Both lenders and advisers have more than their fair share of red tape to combat to ensure the mortgage industry works in the best interest of consumers. In addition to the Mortgage Code, lenders will, from August next year, have to comply with new rules from the Financial Services Authority (FSA).
Although packagers have an increasingly integral part to play in the mortgage selling process, working closely with both lenders and advisers, there is currently no regulation in place that covers this section of the industry. With no way of policing packaging firms, problems that packagers experience or that lenders and advisers experience with them, currently fall into a grey area. So, is it time to push regulation on the sector, or is the industry happy to keep things as they are?
The reason why packagers do not have to answer to the Mortgage Code is because they are not supposed to have any contact with customers. Due to this, they are not seen ‘ in the eyes of the regulator ‘ to influence the sales process in any way. But without having to register with the Mortgage Code Compliance Board (MCCB), it is harder for the MCCB to find out whether packagers do overstep the mark.
Brad Baker, communications manager at the MCCB says: ‘Packaging firms that influence the sales process and provide information to customers should be regulated by the Mortgage Code. But it is not compulsory for packagers to register. Most packagers do not interact with customers and are not involved in the sales process, so there is no risk to customers. But we have no way of checking up on packaging companies to make sure they are not providing advice because they are not registered with us.’
Packagers also fall outside of regulations being imposed on mortgage lenders by the FSA. The rules are meant to regulate the sales process and because packagers are seen to provide an impartial service, they will not be caught in this new regulatory net. But with the FSA’s regulations comes the introduction of pre-application illustrations.
Making life easy
These are designed to improve the quality of information that borrowers receive when deciding on a product. It will be the responsibility of lenders to provide this information. But with packagers sourcing different products on behalf of advisers, it may be inevitable there is some handling of pre-application illustrations by packagers on behalf of lenders.
Jackie Bligh, spokesperson for the FSA, says: ‘The new regulations mean lenders will need to ensure consumers get pre-application illustrations and that brokers give them the right information. So with packagers working between lenders and brokers, this ruling may impact them.’
With this new responsibility, lenders will have to oversee the mortgage selling process from start to finish to ensure customers receive compliant information. David Tweedy, managing director of Platform Home Loans, feels that lenders will, in effect, be the sole regulator of packaging firms once the new rules are introduced and would much rather pass on such responsibility to an official body instead.
‘With the FSA’s new regulations, lenders are going to be the new regulators of packagers. We will have to work with packagers to make sure that point of sale information is compliant. The FSA has refused to regulate the point of sale, so items such as pre-application illustrations will have to be regulated by lenders to make sure both packagers and advisers are meeting regulatory requirements.
Packagers are an important part of the mortgage process and we would prefer them to be regulated by an official body. But it seems that we have no choice but to work together with packagers to make sure regulation is fulfilled,’ says Tweedy.
The benefits of an official regulator for packaging firms are apparent to lenders and advisers alike. Packagers do, after all, provide a vital link between these two parties.
Dean Lawson, IFA at Mortgage Adviser UK, says that if both lenders and advisers are heavily regulated, it seems illogical to exclude packaging firms. ‘Regulation should be expanded to include packagers. Lenders, brokers and packagers all work towards the same goal, so should therefore be covered by the same legislation. With an unregulated party in the chain, it is out of both the lenders’ and the brokers’ hands if something goes wrong,’ he says.
But Mark Charlesworth, managing director of The Mortgage Operation, says responsibility should fall on lenders and introducing new rules for packagers would cause needless extra work. ‘If a case is packaged inappropriately, the lender should pick up on it and will not use the firm again. Packaging is effectively a service and I can see no real added value in creating a further layer of regulation in the industry,’ he says.
Lockhart Bruce, finance and marketing director at the Mortgage Packaging Centre, agrees that responsibility for the actions of packagers should land on lenders. ‘At the end of the day we are advising brokers about products, not customers. The onus should be on lenders to choose the right packagers to do the best job,’ he says.
Others in the industry do however feel that a regulatory body overlooking packaging firms would help to boost the image of this sector. Because packagers have no one but lenders to answer to, they have at times become the victims of criticism due to a percieved lack of authenticity. Being able to display the mark of a regulatory body on marketing material could help to divide the dedicated packagers from less professional firms and emphasise the importance of packaging firms in the mortgage selling chain.
Steve Hoare, managing director of Home Loan Partnerships, says major packagers which are dedicated to providing legitimate services would definitely welcome some sort of statutory regulation.
‘The fact that regulators fail to acknowledge packagers makes certain matters far more complicated than if regulation was in place. There is a recognition problem with packagers. Many in the industry do not think they form a necessary part of the mortgage process, that lenders and advisers can manage by themselves. But they do have an extremely important role and provide a valuable service to the whole industry,’ he says.
Regulation of packaging firms could also help to quash the current trend of smaller brokers setting themselves up as packagers in order to sidestep regulation. According to Hoare, many of these packagers have been known to give unregulated advice to consumers. But because they do not have to register with regulators they are often overlooked, ruining the reputation of genuine packaging firms. ‘Many smaller brokers think they can call themselves packagers in order to bypass the Mortgage Code. This is a loophole that needs closing,’ he says.
Although Bruce is against full regulation, he still believes there should be some industry-wide standards incorporated to prevent less efficient firms tarnishing the image of other packagers. ‘There are a lot of one-man bands that cannot provide a wide choice of products to brokers. I believe firms should be judged solely on the quality of their work and level of reinvestment, instead of through regulation. But I do think some minimum standards should be introduced to help raise standards,’ he says.
The fee debate
Another problem area for packagers that regulation could resolve is the issue of fees. If packagers try to rush through as many cases as possible, they may not give them the due attention they need. If they are not careful this could mean they spend their client’s fee and the lender may then not accept the application if it has not been dealt with properly. As the Consumer Credit Act states that advisers are only entitled to a £5 fee if a mortgage deal falls through, both the adviser and the customer lose out.
Lawson believes there should be regulation in place to prevent this happening. ‘One of the main areas I feel does need policing is the charging of fees. If a sale is not completed, brokers are only entitled to £5. It seems this is becoming more of an issue with packagers. But at the moment they can get away with it, leaving us out of pocket,’ he says.
The need to solve problem areas such as this and improve the reputation of packagers in the industry has resulted in the formation of a new packaging association. The Professional Mortgage Packagers Associates (PMPA), launched in February this year, was formed to boost the reputation of legitimate packaging firms, following complaints from lenders about service levels. Members are expected to transact up to 100 and 200 mortgages a month, so only larger firms are able to join.
Promoting the best
Victor Jannels, founding director of PMPA, says this criteria has been set to help promote more competent firms and improve the image of members by alienating the few firms that have tainted the rest of the sector.
‘In the last 10 years, the word ‘packager’ has proliferated so that a lot of small companies have called themselves by the same title as larger companies. We aim to improve the image of packagers and promote the larger, more efficient firms to lenders,’ he says.
Apart from improving the sector’s image, PMPA is also aiming to work with regulatory bodies in order to introduce a system of policing packaging firms. ‘The industry seems unsure about the part packagers have to play and their position when it come to regulatory issues. We want PMPA to be the official body for packagers. We are looking to assist the FSA and the MCCB and are hopeful of working with them to provide a system of policing packagers and introducing some sort of regulation,’ he says.
The launch of PMPA reflects the growing demand for a regulatory regime aimed at packagers. Although packaging firms do not have direct contact with consumers, they undoubtedly have a growing part to play in the mortgage selling process. Regulation may mean more paperwork, but when compared to the negative issues already appearing in the sector due to the lack of effective policing, it seems the majority of the industry would welcome new initiatives to help raise standards and confidence in the sector. Only time will tell whether these demands will come to fruition.
Packagers fall outside the regulatory regime because they do not have contact with customers.
Regulation for packagers could help improve the image of the sector and control problem areas such as fees.
PMPA aims to work with regulators to introduce a system of policing packaging firms.