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Alan Lakey: What happened to free choice?

When the FSA embarked on its mortgage market review voyage, I attended a London roadshow which, it was suggested, would provide a conduit between the regulatory theory and practitioner reality.

The event started with a slideshow presentation where the FSA speaker tried to justify the ending of mortgage self-certification. He projected a graph that purported to highlight the relative arrears of self-cert and standard loans.

Only when challenged on the astounding differences was it discovered the graph was actually comparing main-stream loans with non-conforming, a substantial distinction that he either chose to ignore or was ignorant of.

From that moment, I knew the dead hand of regulation would prove both meddle-some and intrusive and that this signalled a watershed in the UK mortgage world.
Fast-forward three years and behold a mortgage industry where the application of logic is dismissed as a black science and the insistence on rigidity and unthinking obedience to Draconian rules has swiftly become the norm.

The MMR has forced lenders to introduce processes that satisfy the neuroses of the regulator at the expense of sound lending practice – another unintended consequence, perhaps. Better to postpone the licensing of mortgage advisers and focus attention on lenders, with predictably dismal outcomes.

Why does the regulator understand risk better than a lender? Why is it necessary to dictate commercial decision-making where the consequence is a battening down of the lending hatches and a collective reluctance to use experience and common sense? Many regulatory incumbents were failures in their previous commercial lives, yet their theorising has a dramatically negative impact on consumers and advisers.

Back in the early 1980s, when I first involved myself in arranging mortgages mortgage, the lending decisions were the province of branch managers who worked within a defined mandate and were encouraged to apply experience and discretion. Such notions are now considered antiquated in a world where automated process prevails over reason.

Consider the lack of joined-up thinking at Santander, where a sole trader netting £50,000 will be allowed to borrow up to £250,000, yet, if he forms a tax-efficient limited company with an identical profit, his loan will be dependent on the salary taken.

The recent blows dealt to interest-only loans also serve as a good example. Halifax now insists that only a pension pot valued at £1m can provide the necessary security, regardless of the mortgage size. That pretty much disqualifies all my clients and I reckon over 95 per cent of borrowers. Well done.

Look also at the reduction of the maximum age allowed for borrowers. Lenders are frequently restricting loans to 65 yet we are living longer, retiring later and, in many instances, have little choice due to the advancement of the state pension age.

Perhaps it is as Martin Wheatley suggested, that consumers are too irrational, too bereft of reason to be allowed to make their own decisions regarding repay-ment of their own mortgage. Perhaps they should not be allowed to own houses. Maybe they should only be allowed out under the supervision of a trusted individual, someone with a history of making sensible and balanced decisions. A regulator, maybe.

What we are seeing with the MMR, the RDR and with society as a whole is the wholesale removal of choice. This inc-ludes limiting options and suppression of free will in what they would have us believe is all in our best interests.

Alan Lakey is partner at Highclere Financial Services


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. Alan

    “What we are seeing with the MMR, the RDR and with society as a whole is the wholesale removal of choice.” How true!

    I don’t always agree with your point of view Alan but this time you are spot on! We have come across the rank stupidity forced upon lenders by the regulators. I could add a few more: notably first time buyers with substantial deposits, paying rent for years and knocked out on affordability when the mortgage repayments are considerably less than the mortgage!

    To protect the few vulnerable people who may fall prey to the unscrupulous, everyone is made to pay the price of rigid adherence to rules, lack of choice and lack of accountability.

    I think we are all swimming against the tide of social trends-trends which reduce peoples freedoms to make informed choices.

  2. Well done Alan, you put it so eloquently. Many of us will be nodding at our machines as we read this, but feel these comments will fall on deaf ears. The FSA have long since taken over here at Animal Farm and of course it is in everyone’s interests to fall in line.

    Even though they walk around upright on their hindquarters and believe that they are beyond questioning we still see them for what they are.

    The few that can challenge the regulator have other matters to attend to. Writing to MPs has been attempted with little positive result. Advisers will continue to be culled. Meanwhile, the customer is protected no better, but unknowingly pays a much greater price for products. Perhaps a transparent quote should show customers and clients not just the cost of advice, but also the cost of regulation.

  3. Dermot Brannigan 2nd March 2012 at 2:55 pm

    Excellent article, Alan.

    I know I haven’t necessarily agreed with many of your points in the past, and have been willing to tell you so. But in this case, I wholeheartedly agree with your views on this.

    Personally, I think the MMR reflects more on how the FSA views the public’s ability to make the correct decisions for themselves.

    Not sure the public quite realises this yet, and I doubt it will be the FSA who tells them.

    Being a cynic, I’ve generally believed that regulators & politicians don’t pass laws that have as much of an adverse effect on them as it does us. However, in this case it will. The MMR, if fully adopted in its present state, will result in people be able to borrow less money.

    Should make it difficult to recruit people in Canary Wharf

  4. I think someone has taken too much of the rhetoric pills! either that or we really are living in North Korea.

    Sense of perspective is required although that doesn’t fill column inches.

  5. “Halifax now insists that only a pension pot valued at £1m can provide the necessary security, regardless of the mortgage size. That pretty much disqualifies all my clients and I reckon over 95 per cent of borrowers. Well done.”

    Sorry Alan, but are you suggesting that clients should take out an interest-only mortgage into retirement or take out a pension mortgage? In either case I doubt this is very sound advice… potentially archaic.

    Interest only loans certainly serve a purpose but, and unless I have misunderstood your article, I don’t think they have a place in the areas that you are suggesting.

  6. @Lillian.

    Consider, there will be many thousands of existing borrowers who have, for better or worse, decided to use their tax-free cash as a means of repaying their mortgage.

    If all lenders adopt this rigid approach these borrowers will be trapped with their current lender unless they agree to rearrange their repayment process to suit the lender.

    It is not a question of advocating this form of repayment – in fact the last one I arranged was around 20 years ago, when it was in vogue.

    Freedom of choice is good. May I again recall the words of Professor Jim Gower who stated that regulation should stop being being made fools of but should not stop them making fools of themselves.

  7. Malcolm Norris 2nd March 2012 at 4:13 pm

    Alan are you sure about Santander? Last time I looked (v recently) they took into account salary and grossed up dividend so someone with 7k salary and 40k net divi (44,444 gross) could borrow 5x 51,444. Just my tuppenceworth, and I agree with everything else you said re over-policed non-lending!!

  8. Justin Credible 2nd March 2012 at 4:38 pm

    How true Alan and well put. Blanket rules imposed by those who think they know best but have very limited or non existent first hand knowledge.

    Just today, client in 6th year of annual contract earning c. £130k, wants to borrow £150k on purchase of £450k. His Acct recommended that for tax reasons he set up a Ltd Co on 1st Jan this year. Now as he does not have three years as a Ltd Co most lenders don’t want to know. Same job, same daily rate plus a few other sources of income on top, same office, same phone number but ‘computer / MMR terror says no’. Madness and a negative effect on the housing market.
    So what has regulation and fear of the MMR done to help the consumer in this situation? Or the vendor, or his buyer, or his solicitor, or the estate agents, or me, or the other advisers in the chain, or the removals companies, the builder who has quoted for some improvements etc…. etc…..

  9. Ah, freedom of choice to have to move into rental accommodation when they retire, as they will not have any way of paying off the mortgage as its IO?

    Sounds like great advice. Freedom to use PCLS to pay off a loan, when it should be used to fund retirement? Brill. Anyway, the average pension pot in the UK is under £30k, I’d love to see the size of property that a ‘pension mortgage’ could redeem.

    No, regulation under MCOB is all about affordability. Actually when M day occurred, the chief Underwriting of a Society I knew was cursing FSA for not stamping on IO then, as in his books this would lead to trouble!. It all comes down to the old axiom: ‘If you can’t afford it…’ A bit old fashioned I guess, but there you go.

  10. I agree with most of your comments Alan, except for the Santander comment, however. on the note of self employment, now we no longer have self cert mortgages and self employed need to show a “true reflection” of their income stability to be able to borrow , job stability takes 2-3 years with the self employed in the lenders eyes [ but an employed person could have started a job last week and take a mortgage on (no stability) ]a self employed person will need to plan 2-3 years ahead before he moves in order to make sure their accountant presents their income [and tax liability] is presented in the best possible way to get a mortgage in the future!
    With regards to MMR, they talk about the distinction between advice and non advice, soon there will be no advice! If the regulator keeps making and imposing rules our advice, to which we have studied and work hard to strive an provide honestly will be worthless as the advise, will not meet with regulation. By that I give an example, if an offset mortgage on an interest only basis, repayment to be met by dividend payments from my clients self employment meet their demands and needs, how can I possibly advise them to take a repayment mortgage, payable monthly which may leave them tight on a monthly basis be best advice (sorry dictated legislation) be the right recommendation for my client.
    Whatever happened to adults being able to have a mind of their own?

  11. @Anonymous 4.13

    Whilst what you say is correct the point I was making is that with a sole trader they look at the net profit and discount the level of drawings.

    With a Ltd Co. they look at the withdrawn salary and dividends and ignore any ‘retained profit’.

    This factors against those one man Ltd Co’s where funds are retained in the company and means they are not treated the same as the sole trader/partner

  12. Battered by the crisis 4th March 2012 at 9:05 am

    Well mr Lakey free choice and American style capitalism has got us in a right royal mess haven’t they ? You spoke about experience, well that experience is redundant for a post crisis world. The regulator does not have it right but what we do have is the end of caveat emptor, because if the previous approach didn’t work atleast ending free choice may be an idea worth exploring. And yes mr. Lakey you clearly cannot give sound advice when you lament the fact that people should not be allowed to own houses… Of course they shouldn’t have been allowed when they couldn’t afford it . Yes we are now going the French and German route , where in France credit cards are a rarity and in Germany not everyone owns a house…. Does the rdr and mmr make your life harder… Cheers to that!

  13. The general public cannot be trusted to make decisions for themselves. Invariably, some will make the wrong decisions, some may even make the right decisions that result in a detrimental outcome. As soon as this happens, there must be an inquest and regulations put in place to stop it ever happening again. This, sadly, seems to be the approach to legislation these days.

  14. I thought I should stand up for interest only mortgages as there have been a few negative comments indicating that they are the seventh circle of hell. Used sensibly they can be hugely beneficial.

    I’m not a mortgage adviser BTW.

    I had started a self employed job in a new location and needed to move house. I had a good amount of equity in my previous house but really wanted to buy a family home where we could remain until retirement.

    I borrowed the extra money interest only on the basis that, if I couldn’t pay it back, once my kids had left home we would simply downsize to a smaller property.

    I went to C&G because on previous knowledge their branch manager had the discretion on loans where the deposit was 20%+.

    The self employment was a success and I have been able to repay the mortgage in lump sums as I went along.

    It looks as though this kind of planning is now redundant thanks to silly regulations.

  15. I recently approached Lloyds for a further advance of £12k to put solar panels on my roof. They admit that I can afford it, I have bags of equity in the property.

    They won’t do it because I only take money out of my company for my day to day needs. They blame the FSA rules on affordability and they have rigid multiples on income.

    Well done FSA. Fancy organising a p… up in a brewery?

  16. Steven Pearman 6th March 2012 at 2:32 pm

    I find it exceedingly worrying that supposed qualified advisers do not understand the benefits of interest only loans and the impact that banning common sense and freedom of choice will have on the economic recovery we all need.

    My wife put it best when she said that if the FSA were put in charge of Health and Safety the human race would die out as they would ban child birth due to the cost and risks involved.

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