The FSA’s recent announcement that it is to focus on high-risk areas, notably sub-prime, in the second part of its Mortgage Effectiveness Review, appears to have led some in the industry to become rather hot under the collar.
A few have already gone public with their concerns, even before this stage of the review has commenced. There are worries that the focus may lead to an increase in sub-prime compensation claims, and even suggestions that this might render lenders reluctant to provide competitive products in the sector (Mortgage Solutions, 23/04/07, p5).
This is not the first time that the regulator has flexed its muscles in sub-prime. In November, last year it highlighted poor financial advertising by brokers in the sector, which it said was a sign of wider problems. Following a review of several hundred advertisements and promotional materials, more than 200 mortgage brokers were told to withdraw or amend misleading advertising.
Commenting on its latest venture, Samantha Bennett, spokeswoman for the FSA, says: “Stage one of our review focused on whether the overall regime is working.”
She adds: “Stage two will look more at areas where the risk of consumer detriment is higher, particularly the sub-prime and specialists markets. We will be analysing findings towards the end of this year, with a final report to come out in Q1 2008.”
The FSA says the findings from the review will help to inform its thinking on how it may apply a more principals-based approach to its mortgage rules, as per its overall move towards regulatory principles. This stage of the review will also focus on lifetime mortgages.
These concerns aside, others are generally supportive of the FSA’s work. “Any efforts to help ensure that customers are treated fairly are worthwhile,” says Roger Hillier, lifetime product development manager at Mortgage Express. “If there is malpractice, then the industry has only itself to blame.”
In terms of the lifetime mortgages element of the FSA’s research, Hillier points to other recent initiatives carried out by the regulator, including its mystery shopping exercises. “With current guidelines in place, it would now prove very difficult to mislead customers on lifetime mortgages, and I would expect the FSA review to endorse this,” he says.
Fears have been raised that the FSA’s published review could uncover a number of flawed areas – coupled with possible instances of malpractice – that could cause lasting damage to the reputation of the sub-prime sector. As Robbie Constance, an employed barrister at Reynolds Porter Chamberlain LLP, pointed out recently: “Where the FSA goes, complaints and expensive reviews follow, as seen with pensions, endowments and, more recently, payment protection insurance.”
However, Alan Cleary, managing director of Edeus, is quick to argue that it would be much worse for the regulator to turn a blind eye and ignore obvious problems in the sector. “We have been calling on the FSA to look into the sub-prime sector for some time, as there are still bad practices within it,” he explains. “This review will not have a negative impact. It is right to look at lenders, some of whom are charging massive fees and rates that are disproportionate to risk.”
For Andrew Montlake, director at broker Cobalt Capital, brokers too will need to look over their shoulders. “It is perceived that there are brokers that dabble and do not meet high standards in the sector,” he says. “The only people that should be dealing in sub-prime are sub-prime experts.”
Commenting in Mortgage Solutions (16/04/07, p8), Stephen Brown, senior technical manager at Moneyquest, pointed to ‘very generous’ procuration fees for sub-prime products, which he said could represent a ‘tempting carrot’ for rogue brokers to recommend the wrong product.
“Some procuration fees are too high, and will attract certain brokers for the wrong reasons,” offers Montlake. “I think this is where online cascade systems can come into play. These automatically find the best rate for a client, and are the best way forward.”
A policing role
Any customer complaints that do arise in light of the FSA’s review will likely be dealt with by the Financial Ombudsman Service (FOS). Emma Parker, spokeswoman for the FOS, says the body is well prepared for dealing with mortgage-related complaints, though points out that it rarely receives complaints about the interest rate of a product. “Complaints are more to do with the quality of advice given, particularly in the area of consolidation of debts,” she explains.
Parker also points to the decision earlier this month to extend the FOS’ remit to give clients of 80,000 more businesses access to its complaints-handling service under consumer credit legislation. The 2006 Consumer Credit Act has extended the FOS to cover all licensed lenders. Parker says this will give the body more remit over products, such as second charge loans or mortgages, which are often part and parcel of sub-prime cases.
In its Repossession Risk Review, published in January, the Council of Mortgage Lenders said the proportion of mortgage borrowers with heavy unsecured debts who have also experienced mortgage problems remained stable at around 2% during 2006.
Barring a catastrophic collapse of sub-prime mortgages – as has happened recently in the US – the appeal for creating new business in the sector is likely to remain high among lenders and brokers alike. It will not just remain the domain of specialists.
Whatever the outcome of the FSA’s report on its Mortgage Effectiveness Review next year, intermediaries and lenders are almost unanimous in the view that it is a positive move for the regulator to include the sub-prime sector in its research. However, these commentators also remain largely convinced that the sector remains credible and should emerge with a relatively clean bill of health. n