There has been so much talk about mortgage regulation you might wonder what more could possibly be said. However, so much of what has been written in the press has focused on the lenders and the packagers and little about what the mortgage broker actually thinks.
Having canvassed their opinion the consensus is that, on the whole, regulation is a good thing. Brokers have used their voice and have felt it has been heard but only because of how the proposed regulation stands, not because the powers that be are giving any indication of noticing. This is perhaps a moot point, but an acknowledgement that what brokers have said had been taken on board by the regulators would have been appreciated.
‘It is gratifying that, while it has taken a lot of time to get the message through, the FSA and the Treasury have now recognised regulating advice as the way forward,’ says Ray Boulger, senior technical manager at Charcol. ‘I feel sure they were reacting to trade responses. However, it would have been more magnanimous if they had accepted that the reason they changed tack was partly based on the comments from the industry, rather than solely on the Julius review. It all played a part.’
Yet whatever prompted the u-turn, Mike Boles, director at Savills Private Finance, says the move has to be welcomed. ‘We were in favour of mortgage regulation. We never understood how probably the biggest expenditure people are going to make in their lives isn’t regulated,’ he says.
The key driver of regulation is protection for the consumer and anything that boosts consumer confidence in the industry is welcome. Cynics would point to the questionable success of previous regulatory measures in protecting the consumer. We are after all still sorting through the pensions mis-selling scandal and hearing about the thousands who may have been mis-sold endownments ‘ all of which were situations supposedly guarded against legislatively.
As a result, Rob Clifford, chief executive at mortgageforce, welcomes the move to greater consumer protection, but warns that there is no guarantee that this will happen. He says: ‘I am supportive of anything that gives consumer protection, as there are still some sharks out there. But statutory regulation doesn’t always make for a better consumer environment. It does not wave a magic wand and create complete consumer protection.’
Meanwhile, Rod Murdison, proprietor of mortgage brokerage Murdison & Browning, is sceptical about linking investment advice and mortgage advice in the argument for regulation.
‘If someone is sold a pension plan and then it turned out that a combination of high charging structures, high commission and poor performance meant that person’s life savings have gone to the wall, then it is a complete rip-off. The worst a mortgage broker can do is get the client to pay a higher upfront fee and leave them with a high interest rate. At least the person still owns their own house. On the scale of personal disasters, it not the same as waiting to age 65 and finding your life savings have gone,’ he says.
Clifford adds: ‘I always feel a decent barometer for the success or otherwise of the market is the frequency and level of complaints. Something like half a percent of the 10 million mortgage holders complain about their mortgage ‘ so this isn’t an area of scandalous mis-selling. Relatively few people are ripped off, given terrible advice or misled in connection with their mortgage.’
What price regulation?
Then there is the point that regulation doesn’t come cheap. Clifford’s concern is that it will be the consumer that ends up paying for it.
‘Statutory regulation was explored prior to the Mortgage Code being implemented,’ he says. ‘The key finding of the then Secretary of State, Patricia Hewitt was that it would be unnecessarily expensive ‘ an estimate was in the region of £18m annually to regulate the market. The voluntary code has brought about a perfectly satisfactory regulatory regime and costs little over £4m a year. Who pays? It will be the consumer, with higher interest rates.’
It might well be the majority of brokers are to pay for the sins of the minority of incompetent or dishonest brokers. But for the former this is something one accepts. The view is if you’re doing things properly you have nothing to fear.
‘Mortgage broking is seen by the consumer as being a ‘dodgy’ area because it’s not regulated,’ says Ruth Whitehead, principal of Ruth Whitehead Associates. ‘If you want to be allied with something perceived as dodgy because it’s not regulated then by all means stick to your guns and complain about regulation, but otherwise get used to it. It’s a fact of life.’
Of course, regulation will mean a period of adjustment for many brokers ‘ not because they are ‘dodgy’, but because they may not be as organised as they could be. This is also seen as a positive. Anything that gets the boxes ticked properly can only strengthen the position of the broker.
But can you tick too many boxes? After all, for the majority, the voluntary measures brought in over the years have been adhered to and have been successful. There are two arguments here, if the voluntary code was working, why fix it? And if you were following the code, which statutory regulation will (hopefully) follow anyway, what’s the problem?
‘I felt strongly that the voluntary regime was making a real difference,’ says Clifford. ‘Brokers have to have professional indemnity (PI) insurance under the Mortgage Code. They have to pass fitness and propriety tests to even become a registered firm with the MCCB. They also have to be part of the Mortgage Code’s arbitration scheme to which complaints are referred. Statutory regulation has come pretty late in the day and is far less necessary now than it was three or four years ago and so I wonder whether the cost burden will outweigh the benefits.’
Testing times ahead
But at least for those brokers adhering to the code, the move to statutory regulation should not be difficult. ‘Brokers doing things right now will not have to make too many changes,’ says Boulger. ‘If you have robust compliance now ‘ which you should do to meet existing voluntary regulation ‘ the degree of adjustment required to adapt to FSA regulation will be fairly limited. The brokers whose current compliance procedures are not adequate will be the ones who may find this proposal less palatable.’
Costs aside, while regulation is accepted in principle, brokers are still wary about how it will impact on their business. The consensus seems to be that the early days will be tough while legislation shakes itself down.
Whitehead says: ‘I’d like to see regulation and compliance move from being a philosophy to being a science. There is some possibility that the FSA will be more prescriptive than before. For example, Financial Options is setting up a new compliance system involving a huge amount of technology and is working hand in hand with the FSA, saying ‘tell us what you want and we’ll do it’. This is the first time that has happened, so I have some hope things will be a little clearer in the end.’
Boulger adds: ‘The FSA will be using the MCCB regulation as a starting point ‘ I don’t think the FSA has everything right and there are still issues in CP98 that need to be addressed, but not regulating advice was the biggest thing missing. Now it has put that right it can look at the other things that need addressing.’
There is a feeling, however, that advisers are fighters that won’t go down.
‘I don’t believe mortgage brokers will go to the wall under yet more regulation,’ says Whitehead. ‘Advisers have had to deal with ever-increasing amounts of compliance and I see no reason why mortgage brokers shouldn’t do the same thing. If smaller brokers are having difficulties then, I’m sorry, but adapt or die.’
The hard truth may therefore be that smaller brokers will have to get external support and sign up to a network.
‘The majority of honest small mortgage brokers are being forced to join networks,’ says Murdison. ‘There is no way the various lenders are going to try and make every broker they deal with compliant for just one mortgage deal. I can see I would be obliged to join some form of network just so that network can carry out the compliance and be responsible to the actual lenders.’
Boles, meanwhile, says that the change will lead to more specialisation. ‘The Mortgage Code has been beneficial because it has certainly forced a lot of advisers to leave mortgages to those who specialise in them. That will be moved forward with statutory regulation. It’s an opportunity for the bigger players in the market to consolidate. We have seen quite a few advisers coming to us and forming an alliance. While it is beneficial to us, we don’t want to think statutory regulation will drive decent mortgage brokers to the wall because of the bureaucracy. But that’s always the danger ‘ that it is implemented in a cumbersome way.’
For some time there have been calls for a representative body for mortgage brokers.
‘We need a unified voice speaking for IFAs and mortgage brokers because otherwise the lack of single identity seems to dissipate the message,’ says Whitehead.
Clifford agrees but makes the point: ‘Any such body must separate commercial activity from political lobbying. It shouldn’t also try to be a network and deal with providers for its members, that confuses it with a mortgage club. It would have to be dedicated to lobbying members and government and looking after the industry.’
Unfortunately for NAMBA, there are doubts over whether what this body is offering is the right thing.
‘NAMBA seems to be stuttering to get started,’ says Boles. ‘It doesn’t seem to have a life of its own yet and it has got to get itself sorted out before it can claim to be speaking for anybody.
But launching a trade body may not be as easy as it sounds. Boles adds: ‘The difficulty is getting everyone to agree what form a trade body should take. There is the fear any trade body is an excuse to gobble up fees. It might be costly and we don’t know what we’re going to get from it.’
Another candidate rumoured for the job has been the MCCB, but this was before the Treasury’s December announcement. Now the MCCB will have a continuing role until N3, which currently looks set for early 2004.
‘For the MCCB to turn itself into a trade body in the short term is probably now more difficult,’ says Boulger. ‘But it is important that there is a trade body and now there have been moves to set one up, whether or not NAMBA forms the basis for it, I think there will be something set up this year. It is probably more important for the small to medium-sized brokers because the larger brokers will probably find it easier to make their voices heard.’
Mortgage regulation is one of those unusual situations where you could think there’s a lot of grumbling going on when, in fact, if you listen carefully the grumbles aren’t actually about the matter but the means. The FSA should take note of the positive reaction in the industry. If it keeps its promise to watch the cost/benefit ratios, work with the brokers and then acknowledge their comments ‘ they should all get on like a house on fire.
Brokers welcome greater consumer protection, but state that mortgage complaints are few and far between.
Brokers adhering to the code should not find the move to regulation difficult, but smaller firms may look to networks for support.
Statutory regulation is to prompt the formation of a broker trade body that can lobby Government on brokers’ behalf.