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Committee will have powers to restrict mortgage lending


Published: 14 March 2012 | Author: Bernard Clarke

The new financial policy committee (FPC) will have wide-ranging powers – including the capacity to curb house prices by setting maximum loan-to-value limits for mortgage lending – but the government has rejected opposition moves to make it more accountable and to promote economic growth.

The FPC will be established within the Bank of England to monitor and respond to systemic risks by clause three of Financial Services Bill, which was published in January. 

During the bill’s second reading, the financial services secretary Mark Hoban said that the government was seeking to give the FPC macro-prudential tools "to help dampen down a credit boom or to help in a credit crunch…it will be able to alter the maximum loan-to-value ratios in mortgage lending in order to curb an unsustainable rise in house prices. It will also be able to do the reverse, should we face unwanted house price deflation. It will also, potentially, be able to alter capital requirements for banks, in a counter-cyclical way."

Decisions made by the FPC could therefore have far reaching effects on lenders, consumers, mortgage and housing markets, and on the economy as a whole.

The Financial Services Bill committee is currently scrutinising the bill clause-by-clause and, in its initial sessions, MPs discussed a number of amendments to clause three put down by shadow Treasury minister Chris Leslie. These amendments would have made the FPC more accountable to the public and Parliament, and required it to take into account the government’s economic growth agenda.

Mr Leslie said the FPC had "very real and important" powers and was keen to get clarification from the minister on what macro-prudential tools it would be able to use. He also wanted to know how those tools would affect businesses and consumers in practice.

Mr Leslie was keen to ensure that FPC decisions "impact the wider economy with as few adverse or unintended consequences as possible, especially when it comes to the prospects for economic growth". He also believed that the FPC should have an "employment and growth objective."

The minister acknowledged that the scope of the macro-prudential toolkit available to the FPC would have the potential to affect "every business and everybody in the UK." He said it was vital that the government sought a wide range of views on the toolkit and that it was subject to Parliamentary approval. However, he did not feel amendments to the Bill were necessary.

Mr Hoban said that no decisions had been made on the specific macro-prudential measures available to the FPC. The interim FPC is undertaking an analysis of potential macro-prudential measures and is due to report its recommendations later this month. There will then be public consultation.

On the issue of economic growth, Mr Hoban cited the interim FPC’s recommendation that it should consider the likely impact of macro-prudential tools on the wider economy. Referring to the FPC’s December report on selection criteria for macro-prudential tools, he pointed out that "the second criterion is the efficiency with which a tool successfully achieves a reduction in systemic risk." He therefore believed that Mr Leslie’s concerns were already reflected in the Bill, or in the way in which it was proposed that the FPC would operate in practice.
Concluding the committee’s consideration of clause three, Mr Leslie said he was disappointed that the government had "not conceded a thing," and added that he was not re-assured that the legislation was adequate as it stood. "One of the biggest blind spots in the clause is the lack of attention paid to the impact that macro-prudential policy making could have on jobs and growth," he said.

He continued: "We are in favour of a financial stability strategy and a strong functioning financial policy committee, but clause three would not achieve those ends."  He urged the minister to table appropriate amendments at report stage.

But, despite opposition members of the Bill committee voting against clause three, it was passed without amendment.