Lender viewpoint by Charles Haresnape, head of mortgage sales at NatWest
What seems like many years ago, the Government announced it wished to regulate the mortgage industry. Regulation would apply to both lenders and intermediaries, although originally it was envisaged lenders would carry much of the responsibility on behalf of intermediaries. While both lenders and intermediaries broadly welcomed the principal of regulation the jury was very much out on whether the voluntary Mortgage Code could be improved upon.
Most commentators agree the Mortgage Code, introduced by the Council of Mortgage Lenders and now under the auspices of the Mortgage Code Compliance Board (MCCB), has served the public well. We have seen plenty of criticism and complaints in the press about the way endowment policies have worked, but there are very few issues around the way the mortgages themselves operate. To date, there have been few instances of mortgage mis-selling (perhaps with the exception of some home income plans). However, most parties were prepared to give statutory regulation a chance.
Time is money
Implementing mortgage regulation was always going to take a long time ‘ and it has. In June 2001 the Treasury published CP98 ‘ its first draft of the proposed regulatory rules upon which consultation was invited. A lot of time and effort was put into the consultation responses by lenders, intermediaries and trade bodies alike with many areas of concerns flagged. Not least of these concerns was the cost of implementation; many proposals require changes to lenders’ systems. Despite this and other issues raised in the responses, very little change has been seen since then.
In the meantime, lenders and intermediaries have been training their respective sales forces to comply with the new exam regimes. The deadline is December and it would appear from recent press comment a number of intermediaries still have some way to go in ensuring they have fully compliant sales forces available. Hopefully all are now on track to get suitable numbers authorised by the due date.
So where is regulation going? When CP146 was issued last month there were few surprises. But from a lender’s perspective there are a few interesting changes compared to CP98.
These include the fact that intermediaries can approve their own promotional material. When you think that previously brokers would have had to arrange for their promotional material to be approved by a lender or another third party, this is a positive step. It is the brokers’ message and it is likely brokers will be prepared to put such material in a compliant format. From a lender’s perspective it is one less thing to be involved with on a day-to-day basis.
Another change was that firms should provide customers with prescribed information about the firm and the service on offer, before the customer decides to proceed. From a consumer point of view this will mean more clarity, and the avoidance of doubt. It is not something completely new, but borrowers should know who they are dealing with. From a lender’s point of view it will not create any extra work, so they will not be unhappy.
A third change was the fact that the FSA considers advice should include assessment of affordability, matching mortgage features to customers’ circumstances and needs and to recommend the mortgage that best meets those needs. This is the real cornerstone of regulation. It is largely about the right advice in the right circumstances. From a lender’s point of view it is safe to say no-one wants borrowers to take on more commitments than they can afford. It will be interesting to see what approach is taken over self-certification because this is not as straightforward. A fresh approach is needed to look at other ways of assessing affordability.
The final change of note from a lender’s perspective is that the content and timing of the pre-application illustration (PAI) has changed. This is not a significant difference, and this may be a challenge to lenders from a systems point of view, but obviously the sooner the customer has it the better.
The key now is that lenders focus on changing their sales systems and processes to enable full compliance by 2004. We should not underestimate this task. Detailed rules should emerge over the next 12 months and we shall see if the cost of these changes passes on to the consumer. Likewise, there will be additional costs for intermediaries to keep their sales forces compliant and adapt their sales processes.
On balance regulation is in the best interests of the consumer and we will see more financial service products become regulated. It is to be hoped the current trend in moving regulation across different product ranges does not extend too far ‘ otherwise it will become too costly and cumbersome for many lenders to promote some of these products.
Packager viewpoint by Kelvin Cooper, director of sales at Solent Mortgage Services
From a packager’s point of view the recent regulation documents are good news in that there is now a clearer definition of the role and types of organisations that are labelled packagers.
The Government has considered the packagers’ point of view and looked in detail at what we actually do as businesses. It decided there were four definitions of mortgage packagers, but not all would require regulation. It decided there was a difference between mortgage packagers and broker packagers, and that broker packagers and correspondent lenders could be regulated as they may arrange mortgages, which is a regulated activity. Most organisations undertake more functions than just packaging’ this is just one of the many services that a modern mortgage provider or distribution channel offers (others include marketing assistance and technology support).
Taking a wider view, regulation has developed over the last few years with the key focus of protecting the consumer and, as such, simplicity is vital. With all the changes that have taken place it is important the Government does not run the risk of over-complicating matters and in doing so cause misunderstanding with the consumer and failing to benefit those whom it has set out to protect.
One example of this potential over complication is the different product risks identified in the consultation process. For example, equity release has been identified as a high-risk mortgage. In reality, this means different legislation for different products. Rather than universal regulation this separation by risk could be seen as over complication.
Those determining the outcome of mortgage regulation could learn a lot here from the second charge industry. The Finance Industry Standards Association (FISA), its governing body, has endeavoured to make the regulation that takes place in this industry as straightforward as possible both to the benefit of consumers and lenders.
For any second charge mortgage there is one generic application form accepted by all lenders which contains one legal declaration. For each application consumers are given a numbered pamphlet which is recorded on their application. This document contains all the information they need to know about second-charge mortgages, their rights, and the rules and regulations that lenders have to abide by.
By placing the number of the pamphlet on the application, it is clear to all those who process the business that the applicant has received the relevant documentation regarding regulation. The application form itself is also simple and straightforward.
Currently within the first charge industry there are a multitude of applications, and declarations all of which potentially confusing for the consumer. It may never be that first charges become as straightforward as the second charge market, but the industry needs to think seriously about the information it provides to consumers and if there is anyway it can be standardised.
One simple change could be to have one valuation report. Most lenders insist on their own report being completed. This can lead to an extra cost and or delay for the client if another lender needs to be used.
Another area worth mentioning is the provision of accurate data. This is a topic that has not yet been examined in great detail, but does demand attention if regulation is to serve any real purpose.
While the FSA has looked in detail at the comparative tables it is providing for consumer use on its website, it has not discussed common trading platforms and the need within the industry for a central body from which to obtain accurate and up-to-date information.
It is vital that whatever form this service takes there is a specific regime in place for updating and including data. Without this structure there will always be concerns over accuracy. As more brokers rely on the internet and sourcing systems for mortgage data the need for real-time updates becomes more pressing.
Packagers and brokers alike need to be convinced of the accuracy of the data that they are receiving and using with consumers. Accuracy of data ensures there will be no concerns regarding misinformation further down the line.
The Government has kept to the same timescale for regulation noted in previous documents, which is a good thing. There has to be a line drawn that we can all work to. Brokers have been crying out for hard and fast rules for a long time in the mortgage industry and it would be foolish to keep changing timescales. If we do, then very little will be accomplished. Whether or not the new regulations will be in place by mid 2004 is something that we shall have to wait and see.
It is important to remember the responsibility the consumer has when making the decision as to what mortgage to take. And it is right that the consumer has recourse if they have been ill advised or have been given factually inaccurate details. However, when making the biggest financial commitment of their lives, borrowers need to be aware they themselves have some responsibility. If they are not happy but have been well advised and the regulatory regime has been adhered to (in whatever form it will take) then the consumer cannot always look for someone else to blame.
The Government has not taken the issue of regulating mortgages lightly and consumers should pay the same heed when it comes to choosing and committing to one.