For most people, the two largest purchases in their life are mortgages and cars. In many ways the two purchases are similar in that they are both usually infrequent and they both require a clear overview of all the options available before a properly informed buying decision can be made.
But imagine turning to the new car listings in a magazine only to find a ‘representative sample’ of car makers were present. Not much use as a piece of buyer information. Of course, where cars are concerned, most customers would know that other options are available and continue their search until they had full information. But this is not so with mortgages. Because they may not realise the true extent of the market, borrowers tend to choose from the ‘shopping basket’ they are offered. It is like choosing a car from either Renault, Fiat or Vauxhall, not knowing whether the equivalent offerings from Ford, VW, Peugeot or Toyota may suit your needs better.
For self-employed borrowers looking to minimise the income they take from their business for tax reasons post-October 2004, there are several issues that will affect their choice of product. If they are looking for a mortgage and want the total advance to reflect what they can actually afford, based upon their true earnings rather than that permitted by conventional multiples of on-paper salary, they may want a self-certification mortgage.
However, as we know with the new regulations brokers will either be directly authorised by the Financial Services Authority (FSA) or will join a host company as an appointed representative (AR). If the choice is to become an AR, then the shopping basket of self-cert options will be limited to that provided by the principal. This means many good quality self-cert options will be invisible to clients.
If brokers have direct FSA authorisation, then they can rightly claim to have independent status, which means the client should receive whole-of-market advice. There are some concerns with this term because any reasonable lay person would assume they were being given the pick of the whole market. Clearly this is not the case because the regulations only require that the client is given a choice that is ‘representative of the whole market,’ which different firms may choose to interpret in their own ways.
As a result, some lenders and their products will inevitably be excluded from the mix offered by independent brokers.
This is a worry about mortgages in general, but for self-cert products in particular. The regulatory forces that are moulding the industry will have the effect of producing fewer but larger intermediary players. This could actually reduce customer choice, flying in the face of the Treasury’s avowed intent to help improve consumer information.
So exactly what kind of benefits could clients be missing out on? “Not all lenders claiming to offer self-cert are providing the genuine article,” says Eddie Arkless, director at Peak Financial Planning. “Self-cert should do what it says on the tin, yet you will still get some lenders asking for a letter from the client’s accountant or some other proof of income. That cannot serve the client’s best interests.”
David Booth, director at Clear Mortgage Administration, gives another view: “Virtually all the clients we have under self-cert have non-standard income patterns. One guy who sells industrial plant can go for two months or more with no income, then they make a sale and earns £50K+ in commission. If the regulations are talking about ‘suitability,’ then these people are crying out for a flexible option on their self-cert mortgage. In the new-look intermediary market, there will be clients who simply are not offered a flexible version of self-cert. Or if they are offered flexibility, it might be the half-hearted variety. I am talking about proper flexibility with overpayments, underpayments, lump sum payment, payment holidays and equity drawdowns. Add those to self-cert and I think you have the ultimate broker product – if someone on the panel offers it, that is.”
In other words, the very framework that is designed to protect consumers from limited information could well blind them to the best products by creating a lottery – you are introduced to the best in self-cert mortgages only if you happen to walk in through the right brokers’ doors.
Then there are the new mortgage sourcing systems. The benefits of these are indisputable. They save time, trouble and money at every stage in the mortgage provision chain. And of course their built-in compliance facilities are a lifeline without which many small broker firms and individuals would be lost from the industry forever.
For the straightforward ‘standard’ mortgage clients these systems will hum away invisibly, fast tracking applications and serving the end user as admirably as they service the provider. But most brokers are not generally in the ‘standard applicant’ business. Good brokers are at their best when they are problem solvers, finding mortgage solutions for those the high street cannot or will not help.
It is here that sourcing systems, for all their benefits, should be treated with some caution. Most systems are operated by networks, mortgage clubs and packagers and can be customised to restrict the system’s access to the specified lending panel only. If that panel happens to include a suitable number of innovative, customer-focused lenders who offer brilliant market-leading products, then all well and good. But if the panel is lacklustre, then we return to the argument about what is ‘representative’ of the market as a whole. The distributors must therefore ensure the correct mix of lenders are brought with them in their post-regulation proposition.
Another issue is that even advanced technology is a blunt instrument compared to the human brain. Systems complement flexible thinking, but they are no substitute for it, especially in applications that are less than straightforward, as Neil Hall,director at Mortgage Choice, explains: “A central theme of the new regulations is ‘suitability’ in that it is our task as brokers to understand the client’s individual needs and then find them the most suitable solution – in fact that is something every broker worth their salt has always done, so nothing new there.
“Where emphasis has changed is in the application of a ‘default’ option, which automatically assumes the cheapest option offered by the system is the most suitable one unless we can justify different advice. In our experience, we often find the best mortgage option is not the cheapest one.”
Andy Downes, managing director of HFS Mortgages, echoes this sentiment: “Sometimes you get a client who is in a competitive situation and needs their mortgage to be completed quickly. In that situation it is no good offering the lowest cost mortgage on your system if you know decisions from that lender might be slow. You are better shifting down the list to a lender who will give your client fast service – even if their product ends up costing a few pounds more a month.”
Another example of the need for flexible interpretation of system search results is if an applicant is borderline. If a broker is familiar with one lender’s underwriting requirements and is sure they will be sympathetic, it could be better to approach them than go to a lender who has a lower cost product, but a less accommodating attitude.
Clearly, if a broker recommends a deviation from a system’s ‘default’ lowest cost mortgage, the reasons for the recommendation must be put in writing as part of the quotation.
Most lenders welcome the main thrust of the regulations, but there are still some questions over the details. It seems the FSA has got itself into a pickle over self-cert for the employed and self-employed. Given that the Inland Revenue proactively moved to self-assessment (or self-certification of income) some years ago without any significant differentiation between employed and self-employed it seems at odds for the FSA to try to draw a distinction. This does seem to ignore the enormous changes in work and income patterns in recent years – the massive growth in buy-to-let mortgages is a case in point – how many employed people have invested their savings in bricks and mortar and derive income from a portfolio of properties?
In conclusion, while regulation will undoubtedly protect the borrower from inappropriate selling, the industry must keep a close eye on whether each customer is indeed getting the very best mortgage product and advice for their needs – enjoying the same transparency they get when they buy a car.
Brokers who choose AR status may be restricted by their principal’s lender panel.
Sourcing systems can sometimes struggle with all the complexities of self-cert mortgages to the detriment of the client.
The FSA appears to be ignoring changes in people’s work and income patterns by restricting the application of self-cert to the self-employed.