Given that mortgage lending in the UK easily tops £100bn a year, you could argue that with the financial prospects of such a high proportion of the UK population being inextricably linked to mortgages, it is only right there are precautions in place to protect the consumer.
Determining the effect of the forthcoming regulation is currently difficult, given that the requirements are yet to be determined. Nonetheless, it is reasonable to assume, as many have, that many of the proposals in CP98 will be part of the new legislation.
Clearly the proposal to make lenders responsible for the disclosure of intermediaries was probably best described as strange ‘ although this seems a lot clearer after the demise of CP98 than before. Certainly the Council of Mortgage Lenders (CML) was delighted when the Financial Services Authority (FSA) announced that CP98 was to be abolished. It is more than understandable that as the industry voice of the lenders, the CML should oppose the lender carrying a responsibility for the actions of intermediaries.
More to the point, few intermediaries will expect or want a lender to accept some responsibility for their activities. One of the main problems of CP98 was that it appeared to be suggesting the intermediary cannot be trusted to sell a mortgage without hiding some element of the product criteria, to foist some inappropriate product on a poor and unsuspecting client.
The whole process of the lender being responsible for the disclosure ‘ but not the advice ‘ of the intermediary, was creating an unwieldy mechanism that was going to bend the market inasmuch as market forces were going to be displaced by the requirements to comply with the CP98 requirements.
An obvious example was the plans by most lenders to restrict the intermediaries they trade with, to assist the process of monitoring disclosure. In an otherwise free market there might not be a need to restrict intermediaries. After all, many lenders are trying to expand distribution but here was a piece of impending regulation that was going against the grain of controlled expansion.
So, what can be expected from mortgage legislation, effective from 2004? The following seems likely:
• Intermediaries will need to be qualified to sell and advise on mortgages.
• There will be different levels of advice.
• It will be necessary for mortgage intermediaries to conduct a full fact-find on the client and issue an appropriate quotation or illustration that complies with a proscribed format.
• There will be a greater obligation on lenders to verify the advice of intermediaries and provide additional documentation to the client or prospective borrower.
• The mortgage intermediary will need to participate in a network providing full compliance support in order that their business is accepted by the mortgage lender they are recommending.
At face value some of the above would suggest little change with that required under the Mortgage Code of Practice. Mortgage intermediaries must have completed CeMAP by the end of the year, so qualification poses no increased burden in this respect. Three levels of advice already exist, so little change here also.
As far as the fact-find is concerned this need not mean a much greater workload if the regulator applies a light touch to the legislation. Intermediaries, after all, should already be complying with Mortgage Code requirements.
However, what is the likelihood of this? Experience suggests a light touch is a forlorn hope ‘ the most recent evidence is CP98 which could hardly be described as light. In fact, the words ‘sledgehammer’ and ‘nut’ spring to mind.
No comfort can be drawn from the announcement that Howard Davies is to carry on as the FSA’s head for another couple of years.
He was opposed to mortgage legislation until he changed his mind, or more likely, had the Treasury change it for him. This is where the apparent glee of the CML at the abolition of CP98 needs to be scrutinised. Surely the wisdom of the trade body of the lenders speaking out in favour of mortgage regulation has to be questioned. What message does it convey when lenders support mortgage regulation? The underlying message appears to be ‘we ‘ the mortgage lenders ‘ cannot be trusted to sell mortgages in a proper and diligent manner, so we welcome the fact the State is to deploy a regulation mechanism to protect the customer.’
As if that was not strange enough, the CML has not been alone in welcoming regulation. The usual suspects have voiced their delight, including the Consumers’ Association, but strikingly so have many in the mortgage industry ‘ even some representatives of organisations that are intermediary-facing. Think about the question: why do we need legislation? The most obvious answer is because lenders and intermediaries cannot be trusted to sell the most appropriate product for the customer without legislative intervention. If that is the reason for implementing legislation, one has to question how any professional in the industry can support this development, unless of course they agree that a sizeable proportion of customers are mis-sold too.
Without a light touch to regulation, the fact-find, illustration and terms of reference requirements have the potential to be an administrative nightmare. Mortgage professionals will benefit from the Mortgage Code of Practice. Changes will not seem as severe as when legislation was foisted onto the life industry. This is because an evolutionary process has changed the practice of selling mortgages over several years. For many, however, the changes will likely appear as onerous, not least expensive.
Rise in costs
There are already suggestions of a five-fold increase in compliance costs compared to those incurred under the MCCB regime.
Given that intermediaries are almost certain to be burdened with much higher costs and greater administration it is worth examining the consequences of mortgage regulation in terms of the benefits to customers.
The incidence of complaints, post-completion, about the mortgage product terms is minuscule as a proportion of all mortgages sold. In fact there has been no mortgage mis-selling scandal, albeit the timing of the dual-pricing furore has been unhelpful from an image point of view. But even this problem is caused by non-market force intervention ‘ a quango is effectively dictating a lender’s pricing policy.
If the Ombudsman is so sure about the decision concerning the borrower’s contract precluding dual pricing, then surely its decision was unnecessary. The borrower could have taken the matter to a Court of Law and won compensation. At the very least the dual-pricing policy could have produced a great opportunity for intermediaries to target the borrowers of Halifax, Abbey National, Cheltenham & Gloucester, HSBC and Nationwide with a switch to a better deal.
When one considers the competitive nature of the market it is even harder to understand the requirement for regulation. Many lenders would find it difficult, if not impossible, to achieve their sales objective offering unattractive product terms. With the current climate of low rates, a stable economy, the cheapest mortgage rates ever and cut throat competition, and the excessive cost of the FSA in its current state pre-mortgage regulation, there hardly appears to be a compelling reason for regulation. Less reason still for many in the industry to welcome it.
By the FSA’s own admission the requirements of CP98 were going to eliminate thousands of mortgage intermediaries ‘ so presumably the more onerous implications of full regulation will prompt even more advisers to throw in the towel. It does not seem to be in the consumer’s interest to reduce choice unless, of course, mortgage intermediaries are regarded negatively.
Sadly there will not just be fewer intermediaries. There will be fewer lenders as well and probably less choice of mortgages as the legislators will be unable to cope with the diversity of product design. The consequence will be slower approval or lenders being cautious and not offering products that may not fit easily with the legislative requirements.
Stuart Glendinning is director of Mortgage 2000
Some industry spectators expect the FSA to be heavy handed with forthcoming mortgage regulation.
There is speculation that compliance costs for mortgage intermediaries will increase five-fold once the FSA comes into control.
Regulation may stifle product innovation and could reduce competition in the market.