Ben Marquand The Treasury is still looking to exclude some key areas of the industry from statutory regulation. Do you think it really understands the mortgage market?
Steve Sandiford I am not sure whether it does understand it, but it is probably too late for some of these changes to be made in the first wave of regulation anyway. This is an area of concern because there has been a view that buy to let is the province of professional people who perhaps did not need the protection afforded by regulation, but I think our experience is that this is not the case.
Sue Anderson The CML sees second charge lending as being the big issue. It has always argued that unsecured lending should have been included within the regulatory scope in the first place, but has been rebuffed by the Treasury. It is interesting to note therefore that the Office of Fair Trading has just announced an investigation into debt consolidation companies and it estimates that 60% of secured second charge lending is actually debt consolidation. On buy to let, the Treasury’s rationale is that the risks are different; the risks still exist but they do not tend to result in a risk to that individual’s home by virtue of the mortgage secured on it.
Steve Sandiford The risk still applies to that person taking out the mortgage who I think is still entitled to some sort of protection too.
Sue Anderson Perhaps so, but where do you draw the line? Those investors who do have a portfolio of properties, and who are experienced, do not probably need protection in the way that others do. There is probably still some room for debate on this issue, but certainly on the second charge side there is a clear risk.
David Wylie Surely there is the danger with second charges that unscrupulous intermediaries who do not survive under the FSA regime are going to migrate to the second charge market and make the situation worse still?
Stephen Atkins I think the Treasury knows that the European credit directive is going to deal with second charge mortgages and it has not picked it up at this point in time quite deliberately.
David Wylie The danger with this is that it leaves a regulatory chasm for quite a few years though.
Ben Marquand How well do you feel that the FSA is working with the industry? Sue has already said the CML’s views on second charges were rebuffed.
Sue Anderson Generally speaking the FSA is working collaboratively and is trying to take on board as much as it can from the industry but I feel it could improve its communication with the intermediary sector. Its communication with the lender sector is probably rather better, partly because this sector is larger and more diverse. Although it has excellent links with the MCCB and with AMI coming through, maybe it does not communicate as well with individuals in this sector as well as it could.
David Copland I think that a lot of it is to do with the fact that intermediaries have not got a lot of time. The big lenders have usually got people who can lobby the FSA, whereas individual one-man bands have not got the time to lobby. In many cases a lot of intermediaries still do not know what is going on, but I think the message is slowly beginning to get through.
Luke March This is the biggest issue of all. Communication from the FSA to intermediaries is basically through us and the trade press because there is no other route. The MCCB issues publications almost every month on its behalf, but we have had to work hard to make them intelligible and practical. The biggest difficulty of all this is the 700-page rulebook. I think most intermediaries would take one look and say forget it. They need something much more practical in order to guide advisers through it.
Richard Griffiths I blame some of it on the trade press generally, and I think for the rest of this year is there will be an increase in the volume of various parties touting their own wares in the media with some saying become directly authorised and others saying do not become directly authorised. And I think this is unavoidable.
Chris Cummings It is AMI’s remit to act as a translator for intermediaries and to help get the message across so they can decide what is best for them.
Richard Griffiths But what is its medium for getting this across? It is still the magazines.
Chris Cummings It is a combination of things. AMI has its own direct links to its membership, its own website and email news bulletin service. It aims to provide impartial advice and next year is going to be all about striking the right cord of impartiality.
James Mayne I think it is an industry issue. It is not for the FSA, the MCCB, the trade press, or even AMI to send messages out alone. I think the whole industry has to recognise that lenders have a role to play in educating advisers and they are doing so. It its responses, the members of IMLA try to represent the views of the intermediary sector to back up points made by other people. And also in terms of lenders, some of which have published guides, one lender or organisation cannot reach everyone. Everyone has to do as much as they can to reach as many intermediaries as possible.
Stephen Tully I think that is absolutely right. In the past the FSA has been very spoiled because the life offices tended take on the communication role. I would hope lenders can resource and bridge this gap. Brokers need clarification and practical guidance.
Chris Cummings It is a difficult time for lenders. For commercial organisations to deliver impartial advice would be wonderful but they also have their own business to run.
Steve Sandiford I think this a fair point, the onus for brokers to comply is on the brokers. However they do that, whether they turn to networks or use AMI to learn about what they need to do, it is still down to the individual brokers whatever size they are.
Ben Marquand What will happen to the size of the market next year?
Michael Bolton The market is about to go through its largest upheaval ever, it is clearly oversupplied both on the lender and on the intermediary side and this is an ideal opportunity for this market to clean itself up and get rid of a bit of dead wood on both sides and we will just have to see where we all are post-N4. This will be the survival of the fittest.
Richard Griffiths I think the number of registered mortgage advisers has dropped significantly and it is already beginning to clear out the ‘dead wood’.
David Wylie There are over 13,000 firms registered with the MCCB and that includes the 160 respondents who bothered to write in to the CP146. On a practical issue, intermediaries need to be shown what is coming, to show them the documents and say this what you are going to do. At the moment it is all words and I do not think the practical ramifications are widely accepted. Two-thirds of the firms our BDMs interviewed said they were planning on making this decision between June and August next year, and they probably do not even realise that there is a nine-month window open to the FSA to approve their applications.
Luke March I do not think advisers in general realise that the closing date for applications is 31 March next year and the closing date for authorisation for Mortgage Day. Of those 13,000 almost 20% are directly authorised and are also appointed representatives (AR). That is a no-no going forwards so they have got to make some decisions, they are either going to be directly authorised for everything or they are going to go to a network.
Richard Griffiths I am not at all surprised to hear the figures on the amount of brokers who are planning to wait until next year and I think a lot will leave it too late for direct authorisation and might join a network as a get out of jail solution. But brokers being brokers they will probably leave it to the last minute.
David Copland It happened when the FSA came into the IFA market, it was only at the last minute that people were applying to be registered. They were standing outside the door filling in the forms on the final day.
Ben Marquand Will this give huge power to networks over lenders, allowing them to demand substantially increased fees?
Richard Griffiths I do not think it will be quite that dramatic. There will still be a large IFA community who do not belong to networks and they will be free to place business wherever they like. I think the new emerging networks will still be operating among the big IFA networks and big estate agency chains, so it will not make a dramatic impact.
David Wylie I suspect some of the big IFA networks are currently rubbing their hands because all it is actually going to do is make their members aware that they can now join for mortgages. But at the moment some of the networks and tied agency sales forces do their own thing with regard to mortgages. I have spoken to some of these guys and this distribution will start to get tied up. I think a lot would like to remain independent but a lot are scared stiff of doing something wrong and will be forced to join a network.
Luke March There are a number of other options. You can be directly authorised but you can take some services from a network, or you can become an introducer and my instinct tells me that a very large number will become introducers. They will not be covered by regulation apart from through their principal as it were, but not even as an AR.
David Wylie Is the FSA not proposing that brokers can have more than one principal if the product package is different? So you could conceivably have a principal for your life network, but a different principal for your mortgage network.
Richard Griffiths I think that some of the IFA networks will start to say if you want to place any mortgage business it will have to be through us as well. For the likes of Michael and other lenders he should not be scared of the offerings from Pink, Mortgage Next or Network Data but he should be concerned about what someone like Misys will say to them when groups like that start pulling in all the mortgage business from tied agents.
Michael Bolton I actually support the consolidation of distribution in the market. IFAs are by far and away the smallest part of the market. One and two man bands of mortgage brokers make up the bulk of the market, and they are going to have to decide whether they want to be directly authorised or which distributor they want to go through. I think it will decimate the small broker market. Whether this was the FSA’s plan or not I do not know. Brokers are going to join the AR clubs that virtually everyone is looking for cash off lenders to help establish. At the moment we are in the situation where are lenders are going to stump up the cash for new business start-ups to in effect find a home for the small one-two-man outfits that at the moment clearly cannot afford to be directly authorised. That to me is the crux. The core mortgage broking market, 60%-70% of the market falls into this group.
Ben Marquand What are your main concerns with the consultation process, to date?
Stephen Atkins One of my main concerns is whether there is going to be sufficient market capacity for professional indemnity (PI) insurance next year. Everything we are planning for could go to pot if we cannot get the PI cover we require. And the other thing, particularly with small businesses in mind, is the management systems and controls laid out in CP174. It will mean that there is a lot of daily or weekly work for a small firm to have to contend with.
Chris Cummings AMI has already asked the FSA to look at the issue of PI from three perspectives. First, the inflow between capital that firms are required to hold and PI, whose interplay I would like to see recognised by the FSA. You have the capital resource for one element, does that mean you have to have PI cover of a different level? The second is the market strategy for PI. This is an issue across Europe and it looks as if it is starting to return to the industry, but mortgage intermediaries are just one group standing in a very long line of people who need PI. Third, the issue of whether PI is even necessary. There are certain individuals in the mortgage market who have personal resources that they can call upon in case of fine or anything else.
Stephen Atkins There is also an issue over clubs and third party packagers (who will be unauthorised) as to whether it is appropriate for lenders to pay the procuration fees via an unauthorised firm. There is a risk that if the fee is split and the procuration fee is paid directly to the broker, and the packaging fee to the third party packager, then that packager will undoubtedly get hit by VAT at that point. The FSA says it has no basic objection to clubs being paid but it needs to look into the legal aspect of it.
Michael Bolton As a lender you would have to be on such strong footing to even contemplate dealing with an unauthorised third party entity. I expect that over the next few months more lenders will come out and say that, come-N4, we are not going to be involved with any firms in the market that are not regulated. Again I think that this is what the FSA intended. I am not going to carry the can for an unauthorised third party packager.
Richard Griffiths I agree with you. But I do not believe there will be any significant number of unauthorised packagers post N4.
Michael Bolton The FSA and the Treasury have ordained that there will be this underclass of mortgage business, which is a shame. It has left the door open for the less scrupulous areas of the market to carry on post-N4.
Richard Griffiths But they can only do that with the full knowledge and co-operation of the lender involved.
Michael Bolton I agree and it is a shame that some areas of the consumer market such as second charges and buy to let are still going to have no protection come N4. At the end of the day as a lender I am not going to be running two processes. One for unregulated and one for regulated because you have human nature in there and there will always be human error. I am sure the FSA will be looking for some example post-N4 to show its new position in the market.
Ben Marquand What other areas of the market will struggle under statutory mortgage regulation?
James Mayne I think non-advice is going to be a difficult area to continue to offer. I cannot see many smaller firms be able to put the required processes in place in order to offer non-advice. There is a lot of difference in the onerous responsibilities on whether you are offering advice or non-advice. At the moment people have opted for that route as the quick and easy service and one that does not require an examination.
Chris Cummings The thing that worries me is that the people monitoring those telephone representatives do not have to be qualified, neither do the people writing the scripts. And I think human nature being what it is people will overstep the mark I think the FSA needs to underline the importance of getting advice on mortgages. Particularly when you look at lifetime mortgage questions, it is a problem that is waiting to happen.
David Copland Is the consumer going to understand anyway? Even if they go into a branch of a big lender and just ask a few questions, then in a few years time they are still going to think they have been given advice.
Sue Anderson I cannot see how you will solve the problem unless you make advice compulsory across the market, which is not going to happen.
Richard Griffiths Why not? I think it should be compulsory. I am sceptical about non-advice. I can understand it over the internet with execution only mortgages, but in a face-to-face situation with an intermediary I am not convinced.
Sue Anderson Consumers themselves though are not convinced they want advice. Every time we do a consumer survey a good half of consumers say they would not want advice about which mortgage product to take. I think a lot of it is to do the fact that people have become used to making certain financial decisions themselves. It is not a given that everyone wants advice.
Chris Cummings Unfortunately those people who say they do not want advice would get most benefit from it.
Michael Bolton I cannot believe that anyone would suggest that a client with adverse credit would not need advice. The FSA has obviously decided that, in certain areas, expediency has taken over from what is right for the consumer, but we are coming to the end of the consultation and we have to make the best of what is in some respects a bad job. I suspect that some lenders will take a view on buy to let to do the job that the FSA has effectively reneged on.