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Hon. Members raised concerns about other aspects of the Bill. My right hon. Friend the Member for Greenwich and Woolwich (Mr Raynsford) made it clear that although we understand the aspirations of the Bill, we have suspicions about the outcomes. There are problems
with the drafting of the Bill. A big issue is that it is silent on how to settle competing claims. How will claims be settled among the views of a neighbourhood forum, a local authority and a mayor? My hon. Friend the Member for Stoke-on-Trent North (Joan Walley) warned that mayors could undermine local communities and councillors. My hon. Friends the Members for Cleethorpes (Martin Vickers) and for Keighley (Kris Hopkins) and a number of other hon. Members disagreed with the imposition of shadow mayors. We heard a bid for the independence of Keighley. Unfortunately, that will not come about through a local referendum, as such referendums will only be advisory. Another matter of concern to hon. Members from all parts of the House was EU fines.
For many Opposition Members, the key issues that underlie the Bill are the unfairness of the local government settlement and the absence of the resources necessary to build capacity in communities. My hon. Friends the Members for Birmingham, Ladywood, for Chesterfield (Toby Perkins), for Hammersmith (Mr Slaughter) and for North West Durham (Pat Glass), my right hon. Friend the Member for Tottenham, and my neighbour, my right hon. Friend the Member for Salford and Eccles (Hazel Blears), spoke eloquently about the problems caused by cuts.
The Secretary of State told council leaders that they were in charge of about £38 billion each year, no strings attached. Since then, the Conservative-led Government have subjected council leaders to savage front-loaded cuts and to a stream of exhortations on what they should and should not do with their budgets. Ministers have told councils that they have a duty to preserve library services, that they should treat voluntary organisations fairly, that they have no justification to tighten eligibility for social care and that they should not issue redundancy notices immediately. Department for Communities and Local Government Ministers are telling councils to cut senior management posts, merge services with other councils and cut posts that Ministers see as non-jobs.
My hon. Friend the Member for Hammersmith told us that senior executive pay cuts and shared service cuts each contribute only 1% of the cuts that are needed, whereas 50% of the savings will be made by cuts in adult services and children's services, including a disturbing 60% cut in funding for Sure Start-a service that the Prime Minister said the Tories would protect. My hon. Friend told us about an individual who was paid £700,000 in consultancy fees over four years, while drawing a £50,000 pension from the same council. On hearing such facts, we have to question why Hammersmith and Fulham is the apple of the Secretary of State's eye. Indeed, the Secretary of State has called any council leader who could not predict cuts of £40 million to £100 million negligent
"to the point of stupidity".
DCLG Ministers also want to direct councils on small details. They want to tell them how they should empty their bins, ban them from putting out newsletters and tell them to reduce street signs and bollards. That is the background to the 126 new secondary powers that the Secretary of State wants to take in the Bill.
The general power of competence should give councils the freedom to act ambitiously on behalf of local residents, but the Secretary of State wants to take major powers to restrict how councils may use it and attach conditions to its use. He also wants the power to
"amend, repeal, revoke or disapply"
any statutory provision affecting or overlapping with the general power. That is a very broad power for a Secretary of State to ask for, and it undermines the concept of localism. It raises serious concerns, particularly because, as we have heard, he wants to direct councils on every aspect of their work, from how they manage their budgets through to what they should do about street signs.
The Secretary of State wants to order 12 of our cities to change their governance model to the mayoral model, and to appoint their current leaders as shadow mayors. Furthermore, he wants the power to order any local authority to start operating a mayoral governance model, subject only to a later referendum. Where is the belief in localism in all that?
"This Government will let councils and communities decide how to organise themselves. We don't presume to know more than local people about how their area should be run."
However, the Government do presume to know more than local people, because the Secretary of State wants the power to dictate to councils exactly which model of governance they must adopt. Also, there is no level playing field for councils that opt to retain cabinet or committee systems, as they will not be able to bid for new powers in the same way as elected mayors using the new provisions in the Bill.
To Labour Members, the scrutiny powers of local government are a key aspect of democratic accountability. In the context of the Government's massive and unnecessary reorganisation of the NHS, about which much has been said today, powers for local councils to scrutinise new health commissioning arrangements are more important than ever, and councillors should be given adequate such powers. It was interesting to hear hon. Members of all parties refer to that matter. Councils opting for the committee governance system will not even be required to have a scrutiny committee. We believe that to ensure accountability, those councils should have at least one scrutiny committee, in line with councils that have a mayor or council leader.
The Bill proposes local referendums, a community right to challenge, a community right to buy and a duty on councils to maintain lists of assets of community value. As we have heard, Labour would welcome some of those proposals if the legislation introducing them were better thought through. As it stands, the Bill provokes more questions than it answers. It will lead to extra burdens on local councils, which are already struggling to maintain local services in the face of the Government's swingeing, front-loaded budget cuts. My hon. Friend the Member for Edinburgh East (Sheila Gilmore) highlighted how the community right to buy, which has been tried in Scotland, is an empty gesture without funding.
On local referendums, we support greater public engagement in the political process, but much more should be decided locally. For instance, we do not
understand how it can be up to the Secretary of State to decide what is a local matter. The proposals on the new community right to challenge and the duty on local authorities to maintain a list of assets of community value are ill thought through. Despite there being no definition of the term "assets of community value", 10 powers are proposed for the Secretary of State to make regulations on those lists.
The DCLG note on the extra powers proposed in the Bill, which is a fascinating document, states that the debates during the passage of the Bill will constitute the principal initial scrutiny of the scheme, and I have to ask Ministers why that is the case. There could have been pre-legislative scrutiny, and my right hon. Friend the Member for Greenwich and Woolwich said that it cried out for it. That would have been preferable to giving the Secretary of State powers to regulate, order and specify matters that would be better decided locally.
The Bill aims to allow communities a say on developments in their area through the planning system, but those measures are particularly poorly thought through. Indeed, the Royal Town Planning Institute says that work is needed on the Bill
"to remove those barriers in its drafting that deaden its effectiveness and hinder the ability of Government to achieve its own objectives"
"the lack of a coherent strategic planning system combined with the complexity of the neighbourhood planning system"
"hinder...economic recovery...addressing climate change and enhancing the environment".
"Introduce...strategic planning across local authority boundaries".
"only well-resourced neighbourhoods can take part",
The Government have made the wrong choices in their proposals on social housing and the rights of people who depend on it. On that and other proposals in the Bill, there has been scarce opportunity for scrutiny-indeed, a rushed consultation closed only today. Housing and homelessness charities have rightly criticised the desire of Lord Freud, the Under-Secretary of State for Work and Pensions, to weaken the rights of homeless families. The Bill proposes to strip them of the right to any say over the accommodation that they are offered.
Many of my right hon. and hon. Friends spoke about the fact that the Bill will mean that social tenants lose their right to social housing if their circumstances change. Families who play by the rules and improve their lot could be at risk of losing their homes. The Conservative party said in April that it had no policy to change the current or future security of tenure of tenants in social housing, but the Bill contains provisions to do that. The Government have a record of breaking their word-on VAT, on the education maintenance allowance and on tuition fees-and now council and housing association tenants will see whether the Government keep their word.
If the Secretary of State were a true champion of localism, he would have proposed real freedoms for councils, rather than give himself wide-ranging new
powers to direct them. He would have produced a Bill that engaged local people in planning their neighbourhoods at the same time as promoting sustainable development and protecting the environment, and he would have fought for a fair and manageable financial settlement for local councils. Had he done so, councils could work on giving their residents a real say in how their local areas are run, rather than focus all their energy on making cuts.
My hon. Friends said that the Bill is the worst of all worlds, that it will set community empowerment back years, that true localism will not emerge without a fair settlement for local government, that the Bill gives rights but no resources to back them up, that it is a shambolic cover-up, that it is not fair and not progressive, and that it fools no one. I urge hon. Members with concerns about the Bill to join us in supporting the amendment tonight.
The Minister of State, Department for Communities and Local Government (Greg Clark): You would not know it, Mr Deputy Speaker, but this is an historic day for the House. Opposition Members should have tuned into the TV this weekend to see the Leader of the Opposition say that he was abandoning the tradition of Fabianism in his party and adopting localism. There was precious little of that in the speeches of the hon. Member for Worsley and Eccles South (Barbara Keeley) and her hon. Friends.
The two parties in the coalition see the Bill for what it is-the first of many measures that will do something very different from those introduced by the previous Administration. We are using the powers of the Government and Parliament to give power away rather than to increase it for ourselves. That is the direction in which this Government will continue to go. We will give more and more power to the people.
Successive Governments have increased the power of the centre, which has led to Britain becoming one of the most centralised and rule-bound societies in the world. French local councillors would be astonished if we told them that local councillors here would be in breach of the rules if they passed a view on a local planning application-they would think that that is nuts. In America, they would think it ridiculous and barmy if a member of President Obama's cabinet set the local taxation in a small American town; and in Australia, they would wonder what planet someone was on, if they told them that to judge a planning application one has to wade through planning guidance longer than the complete works of Shakespeare. This is the time to reform and bring us back in touch with the rest of the world.
The response from Labour Members made it clear that were it not for the election of this coalition, which is united in wanting to return power to the people, they would have continued in the direction they had previously taken us. That degree of centralisation did not work, of course, and we know why: there is something about the British people that means they do not like being told what to do; they have a quality that makes them want to push back when people try to boss and bully them, as
the previous Administration did. It is costly, too. We can imagine the bureaucracy of enforcement that needs to be put in place to impose and send out the directives, to gather the statistics and to send in people to ensure that others comply. We cannot afford that in the circumstances left to us by the Labour party.
More than that, Government Members know in their hearts that the best way to improve society is to give people their heads, and to allow them to follow their vocation and use their initiative, rather than to suppress it with top-down impositions that merely demoralise people.
Toby Perkins: The right hon. Gentleman is telling us about how many powers the Secretary of State is giving away, but which of the 126 new powers that he is taking under the Bill does he think local people cannot look after for themselves?
Greg Clark: If the hon. Gentleman is under any illusion that this is not a Bill that transfers power to people, he should talk to the coalition of voluntary and community organisations that this very day launched a campaign to ensure that the Bill is not watered down by the amendments he would suggest.
If this is the occasion when the Labour party converts to the cause of localism, it has a long way to go. The right hon. Member for Don Valley (Caroline Flint) implied-breathtakingly-that when in government her party had tried to localise power. Even the Leader of the Opposition does not believe that. He said in his leadership campaign that the Labour Government looked down their nose at local government. So much for conversion! The hon. Member for Birmingham, Erdington (Jack Dromey) said that the Labour party downgraded the role of local government when in office. First base for the right hon. Lady is to admit that her party got it wrong in the past-I thought that was what her leader tried to do this weekend-in order then to point in the right direction.
Greg Clark: My hon. Friend is absolutely right. The process we are engaged in gives a lot of power to local authorities, but, equally, imposes obligations on them to share their power with communities. That is the right approach.
The Opposition's response, as expressed in the right hon. Lady's speech, represents a split-they have not made up their minds. The right hon. Member for Salford and Eccles (Hazel Blears) said that there was a schism in the Government. Far from it! We are emphatic about the need for the Bill. However, there is a schism in the Labour party because it is advancing two arguments: that the Bill is secret centralisation and that the powers that the Secretary of State is taking represent a covert attempt to recentralise- [Interruption.] The hon. Member for Cardiff West (Kevin Brennan) applauds. Other hon. Members, however, argued that this is a charter for dangerous nimbyism. Which is it? Is it that the Labour party does not trust local people to take decisions on their own behalf, or is it that it fears that Whitehall will
lose power? It must make up its mind. Does it just fear any change, does it fear local choice, or does it fear any challenge by the powerless to the powerful?
Hazel Blears: Will the Minister take this opportunity to give an unequivocal confirmation that, as far as the expression of interest and the community right to challenge are concerned, he will not change the regulatory framework to enable commercial organisations to take over those services and to run them for private profit, and that the regulations will continue to require a community interest and a not-for-profit basis?
Greg Clark: The Bill was drafted deliberately to express that. This is a community right to challenge to allow community organisations to do something that Labour, during 13 years in government, failed to do, which is to let them have the chance to deliver services.
Let me refer to some of the speeches made by right hon. and hon. Members. My hon. Friend the Member for Mole Valley (Sir Paul Beresford) brought his considerable experience in local government to bear. My right hon. Friend the Member for Bermondsey and Old Southwark (Simon Hughes), my hon. Friends the Members for Carlisle (John Stevenson), for Cleethorpes (Martin Vickers), for Crawley (Henry Smith), for Peterborough (Mr Jackson), for Filton and Bradley Stoke (Jack Lopresti), for Milton Keynes South (Iain Stewart), for Morecambe and Lunesdale (David Morris), for Ealing Central and Acton (Angie Bray), and for Oxford West and Abingdon (Nicola Blackwood), and the hon. Members for Birmingham, Ladywood (Shabana Mahmood) and for Sheffield South East (Mr Betts), the Chair of the Communities and Local Government Committee, made passionate speeches about local government. They should not be concerned about the Secretary of State's powers. The key power is the general power of competence. We thought very carefully about whether it was right to set out pages and pages of restrictions in the Bill on that general power of competence. We concluded that the better thing-the more empowering thing-was to change completely the default, so that the powers that a local authority wants to take should be available to it, and it should not have to go through pages of guidance on the Bill. We think that that is the right approach. I look forward to the scrutiny from the Select Committee, but that is the approach that we took.
One of the other powers states that if a council is in danger of becoming insolvent, it is reasonable for the Secretary of State to suspend the requirement to have a referendum for a council tax increase to cover that. Therefore, the Committee, when it scrutinises the Bill, will find that it is content with that.
Let me address the argument, which was depressingly common on the Opposition Benches, that communities are not capable of taking up such rights. What a bleak and miserable picture of communities the Opposition have. I believe in local government; indeed, I am a fan of it. The track record of local government in recent years certainly bears comparison with the track record of central Government, at least under the previous
Administration, so it is absolutely right that we should give local government these powers and trust it. Of course we should give help to the most vulnerable communities to ensure that they can take advantage of the powers, just as everyone else can. However, the argument that people in local communities are so mean-minded that they will exercise their powers only in a way that Opposition Members have described as nimbyish, or that people who love their communities, and want to bring up their children and see them prosper in their areas are not capable of having the interests of their communities at heart is a bleak reflection on the Opposition's world view. It is not a view that we share.
The Bill will put our politics on a different course. It will bring an end to the history of using power to take more power. It will give power to councils, power to communities, power to voluntary groups and power to the people, in the knowledge that the more powerful the people are, the stronger our society is.
That the following provisions shall apply to the Localism Bill:
1. The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 10 March 2011.
3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Consideration and Third Reading
4. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.
5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.
7. Any other proceedings on the Bill (including any proceedings on consideration of Lords Amendments or on any further messages from the Lords) may be programmed.- (Mr. Vara.)
That, for the purposes of any Act resulting from the Localism Bill, it is expedient to authorise-
(1) the payment out of money provided by Parliament of-
(a) any expenditure incurred by the Secretary of State under the Act, and
(b) any increase attributable to the Act in the sums payable under any other Act of money so provided, and
(2) the payment of sums into the Consolidated Fund. -(James Duddridge.)
That Mr James Arbuthnot, Alex Cunningham, Thomas Docherty, Gemma Doyle, Mr Tobias Ellwood, Mr Mark Francois, Mr Kevan Jones, Mark Lancaster, Jack Lopresti, Sandra Osborne, Christopher Pincher, Mr Andrew Robathan, Bob Russell and David Wright be members of the Select Committee on the Armed Forces Bill.- (Geoffrey Clifton-Brown, on behalf of the Committee of Selection.)
That Kevin Brennan be discharged from the Select Committee on Public Administration and Kelvin Hopkins be added.- (Geoffrey Clifton-Brown, on behalf of the Committee of Selection.)
Mr Robert Syms (Poole) (Con): I intend to speak about the future of the mortgage market and, in particular, the current proposals by the Financial Services Authority in its "Mortgage Market Review". When it was announced, Lord Turner said that it was a "major shift" in the FSA's "willingness to intervene". It is a serious review. If it listens to representations, as I hope it will, and is light touch, it will improve the market, but if it goes the way of some of the proposals that are being consulted on, it could have a profound and bad effect not only on the economy, but on the prospects for many of our constituents. I shall touch on those issues today and canter round some of the concerns.
The Council of Mortgage Lenders, the Building Societies Association and many other organisations are very worried about what the FSA is consulting on. We must therefore treat seriously the prospects and the proposals put forward. I support the objectives of the FSA, which are to create a mortgage market that is sustainable for all participants, and a flexible market that works better for consumers. However, it is crucial that the FSA recognises that in the context of the current financial crisis, problems in the European and UK economies today are primarily the result of liquidity and structural issues arising from global financial markets. They are not a result of a dysfunctional and widely irresponsible residential mortgage market. The FSA should be mindful that it is not focusing its attention on fixing the wrong problem.
Despite the economic slowdown, FSA arrears statistics show that the overwhelming majority of mortgage borrowers in the UK are able to continue to make their mortgage repayments. The current low level of interest rates is a major help in this, but the statistics demonstrate that the vast majority of lenders have acted responsibly and have been positive and sympathetic to customers in difficulty. In a sense, the mortgage rescue scheme introduced by the previous Government towards the end of their term of office did not help many people, but it pointed many people with difficulties to their lender. That meant that their lender could deal with the problems. One of the good things emerging from the difficulties that we face is that a far more responsible attitude is being taken by many lenders.
I believe that it is desirable to have a market based on consistent, responsible lending and borrowing. However, the market failures that the MMR is designed to address affects only a small number of lenders that were in the market. Some of those are no longer active.
John Woodcock (Barrow and Furness) (Lab/Co-op): Does the hon. Gentleman recognise that some of the smaller lenders, such as the Furness Building Society based in my constituency-lenders who were not rogues, did not play fast and loose, and were always responsible-feel disproportionately penalised by the proposals currently on the table?
I agree. One of the important things about the proposals is not always to focus on the five big banks but to ensure that there is a diverse mortgage
market that includes many smaller building societies. I shall touch on that issue in a moment.
A measured and well considered response from the Government, the regulators and the lenders is necessary to prevent an inefficient and unsustainable mortgage market. The current proposals will have a far-reaching effect on the wider economy, but the FSA's impact assessment does not consider those wider consequences. They should be considered, because housing is an important component of our economy.
There are also fundamental concerns about many proposals transferring responsibility away from the consumer and to the lender. We appreciate the lender's responsibilities to verify application information and to have appropriate controls in place, but that must be balanced with the capability of customers to make sound financial decisions for themselves. The proposals do not achieve a balance; they take the very patronising view that customers need protecting from themselves-a view that could be insulting to many mortgage borrowers. In my experience, the people who get most upset are those who are refused a mortgage, a loan or some help from a bank. People take that personally, and if we are not careful, we will exclude many people from gaining access to finance.
Mr Marcus Jones (Nuneaton) (Con): I congratulate my hon. Friend on securing this debate. Does he agree that responsible lending should not exclude first-time buyers from accessing mortgages with loans-to-value ratios of up to 95%? The bigger issue is about lenders ensuring that they do not over-expose themselves to such loans. They should keep them proportionate within their mortgage book to ensure that first-time buyers gain that vital access to mortgage finance.
Mr Syms: It is good that we are moving away from 120% mortgages, which were clearly unsustainable, and it is probably good that people should have to put down a deposit, but I do not want to be too dogmatic, because all the surveys suggest that for first-time buyers the deposit is one of the biggest hurdles, so we ought to leave it to the market to make decisions, rather than being too dogmatic in terms of regulation.
Flexibility will be the key to delivering outcomes for customers, but if we are not careful, the proposed changes will undermine current flexibility. Setting prescriptive rules will inevitably lead to some creditworthy customers, with and without complex financial situations, being excluded from the market, and that is not an acceptable position in which to place borrowers. I also believe that the proposals will affect considerably more customers than the FSA expects. Tighter controls on affordability assessments will not weed out customers on the margins only; they could have a much wider impact on the market.
The MMR should aim to promote responsible borrowing by raising financial capability, empowering borrowers to take ownership of their personal finances, enabling them to make well informed decisions, promoting best practice to raise standards across the industry and ensuring better outcomes for consumers through consumer choice, transparency and fair treatment.
The MMR should also promote competition in the mortgage market, so that lenders of all business structures, including those small building societies,which were mentioned earlier, can compete on a level playing field. It should further promote product innovation to meet
the demands of a diverse and ever-evolving customer base. Innovation must stay with the market, because we should not have a regulator that stifles innovation, and the MMR should also ensure that lenders have the flexibility to provide support to their customers when they need it-for example, when they experience financial stress.
On the current direction of the MMR, however, there is considerable concern, first, about the wider impact on the economy and housing market, and how the proposals interact with wider Government ambitions and policy. There seems to have been a firm shift, apparently removing responsibility from borrowers and placing unreasonable responsibilities solely with lenders. Distortions in the market will sometimes affect large banks, and, as we have heard, building societies are concerned about that. If we want to have a diverse market, we have to have small as well as large lenders. The direction of the MMR might also have an adverse impact on social mobility. There are concerns about the interaction with existing and planned macro-prudential reforms, and about the potential conflict with regulatory reform initiated at European level.
Certain groups might be affected. First-time buyers could be expected to have higher deposits and to pay higher prices, because under the proposals they might have "risk" status, which would dampen their capacity and willingness to transact even more than we have seen to date. We know that there is a problem with first-time buyers. Those who have wealthier parents who can help them will get into the market; those who do not may be excluded. We have to bear in mind that important fact.
Existing homeowners with self-certification loans will have to prove their affordability next time around. For some of those with variable incomes from different sources that will not be straightforward, so some existing mortgage customers may find it difficult to remortgage, which could have a major impact on the housing industry. One of the industry's responses may be that lenders become less willing to serve such complex prime cases because of extra administration and potential risk. There will be a major impact on the self-employed and contractor markets, as such people necessarily have difficulty in proving or certifying their earnings. There is also a group of prime mortgage customers who have become impaired owing to the impact of the recession on their finances. Recent short-term arrears will make it more difficult to refinance with their existing lender or to remortgage elsewhere; they are trapped until they can demonstrate that they are no longer "credit impaired" as defined by the FSA. We have to be very careful that reforms of any kind will not make it more difficult for those who have had short-term difficulties to stay within the market and to remortgage.
Many of the organisations that have contacted me are also concerned about shared ownership. In its sourcebook, the FSA specifies that as a high-risk area, and that could have a big impact. Shared ownership is one of the most under-exploited areas that we have. We could do a lot more in respect of that market, and we do not need restrictions or classifications that could make it much more difficult to help to grow it.
A large number of existing borrowers, the majority of whom are successfully meeting their mortgage repayments, will find it difficult under the proposed rules to remortgage in the future or to get new mortgages at all. This will have a major negative effects in terms of social mobility,
particularly in the coming years. Restricting the ability of consumers to move home in order to take up new or improved employment will also have serious adverse consequences. The FSA should not consider implementing any changes to conduct of business rules until a full assessment of the impact on changes already made to prudential requirements and enhancements to the supervisory regime has been carried out. If there are still concerns once this has been undertaken, targeted action through rule changes can be undertaken. It is important not to go too fast in addressing this matter.
One important thing that is coming over the rainbow is European reform. In the first quarter of 2011, we expect a European directive focusing on responsible lending and borrowing. This directive may well have an impact on changes proposed in the consultation, and that might be an important factor.
I am concerned that if we are not careful, as a result of the excesses of a few lenders in the last property boom, we will have a set of rules that impairs some of those who are more marginal borrowers, makes it more difficult for people to get on the housing ladder, and penalises many lenders by putting up their costs, and that will not lead to a diverse, flexible market where there is innovation. The housing market is crucial to the future of our country and our economy. We all want people to be well housed and to have the ability to buy a home if they can afford it. We have to be very careful about the rules that are implemented.
I hope that this debate plus all the other representations being made to the FSA are listened to, because we have to get this right. If we get it wrong, it will be disastrous, and we will all find people in our surgeries who cannot understand why a few years ago they got a mortgage and now they cannot. This is a crucial issue. I know that there is still a consultation going on and we do not yet know the results, but I hope that the Minister takes on board the fact that there is genuine concern about this. We are not going to sit as late as the Lords, which I understand is going to sit through the whole night, but it is still quite late and there are a lot of Members in the Chamber for an Adjournment debate, several of whom take a special interest in housing issues and are well respected for it. That says something about the concerns that exist about these issues.
The Financial Secretary to the Treasury (Mr Mark Hoban): I congratulate my hon. Friend the Member for Poole (Mr Syms) on securing this debate on the important issue of the future regulation of the mortgage market. As he said, the FSA is conducting a wholesale review of mortgage regulation in the UK. He and I share the aims of that review. We want to see
"a mortgage market that is sustainable for all participants"
"a flexible market that works better for consumers".
It is vital to address those issues in the light of the failed regulation of the mortgage market before the financial crisis, when there was a huge expansion in the availability of credit and the number of lenders in
the mortgage market. That led to a rapid increase in house prices without an accompanying increase in home ownership, and put more people at financial risk because of the greater debts that were taken on. My hon. Friend was absolutely right to highlight the current low levels of arrears and repossession, but that reflects the low interest rate environment, lower than expected unemployment and, as he pointed out, forbearance by lenders. We cannot be sure that the same conditions will occur in any future housing downturn.
There is a lot of concern about the mortgage market review, but there is also a lot of misinformation. I welcome this opportunity to set out clearly the FSA's plans for the review. The FSA is conducting the review under the powers of the Financial Services and Markets Act 2000 to meet its statutory objectives, which include market confidence, financial stability and consumer protection. We must remember that Parliament set the framework for regulation, but that the FSA is operationally independent, although accountable to Parliament.
Mortgage lending plays a vital role in ensuring a stable and accessible housing market. As the Minister for Housing and Local Government has set out, it is the ambition of this Government to create a housing market with stable prices that does not exclude many from home ownership. Owning a home is an important ambition for many people in this country. It brings social benefits such as stronger and more committed communities. A flexible mortgage market is important for labour market mobility. Although the link between lending and building is complex, mortgages must be available to encourage the home building industry to provide the new homes that we need. Perhaps most importantly, an open mortgage market promotes fairness between generations and helps to smooth out the differences between the housing haves and the housing have-nots. It allows young people to buy their own homes, which in turn helps older people to trade down as they move into retirement.
However, increased lending can force up house prices beyond the reach of those who want to get on to or move up the housing ladder, putting home ownership further and further out of reach for many people. High prices can cause inequality, indebtedness and inertia, with young people having to take out bigger and bigger debts to buy their own homes or give up on the dream of home ownership.
It is therefore important to strike the right balance. A properly regulated mortgage market is needed to ensure that house prices remain affordable and that consumers are protected. It is worth remembering that consumer groups such as Which?, Citizens Advice and Shelter have warmly welcomed the mortgage market review. Those organisations highlight the number of people they see every day who struggle to make their mortgage payments.
Mr Adrian Bailey (West Bromwich West) (Lab/Co-op): Does the Minister agree that an important element of financial provision in the mortgage market is diversity? I would welcome his views on possible recommendations by the FSA review that might impact disproportionately on small building societies and restrict such a diverse flow of funds to the market.
I know that the hon. Gentleman is a keen supporter of financial mutuals. He will recognise that there was a commitment in the coalition agreement to
diversity in the ownership of businesses in the financial services sector, and that we are taking action to support mutuals. A mutual should be as safe and sound as a big or small bank. The customers of mutuals deserve the same protection as customers of other financial institutions. I want to see a level playing field in the regulation of the financial services sector, not just the mortgage market.
The boom and subsequent crash in the mortgage market cast doubt on the prudential soundness of lenders, and on their ability to take on appropriate risk. There need to be adequate controls over lending to ensure that the requirements for the retention of capital are proportionate. Without reform of the rules on mortgage lending, banks would need to hold more capital, thus restricting their ability to lend. We do not want lenders to put their solvency at risk through aggressive lending. We are working internationally to agree a new framework of prudential regulation, and capital and liquidity requirements. It is important that all these regulatory reforms are seen as one wide-ranging package to strengthen the stability and sustainability of our financial system and our economy.
I wish to give a few statistics about the mortgage market, to illustrate some of the challenges that we faced during the boom years. The volume of lending was fairly consistent from the early 1980s to the mid-1990s, at about £50 billion a year, but from the late 1990s there was a steady rise in lending, with the boom peaking at £360 billion a year in 2007. Many assume that the rapid expansion in mortgage lending during the boom allowed more people to become home owners, but the rate of owner-occupation actually fell between 2003 and 2008. That may reflect the fact that house prices grew very rapidly from the mid-1990s until 2008, matching the boom in lending, but for many, neither their income nor deposits grew at the same rate. The number of mortgages granted to first-time buyers decreased steadily over the period from 2000 to 2007.
After the boom, mortgage lending fell rapidly from mid-2007 through to 2009, and it remains below peak levels. That reduction reflects a reduction in both demand and supply. Banks now realise that they overstretched themselves and underpriced risk in the boom years, and are therefore increasing deposit requirements and tightening credit checks. On the demand side, household debt is historically high, so people are reluctant to borrow more and add to their debts. People are cautious about the economy and their jobs, and many expect house prices to fall this year.
We know that during the boom, a huge proportion of mortgage lending-about 40%-was for remortgaging. In 2007, of the £360 billion in gross mortgage lending, £150 billion was for remortgaging. Surveys suggest that about 60% of remortgages also entailed equity withdrawal. Although mortgage lending for house purchase has reduced to some extent since then, the 72% fall in remortgaging has made the most significant contribution to the fall in gross mortgage lending over recent years. With interest rates currently at historically low levels and house prices flat, there is little incentive for borrowers to release equity or switch their mortgage.
I acknowledge that the reduction in mortgage availability has hit everyone hard, particularly first-time buyers. The proportion of first-time buyers reliant on help from friends and family to put together a deposit has reached 85%, compared with 45% in 2006, which is not an equitable or sustainable state of affairs.
I turn to the details of the mortgage market review. In October 2009, the FSA published a discussion paper setting out its high-level objectives for the review. That has been followed by a number of discussion and consultation papers over the past year. In the course of the review, the FSA has produced a range of options and proposals for consultation and consideration, and it is considering the responses carefully and will publish further proposals later this year. Nothing is set in stone. The FSA has made it absolutely clear that it will assess fully the potential impact on the market before implementing any rule changes. Later this year, it intends to publish an impact assessment that will take into account the cumulative impact of all its final proposals.
The FSA is also committed to ensuring a smooth transitional period, to minimise the impact of changes and keep the mortgage and housing market stable. It has made it clear that it will not implement any rule changes until the market is back on a stronger footing. Its review process is an ongoing consultation, and it is important that all interested parties engage constructively in it. I encourage everyone with an interest in the debate to do so.
I shall respond to some of the points that my hon. Friend the Member for Poole made. Traditionally, self-certification was a route for the self-employed to take a mortgage, but that has been abused by people for whom the scheme was not designed. The FSA's proposals would required greater disclosure by the self-employed. For example, a borrower could submit their tax returns to prove their historical income, giving lenders better information on potential borrowers and enabling them to assess risk, and therefore price, more accurately.
As I set out earlier, in the run-up to the crash many first-time buyers were frozen out of the market. My hon. Friend the Member for Nuneaton (Mr Jones) highlighted the fact that the low loan-to-value ratios that we see today act as a barrier to those who want to get on to the housing ladder. Those ratios are a response to the crisis, not the MMR. The MMR emphasis on affordability should help in the long run to create a stable market with stable house price growth, which will bring homeownership within the reach of many more people.
The MMR should have no impact on the shared equity sector, as there is no in-built prejudice against it, but again, borrowers will need to demonstrate that they can afford to pay both the mortgage and the rent.
My hon. Friend the Member for Poole also raised the issue of European proposals on mortgage lending. He is right that the Commission intends to publish proposals on responsible mortgage lending and borrowing in the coming months. The Treasury and the Financial Services Authority have held a number of discussions with the Commission on those proposals, and we expect them to be broadly consistent with the principles of mortgage regulation in the UK. However, the FSA has acknowledged that it will need to consider that European initiative as it refines its proposals. It will ensure that the timetable for refining the MMR is consistent with developments at European level.
It is clear that mortgage regulation failed by allowing an unsustainable boom in lending and increasing house prices, followed by the inevitable crash. We do not want to see that repeated. We have a clear objective to create a sustainable and accessible housing market that sees a
gradual rise in prices in line with people's salaries. The mortgage market is a key part of creating that, but unregulated lending will not help us to achieve that aim. The MMR is an essential step to ensure that both consumers and lenders are protected, but that will always be balanced with the need to ensure innovation and competition in the mortgage market. The FSA will take
a proportionate and balanced approach in order to help to build a stable and sustainable mortgage market for the future.