The juggernaut of mortgage regulation continues to roll on, with the release of the Financial Services Authority’s (FSA) new consultation paper. So what changes will be made and what will its impact be on the adviser?
The previous consultation paper invited industry responses. Sadly, there were only 100. But these views do appear to have been taken into account, as well as some other changes which have been made as a result of the Treasury changing the definition of a regulated mortgage.
At the crux of the matter is the fact that although intermediaries will not be authorised by the FSA in respect of their mortgage-related activities, the statutory regulation in mortgage lending will have an impact on intermediaries as they will be affected by the financial promotion regime and may be affected by the disclosure rules. The new consultation paper has four central themes that develop this:
Use of the various tools available to the FSA to improve the information available to consumers and ensure that they can make informed decisions.
The treatment of consumers after point of sale, most particularly where they fall into arrears and face repossession. Although the intermediary is not affected, it is encouraging to see that some of the views expressed have been taken into account.
The application of the minimum requirements or threshold conditions for authorisation of mortgage lenders and administrators.
Ongoing data requirements on lenders and administrators.
Clearly, the intermediary is most affected by the first of these areas. The proposals to help ensure consumers make informed decisions include rules relating to the content of financial promotions, disclosure requirements before or after sale, comparative tables and consumer education initiatives.
While much of the detail on this is to be welcomed ‘ most notably the removal of a lot of small print currently required by the Consumer Credit Act Advertising Regulations ‘ in the spirit of producing clarity for the consumer, much of it does not overcome the fundamental problem that advice is not directly regulated. We therefore face a situation where consumers will have even more information at their disposal, possibly conflicting and often confusing, and running counter to the very impact that the regulator expects.
So where among these proposals are the issues that affect the intermediary? There remains the dichotomy that financial promotions must be approved by an FSA-authorised firm. This in essence will cause problems for non-FSA regulated intermediaries and may portend the launch of a group of specialists who will carry out the necessary approval for non-regulated businesses. This merely adds another cost tier into the regulatory process. Clearly in a tight margin environment this results in another squeeze on the intermediary.
The pre-sale disclosure documents are lengthy and standardised. The content runs to 14 sections for an intermediary and it is believed that the illustration will cover at least four sides of A4 paper. The FSA believes this will aid shopping, as consumers will get illustrations with the same format and content wherever they go. There are systems issues which the industry will be sure to address promptly, but nevertheless, it remains to be seen whether a consumer armed with multiples of 14 sections will, in reality, be better informed. The FSA has also tried to make a pitch for CAT-standard mortgages in this area, which, as most intermediaries will agree, are rarely best advice.
In post-sale disclosure, cooling off rights for re-mortgage business have also been introduced. Those who have been active in the cooling off regime in CCA-regulated loans will appreciate this is another onerous burden on the intermediary.
All in all, the more detailed disclosure requirements mean little change when it comes to the burden that is put on the intermediary.
The really interesting issue surrounds the comparative tables. The draft rules propose that the consumer will be told about comparative tables in a pre-sale illustration.
The content of these is currently outlined in a separate 52-page document issued by the FSA. The purpose of the comparative tables is to allow consumers to compare and draw conclusions with confidence and, as such, the tables, which will be internet-based, will include filtering and sorting tools. There will undoubtedly be much consternation in the industry concerning this move.
For the mass market mortgage, price is by far the leading deciding factor and as we saw with the traffic levels on our own internet broking site, consumers are hungry for price comparative information. Therefore, for those brokers who merely act on price, the comparative tables may well replace their role entirely. From the FSA’s perspective, there is a risk that it is putting itself effectively into an advisory role. Questions need to be asked concerning what happens if the consumer takes out a loan following advice provided by the FSA. If the information is incorrect ‘ who is liable?
It seems that the comparative tables will be the most controversial area of the new regime. Much discussion will ensue over time as to the appropriateness of the FSA providing this level of data. In the meantime, many in the industry may remain sceptical about the FSA’s ability to provide information on an accurate basis the entire time.