CP146 is the second consultation document on the statutory regulation of the mortgage industry. The first, CP98, was effectively abandoned in December last year when the Treasury announced mortgage advice would be regulated and that general insurance was to be included in the regime, which meant the process effectively had to start again from the beginning.
This led to the most contentious issue in CP98, where lenders were supposed to be responsible for any printed material a broker may or may not give to a client, being dropped.
So following the latest deadline for responses to CP146 a year on, what were the most contentious points discussed?
Following its Regulation Response campaign, based around the recent Mortgage Event, Mortgage Solutions found the majority of brokers’ concerns are focused on aspects relating to the actual transfer of power from the Mortgage Code Compliance Board (MCCB) to the Financial Services Authority (FSA).
At the Events, brokers repeatedly asked the FSA about the ‘due credit’ it has alluded to and demanded clarification in advance of October 2004 on its stance concerning the MCCB’s required mortgage qualifications. A pertinent question asked by a broker from Bolton was: What plans are in place to ensure outstanding complaints against firms are carried over into the new regime?
In general queries centred around the conditions of giving advice to clients, especially over definitions of terms such as ‘independent,’ which is an issue that has been brought up in the IFA market under CP121. There was a certain amount of consternation concerning the FSA’s decision to leave filtering questions outside the scope of regulation, with several brokers focusing on this point.
Chris Fleetwood, managing director of mortgage broker Paradigm Consulting, says: ‘Any form of questioning can be taken as advice, it is similar to leading a witness. Filtering questions also provide a lifeline to the very people who should not be in the industry in the first place.’
Brokers are not alone here. Larger lenders are also alarmed at this omission. Mike Davis, mortgage regulation project manager at Bank of Ireland UK Financial Services, which also encompasses Bristol & West, says: ‘The main issue we want to address, and this is common to every response we have seen so far, is the issue of giving and using filtering questions. We have opposed that quite strongly. We want to see a regime that is either advice or execution only. Filtering questions can easily be construed by a customer as advice, and we feel this is too risky a scenario to allow.’
One broker at another of the Events, asked: ‘If an intermediary advises a client and a lender accepts, but the deal then falls into arrears, will there be any chance of a comeback on the broker by the client?’
The FSA has already stated that there could be, but Davis added a similar dilemma that affects lenders and advisers. He says: ‘If an intermediary presents a well-researched case based on affordability to us and then we reject it, for whatever reason, will the adviser be in breach of FSA rules? We lenders are possibly going to be given a dilemma about whether to revisit the issue of affordability.’
However, not all brokers are worried about the impact of CP146. James Rodea, business development director of Hamptons International Mortgages, says: ‘I do not think it is too onerous to expect a broker to take some level of responsibility for a client. It is up to the broker to ensure the lender is responding responsibly to their client.’
He continues: ‘On the whole we were quite pleased with CP146 and thought it covered most of the ground fairly well. We would also like to have seen a facility for charging fees for aborted work. A point we did note was the non-regulation of pure introducers, which we were delighted about as we use our estate agents as introducers of business, and to regulate them would have been harsh.’
A sizeable proportion of brokers responding to the campaign were worried about the FSA’s intention to ban the practice of cold calling.
Fleetwood explains: ‘My main point of complaint was over cold calling, trying to make the FSA understand that there is a difference between banning cold calling for the sale of investment products and calling to sell someone a cheaper mortgage. This is on the basis that the investment ‘ the house ‘ has already been bought. The broker is only advising on the method of repayment of a debt.’
Although second charge mortgages did not feature prominently at the Events, it is an issue of significant importance to some lenders.
Richard Hurst, communications manager at Future Mortgages, says: ‘We will consider second charge mortgages and our stance is that while we have no problem with the Consumer Credit Act (CCA), we share the Council of Mortgage Lenders’ vision that it would be better to have both sides of the mortgage business under one body. It seems to make sense on a practical level.’
However, some lenders would be happy to see them regulated by two different bodies. Second charge mortgages account for about 40% of igroup’s business by volume and Bob Sturges, communications manager for igroup, says: ‘Second charge mortgages under £25,000 are already regulated by the CCA and the Office of Fair Trading (OFT). Those over £25,000 are in covered under the MCCB remit to 2004, but the OFT has signalled that this threshold will be increased. We hope that by 2004 there will be a clear indication that second charge mortgages over £25,000 will be regulated elsewhere.’
Little help given
Packagers, as expected, were satisfied with their treatment under the consultation. John Mawdsley, director of packager The Mortgage Partnership, explains: ‘While CP146 does not specifically mention packagers, we are comfortable with the way the FSA implies they will be dealt with. If a company is not going to be involved at all in the advisory process then it should remain outside regulation, and if it is then, quite rightly, it will be. The distinction should be made between business to business and business to consumer.’
However, Mawdsley asked the FSA to clarify one or two points, in order to properly focus the questions and points it made on the consultation, but received no reply from the regulator.
Mawdsley says: ‘I asked the FSA questions in order to formulate an intelligent response to the consultation document. My questions concerned the difference between the accuracy of illustrations available on the mortgage search systems compared to those received direct from the lenders.
‘I was wondering how strict they will be with the intermediaries on this point, due to the inevitability that the illustration will not always exactly reflect what comes down on the mortgage offer. I suppose we will just have to wait and see.’
With regard to the final timing of the regulation, October 2004, industry views are varied. From the brokers’ side, Rodea says: ‘I think the general transfer will be relatively smooth as by 2004 most advisers will have systems in place. But personally I think the FSA will over-complicate this and miss the deadline, to the detriment of the consumer.’
And from the packagers’ side, Mawdsley is also downbeat. He says: ‘The timescale is pretty tight. It will all boil down to how the FSA treats the detail. After the consultation period is over I think there will be a few raised eyebrows over how many issues there are to be sorted.’
However, Sturges is more positive. He says: ‘It is up to everyone to pull together to meet the 2004 deadline, but it is perfectly possible. It is only after all this is done that we then receive notification from Europe on a different raft of legislation then problems will arise.’
It seems that in general the FSA has learnt its lesson from CP98 and presented a more coherent and encompassing proposal this time round.
Hurst says: ‘Had the lenders been made responsible for the data given to clients by brokers, as under CP98 then there would have been major implementation problems as that would have required a major investment in IT systems. Because under CP146 that requirement is absent there has been a great sigh of relief across the lenders as we feel we can sort out the rest of the issues in time.’
As a whole the industry seems to have taken to CP146 fairly well, with most feeling that it has touched on all the points that needed addressing. Although a common point raised in discussion with lenders, packagers and brokers is that the FSA has still not explained what customer detriment this regulation is supposed to be addressing, given how much it is going to cost.
Fleetwood raises the principle of accountability: ‘At the moment the FSA can say black is white and when proved wrong in the future they remain unaccountable. Accountability is all on the industry’s side and none on the regulators.’
But at least these regulations should result in a level playing field of best practice professionalism in the market. According to most responses, the Mortgage Code has done a good job, but there are still areas of the marketplace where best practice is lacking and CP146 should pave the way for this.
Paul Robertson is a staff writer
The transfer from MCCB to FSA is the greatest worry for intermediaries.
Lenders do not agree over the treatment of second charge mortgages.
There are concerns over the FSA’s apparent lack of accountability at the moment.