The plight of mortgage lenders is not something that would normally garner much sympathy, but there are a number of issues apart from the Financial Services Authority’s (FSA) proposals that are making lenders’ lives much more difficult at the moment.
One of the biggest issues for lenders is the intensity of the competition. Margin squeezing on new business has been around for a while, but a new front has been opened up. Back books are re-pricing and it has been suggested that the standard variable rate (SVR) will be passing away.
At the same time, the intense focus on the type of charging basis is resulting in lenders revising their practices, even though it is not well understood that the customer impact is only around 0.05% on the effective rate.
Many customers are better informed and feel more confident in tackling lenders on what they see as unfair practices. Consumers are also asking for multi-channel relationships and expect their personal details to be ‘to hand’, which has resulted in unprecedented cost pressures with several players opting out of outsourced back office operations.
The challenge ahead
It is clear that while 2001 is a great time to be a borrower it is a challenging time for lenders. But it needs to be mentioned to put the FSA paper (CP98) into context. The paper fits comfortably with this current environment and the FSA seems to be speaking to lenders from the viewpoint of customers. The message appears to be that while competition is tough for lenders, ‘confusion marketing’ is not an option. But the question is, will it improve the quality of borrowers’ choice of product?
The paper contains a number of interesting points, but the main ones include instructions on product comparisons and intermediary lending. The proposals on comparisons are lengthy, but seem to be a combination of highly specific requirements, such as showing the impact of paying a salary into a current account mortgage. But there are gaps in the measures that are considered easier to understand. Annual percentage rate (APR) is still held up as the best benchmark despite the FSA’s own research showing there is little understanding among customers.
Furthermore, the question most borrowers want answered is, which is the better deal for me? This can depend on how the product is used, how many drawdowns are needed and whether the borrower is able to let the property. Product comparisons should be based on how many years borrowers think they will keep a product while taking into account penalties. It could be argued that the lifetime cost, based on a range of lifetimes, would be a clearer comparison. This would also flag the shortcomings of products which have headline grabbing rates, but short benefit periods, such as an initial rate of 0.5% payable for three months and large penalties.
The total impact of the comparisons will be that a huge quantity of information will be given to prospective borrowers, a fact acknowledged by the FSA itself, which says: ‘Consumers are often overwhelmed by the amount of information they receive.’ The wad of comparison sheets on two or three products from each of four or five lenders risks worsening this situation.
The proposals on intermediary lending may make it the responsibility of lenders to take reasonable steps to ensure introducers’ delivery of the disclosure document, which has caused disquiet among some lenders. Some have been working hard at their relationships and creating facilities such as online applications and case tracking, while others are making comments about wholesale industry restructuring. It is clear that the challenge of lenders’ responsibilities will only be resolved by working together. A positive approach and the use of centralised agents to avoid the chaos of multi-lender, multi-introducer compliance must be the most realistic option. If this does happen only bad lenders and introducers need be worried as the quality of lending and sales processes become more visible to all.
For lenders, the time scale until the third quarter of 2002, when the regulation takes effect, now looks alarmingly close. The changes to front end and back office systems need to be slotted into an already full programme of work. But while lenders upgrade products, manage the issues around migrating away from SVR, plan for euro enablement and a hundred other matters, accommodating changes needed to meet the FSA’s requirements could delay valuable enhancements.
One minor but unexpected by-product of the proposal is the liberation of mortgage advertising from the unsightly and unloved small print of the ‘typical illustration’. Personalised standard information will replace the need for this and, as a result, there should be some more creativity in advert design.
Alongside this, the proposals on simplifying the wealth warning and the requirement to promote drawbacks look sensible. Overall the thrust of the proposals are sound and customers should benefit provided pragmatism reigns. However, for the harassed lender it may have undesirable side effects; these are added costs ‘ which may have to be passed onto borrowers, additional processes slowing down loan approvals, and damage to intermediary relationships. The industry will need to work even harder, but no one ever said it was going to be easy.