential. There will be an end to people self-certifying their income, encouraging lies about exaggerated earnings. Mortgage advances which assume the value of the property will always rise are ruled out, lenders will have to take into account the probability that interest rates will rise above present record low levels.

This will have an impact on the already squeezed mortgage market. Banks and building societies not only have much less money to lend, but are also being rather more careful about who they lend money to. The size of deposits now being demanded by lenders is ten times what it was two decades ago, while the time that an average Scottish income-earner needs to save a deposit for a first-time house purchase has risen to 17 years.

While this may restrict a market which is much shrunken and therefore threaten that more jobs will be lost from property-related businesses, the FSA argues that it is necessary to prevent a resumption of riskier lending to people who may not be able to afford repayments. The assumption seems questionable, particularly as Britain’s property market has rather more people wishing to buy than sell houses. While the FSA’s intentions are right, there is room for debate about whether the next few years are the best time to introduce new rules.

Such discussion seems unlikely to happen if the speed of government movement on banks is anything to go by. There has been speculation that intensive lobbying by the banks against dividing their operations persuaded the Treasury to water down the proposals of Sir John Vickers’s commission. Apparently, the banks’ entreaties have been ignored, which is satisfying given that bankers continued to ignore public protest about the grotesque size of the salaries and bonuses they paid themselves while their customers shiver in recession’s chill winds.