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Cause and Effect

  • 14/04/2008
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The publication of the FSA's Mortgage Effectiveness Review passed with little fanfare, but what exactly does it say? Paul Robertson finds out

The FSA monitors the markets which it oversees through a rolling series of reviews. The latest of these, the second Mortgage Effectiveness Review, is, as far as mortgage advisers are concerned, an endorsement of their sector, even if the same cannot be said for lenders.

A follow-up to September 2006’s review, which looked at disclosure, advice and selling practices in the prime markets, this review examines the same practices in the sub-prime and lifetime mortgages sectors, where the FSA believes there is a greater risk of consumer detriment. It also gives an additional, timely look at the industry’s treatment of customers in arrears.

The FSA is careful to stipulate that: “We are not assessing compliance levels in the mortgage market in this review. We are investigating the effectiveness of the mortgage regime in achieving the five intended consumer outcomes.”

For each of these outcomes, bar one, the FSA found the market to be generally positive. The desired outcomes of the review are:

nConsumers shop around for mortgages

nConsumers understand whether they are being given advice or information by firms

nConsumers better understand the risks and features of the mortgages they take out, including the affordability risks

nConsumers take out suitable and good value mortgages

nConsumers are treated fairly over the life of the mortgage, including when they go into arrears.

It is this fifth outcome that may reflect badly on the lending industry, though not necessarily on mortgage advisers. The FSA had to abandon this part of the report, as: “the evidence from the qualitative research suggests that some lenders across both the prime and sub-prime markets may have been failing to abide by the MCOB requirements on arrears. So we have been unable to assess and test the effectiveness of our arrears rules.”

The FSA is now doing thematic work on the arrears-management practices of lenders, to establish whether there is a widespread problem. It will report back in June 2008.

Sue Anderson, head of member and external relations at the Council of Mortgage Lenders, says: “There are certain things within MCOB that are clear – practices that lenders must take on board – and then there are bits that are interpretive, which can be problematic for firms.

“I am sure that one of the reasons that the FSA is looking into this is the perceived variety of practices within the market. But whether that equates to those at the best end of the spectrum being compliant, and those at the other end not being compliant, should not be a foregone conclusion. The question is whether lenders are compliant or not, not whether they are better than others.”

Further research

Outcome four also proved difficult for the FSA to quantify from the available data. The regulator wanted to find out whether MCOB has led to a higher instance of consumers being sold suitable mortgages. It decided to use arrears rates in the sub-prime mortgage market as a measure of suitability, but this proved an inadequate source. The report concludes: “Our analysis could not identify an appreciable impact of MCOB on suitability levels.”

While further FSA research on this subject is expected, the regulator adds: “The qualitative research suggests that consumers still focus on cost: for sub-prime consumers, the main consideration is finding the cheapest deal or APR; for lifetime consumers, it is finding products with lower interest rates.”

However, mortgage advisers can be pleased with the first three outcomes. The FSA found that customers do indeed shop around and understand the risks and benefits of the mortgages they take out.

Andrew Strange, policy adviser at the Association of Mortgage Advisers (AMI), says: “This is an endorsement of brokers, acknowledging that in the sub-prime market, the public trust brokers to do the shopping for them and understand what they are told.”

However, one observation was that key facts illustration (KFI) were not viewed primarily as a means for product comparison, but used post-purchase as a check on what the broker or lender had said.

Commenting, Duncan Young, managing director of Retirement Plus, says: “Home reversion KFIs are particularly difficult, as there is so much mandatory wording that you have to wade through to get to the nub. KFIs are used as an aide memoire: you would have to sit through hours of interview and fact find in order to get three for comparison.”

Another point raised was that neither sub-prime consumers nor lifetime mortgage consumers recognised a difference between the types of service they could get: advised or non-advised. The report noted that clients do not care, believing that the final decision was theirs anyway, assuming they would not being misguided.

Strange says: “This raises some interesting questions about consumer responsibility. Even so, AMI does think there should be more clarity between sales and advice. The initial disclosure document (IDD) does not seem to provide enough clarification.”

Young adds: “This is a very subjective thing to measure. You can ask people soon after a consultation and they will remember being told in the IDD, but two weeks later they will have completely forgotten. Overall, I regard this report as a ‘tick’ for the equity release sector, but at the same time it is what was expected.”

So what next? Onwards and upwards as both the first and second stages of the review will feed into the wider review of MCOB, recently announced in the FSA’s Business Plan, moving towards high-level rules and the potential for simplification. n

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