As the severity and depth of the latest Mortgage Market Review consultation paper from the FSA sink in, the challenge for intermediaries is what to do next. Some may be thinking: is there a practical move, or has the bell tolled for my business?
The first point to make is that this is a consultation paper, and despite the FSA’s commitment to the proposals, it is legally bound to consider feedback. So the first positive thing to do is to provide your reaction. Comments can be submitted to the FSA at: www.fsa.gov.uk/Pages/Library/Policy/ CP/2010/cp10_16_response.shtml or through
the AMI website for its members.
You can find the consultation paper on the FSA website by following the trail FSA Library>Publications by date (13 July 2010). The responses to questions 16 to 22 and 33 & 34 are needed by 30 September 2010, with the rest by 16 November 2010. The FSA intends to issue a policy statement in Q1 2011 with the ‘almost final’ rules.
The content of this consultation paper is comprehensive; it turns plenty of lending assumptions upside down and is likely to have an impact on the consumer lifestyle that many people have adopted in recent years. Some borrowers will be trapped in their homes, unable to remortgage, and we might return to a market dominated by a small group of lenders, similar to that of the 1960s and 70s. Mortgage intermediaries have
brought freedom of choice, which the UK embraced, as consumers grew a sense of entitlement and independence. How can we go back now?
I would like to think that not all the FSA proposals will become working practice because of industry feedback. However, planning and preparation against a backdrop of uncertainty usually pays off. So, firms must consider a plan of action, if they have not already done so.
The previous MMR policy statement (10/9 issued in June) outlined both new arrears rules and the requirement for firms to obtain approved person status for a mortgage compliance oversight person (CF10) and for all advisers to become approved persons (CF31) by 2011. Advisers must study the requirements carefully, and consider attending training courses designed to review the requirements and processes.
Affordability is another key issue in the latest MMR, which describes how through prescriptive regulation, new borrowers will hopefully be protected both from themselves and over-indebtedness – or protection from ‘greed, need and life’, as one commentator put it.
So, get yourself a very detailed budget planner or an income calculator to record and calculate affordability. This makes even more sense as the need for top-class record keeping will be crucial. For firms dealing with lenders who are prepared to accept ‘independent evidence’ of income, the need for robust record keeping is critical.
The FSA proposes to assess affordability not only on a twenty five-year term, but also to stress test against interest rate rises, with the calculations yet to be clarified. However, look at all these issues now, feedback your thoughts and get ready to handle the changes if and when they become rules.
Now for the homework. In the latest CP10/16 paper, the section on creditimpaired borrowers is really interesting. Advisers should carefully read Appendix 1 in the proposed new MCOB rules. In particular, look at 11.3.6R, 11.3.7.G, 11.3.8R and 11.3.14R. Adverse credit borrowers have already been harshly described as regulatory prisoners with possible life sentences. Again, it is better to understand what may happen and help clients avoid possible problems now.
Further proposals on interest-only borrowers will follow later, but we already know that the FSA is keen to assess applicants on a capital and repayment basis. The self-employed are another target and applicants will probably have to offer more detailed, historical evidence of their income. These proposals are likely to add considerable cost to the process for applicants, because this verification may need to come from an independent source.
The FSA also admits in its research commentary that intermediary relationships with lenders could be adversely affected by its own proposals, with a 29% reduction in the number of intermediaries that lenders will be prepared to accept business from. The regulator counters this by stating that it believes the research may exaggerate the effect on intermediaries, so there will still be enough lenders to go around.
The challenge now for intermediaries is to grow the number and range of lenders they deal with regularly. The value of distribution firms dedicated to the intermediary market, such as Linx FS, could grow dramatically in this potential vacuum.
The extension of regulation to cover second-charge lending, unregulated mortgage portfolio buyers and the buy-tolet market are still under the microscope. The Treasury is conducting a technical review, to be published later this year. But the current climate suggests that all three will become regulated at some point – with some idea of the timescale by Q4 2010.
The challenge for intermediaries is to put negative responses aside and prepare for the future now. Do not wait until the proposals become law.
Bill Warren is managing director of Bill Warren Compliance LLP
