Home a loan in a halfway house

The Treasury is not renowned for its finger on the pulse assessment of the personal finance markets but the revelation last week that it does not know what a mortgage is has to be one of the corkers of this administration.

Joking aside, it is a bit worrying that a Government decides it will regulate a product when it has no idea what that product is – never mind how it interacts with other financial products.

But come the end of next year, mortgages should be regulated and consumers should feel more protected than they do at the moment – although some say that the Government has not gone far enough.

The mortgage market is currently split into three areas of accountability.

There is a voluntary mortgage code which has covered lenders and intermediaries for the last two years, the Consumer Credit Act, which is policed by the Department of Trade and Industry for loans of £25,000 and under, and the guidelines for non-status lending which were issued by the Office of Fair Trading.

Council of Mortgage Lenders spokesman Michelle Vosper says: “We wanted everything pulled together under one roof for simplicity.”

Instead, the Treasury announced in February that it would regulate mortgages through lenders which would be responsible for information given to consumers by its own staff or third-party brokers. The idea being that regulation of information would make it clearer for the consumer.

London & Country senior manager Patrick Bunton explains: “They said they were not going to regulate with statutory regulation. Instead, they are going to require lenders to get authorisation from the Financial Services Authority and to be responsible for it.”

This falls short of the current remit of the CML code and of mortgage industry expectations, according to John Charcol senior technical manager Ray Boulger. “It has missed an opportunity to bring it all under one roof and the fact the Government is not regulating advice is a major blow. Without question, it would be better for consumers,”

he says.

Bunton comments: “These prop-osals do not go far enough. The only thing that will work is statutory regulation where the FSA polices it rather than the lenders and there should be minimum qualifications.”

But there is a reason for this halfway house, according to Boulger, who says: “It is down to bums on seats. FSA chairman Howard Davies says it would take 250 bodies to introduce full regulation and 50 to do it this way. If they start off with 50, it makes the job less onerous and they can build it up over time.”

Bunton says: “It is a big market and I can understand the practicalities of trying to regulate the whole thing in one go but it is the first step down the road to full regulation.”

But it is difficult to see what this halfway-house regulation can achieve that the mortgage code has not already.

Vosper says: “We have got a set of standards that was not there previously and a single complaints&#39 system for the first time and it is difficult to say what regulation will achieve because we do not know exactly what it is going to look like.”

Nationwide Building Society spokesman Peter Brown agrees that the mortgage code raised standards and improved transparency for consumers but says: “The Government obviously thinks that some companies need bringing up to standard.”

Boulger believes regulation may have a more immediate effect. “In the short term, making lenders responsible may get rid of a minority of rotten eggs in the market,” he explains.

Private Label managing director Simon Knight is more sceptical. “Regulation in its own right does not do anything. Pensions have been regulated since 1986 and there was still a misselling scandal.

“The code has taken things a long way over the last two years and you have to wonder whether all that regulation will achieve is a cost which only the big boys can afford to absorb.

“This could reduce competition because the smaller companies will not be able to compete.”

The good news is that everyone involved will have an opportunity to contribute to the final shape of the regulations.

The first part of the process is a consultation document which is expected from the Treasury in the next few weeks.

A Treasury spokesman says: “We have always said there will be further consultation and precisely what the working definition of a mortgage is will be part of this consultation.”

Boulger thinks this may not be as bizarre as it seems. He says: “Before the FSA can put anything in place, they need to define a mortgage so they need to decide things such as will a second mortgage for home improvements come under these regulations?”

Knight says: “They need to decide things such as will an equity-release mortgage come under the regulations and what about buy-to-let mortgages?”

The FSA says it has done the groundwork and is just waiting for the Treasury to give it the go-ahead. “We cannot consult until we know what the definition of a mortgage is. It is for the Treasury to produce a document and then for us to consult after,” says an FSA spokesman.

Whether it can do this and still meet the deadline of the third quarter of 2001 for the regulations to be in place is questionable.

“It is difficult to say whether that date will be affected by the consultation process,” says a Treasury spokesman.

Once the rules are in place, the mortgage industry will have to look to the future, accord-ing to Boulger. “If Labour wins the next general election, I think it will move towards full regulation but if the Tories win or it is a hung Parliament, it is less likely to happen,” he says.