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Saturday, 22 August 2009

Just why did the FSA license them in the first place?

Grace Nmadibechi Ada Ukala got off fairly lightly when the FSA revoked her licence and fined her £70,000 for mortgage fraud this week; it would have been £100,000, but she offered to pay the fine in cash and got a discount. She ran a fraudulent mortgage broking business at a time when the banks were falling over themselves to lend, and accepting property valuations and income statements from mortgage brokers such as Ukala rather than independently verifying asset values and earnings themselves.

The Chelsea Building Society has made a provision of £41m for such mortgage fraud, and it is not alone. The fraudulent mortgage brokers licensed by the FSA were a critical link in the chain that allowed the banks to lend so recklessly; the negligence of the FSA in this respect is directly responsible for the billions that bailing the banks out has cost us all. Ukala and hundreds more like her are part of the government's self-inflicted economic injury. And they're not all Nigerians.

Thamesmead in south-east London is an area of new pile-it-high flog-it-cheap housing on a rancid marsh at the side of the Thames opposite Dagenham. It's also the centre of mortgage fraud and over-valuation on an unbelievable scale; stories have been circulating on south London building sites for a couple of years about pastors from the African churches arriving at sales offices with suitcases crammed with banknotes to buy the new homes as they were built. When the bubble burst the collapse in property values was so catastrophic that rumours abound of emergency intervention to stabilise the local market.

Now six more people have appeared in court in connection with Thamesmead mortgage fraud; as FTAdvisor reports;

The fraud came to light last year following reports from banks and building societies when the properties came to be either sold or re-possessed and the true property value was realised by the lender. Eleven arrests were made as part of an investigation by the Metropolitan Police's money laundering team between May and November last year. It is alleged a company bought 84 off-plan new build flats in Thamesmead, south-east London, and resold them at inflated prices.

In most cases, it is alleged the buyers would not otherwise have qualified for a mortgage.

Mohamed Alie Barrie, 38, of Pinewood Close, Dartford, has been charged with conspiracy to defraud, conspiracy to money launder and money laundering. Brad Sean Fisher, 42, of Tiptree Crescent, Ilford, has been charged with conspiracy to defraud and two counts of money laundering. Sofiyah Ahmed, 26, of Howard Road, Walthamstow, has been charged with conspiracy to defraud. George Sourou, 42, of The Crescent, Ilford, has been charged with conspiracy to defraud and five counts of money laundering. Stuart Joseph, 62, of Furham Field, Pinner, has been charged with conspiracy to defraud and false accounting. Dean Aladapo Dairo, 44, of Eastern Avenue, Aveley, Romford, has been charged with conspiracy to defraud and false accounting. Two men have been released without charge, while three men have remained on bail.

Those that remain on bail include a 40-year old man who was arrested in north London on suspicion of laundering the proceeds of crime. He was found in possession of a briefcase containing 152,000 Euros and $2000 US dollars. A 28-year old man who was arrested in north London on suspicion of laundering the proceeds of crime is on bail. He was found in possession of a carrier bag containing £100,000 cash.

Also remaining on bail is a 39-year old man who was arrested on suspicion of money laundering offences.

It wasn't only the bankers who got rich from the recklessness of Fred Goodwin and his kind; it was every minor league fraudster, 419er, scammer and crooked babu in the country. And the extent of mortgage fraud now appears to have been so widespread that a good part of the hit we're taking on our home values is not down to the US Sub-Prime market but the reckless negligence of the FSA in licensing so many fraudsters, crooks and scammers.

If ever there was a better argument for a return to Bank regulation and the consignment of the FSA to the dustbin of history I've yet to hear it. The creation of the FSA was one of Gordon Brown's first acts as Chancellor, and his purblind stupidity and utter unfitness for any financial office is ultimately to blame for this debacle.


tory boys never grow up said...

Just one little fly in the ointment of your argument however. Mortgage brokers were not regulated at all under the previous regime and it was the Labour Government that introduced the power to do so - although as you point out there are questions as to whether the FSA has used its powers properly. You also need to recognise that there are different types of regulation - direct supervision, market conduct and legislation do need some segregation, for good reasons that most Tories who claim to believe in free markets should understand - that is not to say that there needs to be proper co-ordination, which is clearly where there have been weaknesses both recently and in the past.

Actually, it is probably more important that the regulation of mortgage brokers should be done more directly by the mortgage providers themselves rather than the FSA - they have the real clout and are close enough to do so. There would be a lot to be said to making the mortgage providers responsible for the acts of the brokers and then you would see some real incentive for them to exercise control. Somewhat strangely for a Tory you appear to want the regulation to be done by a third party using regulations - which as well as being over bureaucratic would probably not be effective.

If you think that the Bank would have got its hands dirty with the regulation of Mortgage Brokers in the days when it regulated the Banks (and not the building societies which were then regulated by the Building Societies Commission) then you clealry had little understanding of how the Bank operated. Remember this is the same Bank of England that did not know about what was going on at BCCI until well after most of the market had cottoned on.

The Building Societies Commission did have a more hands on role in regulation and used to ask questions about how Societies manged and controlled their distbution networks (i.e brokers) - but you should be aware that there was continuous pressure from the then Tory govt (who were heavily lobbied by Society executives) to reduce the scale of such intrusive regulation and to allow Societies to convert and diversify their activities. And what happened to those societies which were allowed to convert and move to the much gentler regulation of the Bank - perhaps their names should be enough of a reminder - Northern Rock, Abbey National, Woolwich, Bradford and Bingley, Alliance and Leicester, Bristol and West - and I wondered what happened to them??

Clearly much has gone wrong with UK Regulation - but only an idiot would attribute it all to the formation of the FSA. The fever for deregulation and a hands off approach to deregulation clearly precedes the formation of the FSA. Just shuffling the deckchairs and passing responsibility to the Bank (most of the Bank's supervision department moved to the FSA btw) is clearly an inadequate response.

Raedwald said...

Thanks TBNGU - some good points there. A Tory belief in free markets doesn't preclude intervention to prevent public harm; laws to prevent the adulteration of food or the poisoning of watercourses date back almost a millennium.

In a world in which the reckless banks lost money to the fraudsters without damage to the public purse, or in a world in which the fraudulent inflation of prices had no negative impact on others, I would leave them to bear their losses and learn their lessons. However, that's not the case, so intervention in this market is justified.

The banks were negligent in accepting spurious asset valuations and spurious earnings declarations. In court they would contend that they placed reliance on the probity of the FSA's licensing system, and therefore on the representations of the mortgage brokers.

The abolition of the FSA and a clearer duty on the banks to assure themselves of these things would avoid this excuse.

And I stick with my conclusion that the creation of the FSA and its grossly deficient licensing system therefore placed us in worse position than had Brown never conceived it.

tory boys never grow up said...

Just in practical terms I think the onus on mortgage regulation whould be with the providers rather than the brokers - the are considerably more of the latter and it is very difficult to effectively check the credentials of thousands of mortgage brokers.

As well as placing the duty on the banks to check credentials - I suspect that there should be rather more - proper audits of the controls they employ to ensuire that they meet those duties, and tougher capital requirements where they do not or chose quite legitimately to accept a higher degree of risk would also be helpful. Direct regulation of mortgage brokers is never going to be as effective.

The abolition of the FSA would be pure gesture politics however - there will still need to be prudential supervision of financial institutions, and this will need to be co-ordinated with regulations of markets and legsislation/goverment policy. Handing over thses three legs of regulation to a single institution (i.e the Bank) would actually create lots of conflicts of interest and something of bureacratic monster. Should also bear in mind that the FSA in effect replaced 13 regulators and a very confusing and not very effective structure before - so should be careful that some of the advantages arising from the creation of the FSA are not lost.

One positive note is that some Conservatives do appear to recognise that the trend to deregulation had to stop (although there are still some e.g Budgie who would argue that any form of regulation is tantamount to Marxism) - and I will happily admit that the Labour Govt was wrong to let it continue. Perhaps there should also be some acknowledgement that the market also failed in pricing risk properly. All this does not mean that there shouldn't be some very serious thinking about how regulation should be reintroduced - and I am somewhat surprised how often the Tory proposals often seem to look at using regulations and authorisations rather than trying to work through the market structures (e.g. through the use of capital and liquidity requirements, using provider/distributor relations)

The other part of the jigsaw in regulation is the role played by corporate governance structures - and the disgraceful passivity of the investment management community in recent years, which cewrtainly should have been acting as more of a restraint on the financial institutions. Worth noting that apart from Myners raising some points in this area all the political parties have hardly anything constructive to say at all. Perhaps Cameron/Osborne are rather too close to the guilty parties to say any thing, even though one would expect natural Tories to place rather more emphasis on this route?

Budgie said...

tbngu said: "... some Conservatives do appear to recognise that the trend to deregulation had to stop (although there are still some e.g Budgie who would argue that any form of regulation is tantamount to Marxism)"

No. I am not a Conservative. I do not argue that any regulation is tantamount to Marxism.

Whilst Brown's "tripartite" regulatory system has proved a failure, it is his economic incompetence that has had a more significant impact on the UK bust.

Brown expanded the money supply, forced the BoE to follow CPI (rather than RPI), damaged pensions and encouraged government and the public's debt. These policies caused a housing bubble.

When the economic cycle turned down (because, despite his boasts, he had not eliminated "boom and bust"), the UK was uniquely badly placed. Especially vulnerable were the building societies turned banks, and also, as we are now seeing, the building societies themselves, so dependent on the property market.

Brown's economic failure and incompetent regulation are not adequate arguments for yet more state control. Unfortunately socialists see the expansion of state powers as essential of itself (this is the dictionary definition of socialism btw) and this predisposes their views despite the evidence.