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Alan Lakey: Why trust people with their pensions but not mortgage repayments?

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Whenever I speak to the regulator I always make them aware of the law of unintended consequences. 

The domino effect of ill-thought out regulation which takes one step forward then two back and consigns thousands of advisers to a place where they cannot provide or receive advice in a profitable or balanced manner. 

More pertinently, from the regulator’s stance, the consequences for consumers are such that their ability to achieve reasonable outcomes is thwarted.

The latest example is the Mortgage Market Review which is founded on the notion that inappropriate lending conspired to create the credit crunch – whereas any rational observer will confirm that the catalyst was actually nonsensical US government policies allied to greed.

The MMR places added responsibility on the lenders and leaves each lender to interpret the requirements and design its own systems and processes.  As often happens with networks, the fear of regulatory opprobrium is such that the rules become gold-plated and the processes develop a rigidity that provides little room for sensible judgement.

Does the FCA want a reduction in lending?  Does it intend that lenders batten down the hatches and reduce the borrowing prospects of millions of consumers?  Previously the FCA has advised that such matters are a ‘commercial judgement’ but if they are in favour of commercial judgement then they should leave the lenders to their own devices and not seek to design lending processes.

The Woolwich sensibly takes loans and credit card balances into account when assessing affordability but it then veers into murky waters when they also make a reduction where pension contributions are being made. Unlike loans, pension contributions are voluntary and can be stopped or reduced at any time and in an era where not enough is being saved it sends a peculiarly mixed message to borrowers.  I wonder if I will be the only adviser telling his clients to cease making contributions in the months prior to a mortgage application?

Halifax does not follow Woolwich’s lead but is nonetheless guilty of irrationality when existing borrowers wish to switch products. Even though no additional borrowing is involved they can elect to request proof of current income. 

If the income is deemed insufficient the borrowers will be denied his chosen cheap interest rate product and will be forced onto the variable base. The Halifax logic revolves around risk but it seems to have escaped their notice that being placed on the dearer base rate then makes the borrowers higher risk.

Another created problem involves those house movers and remortgagors who aim to consolidate debt.  Many lenders will ignore the intention to repay the debt and will calculate affordability on the assumption that the credit will remain outstanding.

Multiple applicants and guarantor mortgages are also facing the chop although the rationale for this remains a secret that lenders protect with their lives.

I realise that a number of readers will take an opposing view – after all there are always three opinions for every rational thought – yet the question I have for the regulator and also the Government is why is it that consumers can be trusted with their pension funds yet treated like idiots when it comes to repaying their mortgage? 

The answer, surely, has nothing to do with next year’s election, has it?

 Alan Lakey is partner at Highclere Financial Services 

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. Interestingly the FOS has today reported a rapidly growing number of people with debt problems due to mortgage debt. 138,200 mortgages had arrears of more than 2.5% of the outstanding balance in the first three months of this year (CML). Can folks be trusted????

  2. Julian Stevens 14th May 2014 at 11:09 am

    I’m not a mortgage adviser so I can’t comment on the difficulties that may now be arising for potential borrowers seeking a mortgage large enough to enable them to buy a home in today’s price-inflated market, though perhaps the requirements of the MMR are a knee-jerk reaction to the state of affairs prevailing not very many years ago when lenders were too lax with their criteria and far too many people were taking on mortgages that really were OTT.

    That aside, at least as big an issue is the all too common problems that arise due to unrestricted unsecured borrowing, particularly from PayDay Lenders (in most cases, probably better described as barely legalised Loan Sharks). Unsecured borrowing ought, in my opinion, to be limited to a maximum of 3 months nett income and subject to far more stringent criteria such as affordability, ATR, CFL and all the rest of it.

    A few years ago I had an amazingly feckless client who ran up a credit card balance of £75,000. When the train finally hit the buffers, he just shrugged his shoulders and went bankrupt, leaving everyone else to pick up the tab. It was all so easy. That hardly constitutes an orderly and properly functioning sector of the financial services market, yet there seems to be remarkably little concern about tackling the issue. Why isn’t the FCA on the case? Surely it’s of considerably greater importance than beating up financial advisers with never-ending embellishments to its already gigantic rule book and issuing endless regulatory updates with which we’re all expected to keep up?

    But then, as we know, the regulator remains entirely free to set its own agendas and priorities without reference to any outside body and unless or until Parliament gets round to creating a Statutory Independent Regulatory Oversight Committee, what’s likely to change?

    On this point, I think I’ll pop across the road to my local MP’s constituency office to ask him, if he’s in, when I might expect from him a reply to my latest letter.

  3. Imagine the level of debt we’ll see when the base rate starts rising…

    I’m betting on June 2015 – the month after the election.

  4. Spot on Alan – HMG views retirees as very sensible people – to be treated like adults (let’s forget all about pensions unlocking shall we….all those “responsible” folk who flocked to splash the cash now…..) while mortgage borrowers are totally incapable of making any decisions for themselves……

    One of my sons who is in the process of moving home, having spent three years in a previous life as a morgage consultant has just experienced the joy of sitting with a bank adviser and (quite literally) explaining to her how to do the job…….

    Undoubtedly the mortgage market warranted some review and tightening up – but the revolution that is the MMR?

  5. Nick Pilkington 14th May 2014 at 4:01 pm

    The remit of the regulator should be looked at.
    Is it to ensure sensible lending criteria with which I agree or has the FCA decided on controlling the market price of houses by availability of loans which I consider is totally beyond it’s remit.
    There are also the unintended (or at least I hope it is unintended) consequences. A recent client who has 9 years to run on his repayment mortgage and has a faultless record with no loans or debts, applied to remortgage with a new lender onto a lower rate & hence lower premiums. He was advised that he couldn’t afford the lower premiums and would have to extend his mortgage to 15 years.
    So here we have an exemplary borrower being told to continue to be in debt for an additional 6 years and this is meant to be responsible?

  6. Interesting article and I agreed with the sentiment but I have to query the headline….

    Surely the concept of ensuring people dont borrow irrationally and beyond their means is totally different to controlling/dictating how people spend their own hard saved investments?

    Whilst I agree that there are people who will no doubt make ill informed decisions, I feel that with a BSP which lifts poeple above means testing, people should be free to make their own decisions. If that backfires, they’ll only have themselves and their IFA to blame ;o)

  7. Alan I think you have successfully demonstrated the reasons why mortgage market needed MMR after all your simple analysis of the credit crunch is wrong for a start.

    The big investment banks including the ones in the UK were wrapping up mortgage loans both in the UK and the US into investment products. Sub-prime was not just a problem in the US it was a problem right across the UK and Europe. Look at Ireland property market dropped by over 30% Spain nearly 50% and if you factor in inflation some parts of the UK by nearly 20%.

    The only thing that saved the UK market is super low interest rates! The level of reckless lending by large banks and building societies is well documented. Halifax for example was only carrying out 5% of check on all applications according to an ex-Halifax director.

    So, I think this shows that the mortgage market cannot be trusted to be self-regulated and indeed you only have to look at the present media hype in trying to stoke up the housing market to realise that these rules are desperately needed to provide stability to the housing market.

    I would go even further that I think the PRA need to use its new authority to curve any housing boom as in reality above inflation growth in property does nobody any good. I wish that the regulator would also extend MMR to buy to lets. After all an investment adviser has to provide written recommendations when providing investment advice so why not some of these property gurus.

    One of the most welcome parts of the new regulations is the mandatory stress testing of new mortgage applications. How many clients have you seen in your life time come out with a line how much can I maximally borrow, not how much can I afford to borrow.

  8. Christopher Petrie 14th May 2014 at 5:16 pm

    Alan Lakey has correctly identified the contradiction between the pension rules and the mortgage rules.

    The reason for that is simple – the mortgage rules were put in place by the Regulator which wants a “safety first” policy.

    The new pension rules were put in place by a politician, who clearly caught the regulator on the hop, and who were clearly not consulted. His policy was not “safety first” but more “let people choose for themselves”.

    I’m not suggesting which approach is more correct, but that’s why there are two different approaches.

  9. Alan the answer to your question is partially explained by the following:

    Savings: As a share of National Income we invest less than 158 other countries worldwide. Since Q1 2008 total public and private investment has collapsed by 24.8%. Government consumption is UP 6% despite the cuts.

    Debt: Families debt is still worth a cumulative 208% of GDP. Total public & private debt (excluding financial firms) is a record 298% of GDP.

    None of this includes PFI Liabilities or the huge amount of Student Loans that are unlikely to be repaid. (This alone approaches £1 trillion)

    Mortgages are a debt. The change to pensions may just increase investment, but most of all it will increase immediate tax revenues. This Government (like all Governments) doesn’t give a toss what happens in a few years’ time when these people will be claiming benefits and they will no longer be in office. Anyway the vast bulk of annuities have a purchase price of less than £30k. At the higher end people will be unlikely to blow their pots. The total money going to annuities may well not change much.

  10. I think the ills of the past are very easily forgotten, Remember fast track apps and gmac star just to name a couple. As a financial adviser who gave mortgage advice i was completely shocked by the selling practices I encountered from so called mortgage advisers.

    Clients who were sold short term fixed rates so the ‘advisers’ could re-visit every 2 years and rebroke (churn) their Cllients, selling life assurance on 2 year commission breaks to fit in with the new advice. Window cleaners earning £75k fees added to the loan, 5 year ASU plans paid up front and added to the loan.

    Clients advised to take out ‘complex multi part mortgages with savings and current accounts just because they paid commission. Interest only 6x income mortgages self cert of course. Thank God for MMR.

  11. Peter Herd and Roy Miles have hit the target. Is Alan in denial?

  12. if I recall correctly Peter Herd was a building society manager for a firm which is now part of the reviled Co-operative Bank. No doubt this provides him with a unique perspective.

    The UK market did not implode because of UK securitisation but because of the US situation where Clinton decided that everybody should be able to purchase. When the US sneezes the UK catches a cold, an aphorism proved by this meltdown.

    The political and social question here is should the Government or its various departments (FCA included) design every facet of our existence. Remember what Jim Gower said, people shouldn’t be made fools of but should be allowed to make fools of themselves.

    Every lender should be able, without interference by the regulator, decide its own lending policies and to let its success be decided by market forces and not political theories.

  13. If I had one thing to say on this debate; extra burdensome regulation is not the answer !

    We have seen and still seeing the mistakes of the RDR and it looks like the MMR is heading the same way.
    We (as a country) need to re think how we lend money and we know this is not working now or worked in the past

    I fear all this (MMR) will do is preclude a large section of people buying a house, and real innovation will stop.

  14. Well said, Alan. If only the FCA would realise the truth and consequences of what you say…”the fear of regulatory opprobrium is such that the rules become gold-plated and the processes develop a rigidity that provides little room for sensible judgement.”

    Unfortunately this so often leads to more consumer detriment than the original evil it was intended to head off. And in the end they have to pay for it in extra charges (or loss of access to affordable advice).

    Obviously ability to pay should be checked out in the lending process (and other ills such as Roy describes should be ruled out), but not in such a heavy-handed way as to arrive at the ridiculous results so well out-lined above.

    Last year the Independent quoted Sue Lewis, the Chair of the Financial Services Consumer Panel whose role it is to advise the FCA on the interests of consumers. She too high-lighted a problem with another example of the compliance-fear problem leading to “gold plating as you put it.

    “One of my big passions is the industry talking to consumers in a language that they understand. [ ]

    ” There’s nothing to stop financial services communicating in that way to customers, but actually it’s become a sort of a nuclear proliferation. More pages of terms and conditions so customers buy or are sold the wrong thing, so they make a claim, so there are more pages of terms and conditions and the whole thing just escalates.”

    She added: “I think there needs to be an arms amnesty here. We need to take a step back and say, ‘Actually, what would really be the best way for consumers to be served about the information they get about products?'”

    The question is what will it take for the regulator and the industry to be able to find the pragmatic middle way best placed to protect consumers which gets away from escalating and maddening bureaucracy.

  15. Simba

    No Simba you are wrong, I have in the past worked for AVIVA through Chelsea and then NatWest like many IFA’s I started my career in banks and building societies and got out before I lost my soul in 2007.

    Anyway just to correct your information I think you’ll find that many of our large banking corporations including RSB, Barclays, and Lloyds all had US subsidiaries and exposure to the US market. We also had our fair share of sub-prime mortgages the only reasons why the repossession rates in this country didn’t go through the roof after 2008 is partly due to political pressure put on banks and building societies and directions by the courts not to take repossession of property. Super low interest rates also helped dramatically.

    Yes I have seen the excesses of banks and building societies first-hand and I’ve also seen an awful lot of mortgage brokers over the years gives really crummy advice to clients.

    Sorry that you may not agree with that point of view, you may in fact do a decent job for your clients, but there are many more mortgage brokers that don’t and many of them have lost their licences recently for mortgage fraud.

  16. If it wasn’t for comments from the likes of Peter Herd and Roy Miles one could cry buckets.
    The other posters were part of the original problem and they want to continue to help people mire themselves in unsustainable debt. Currently borrowers are being heavily subsidised by savers who are getting shafted. If savers were getting a decent rate (RPI X 2) then many of those now seeking loans at the height of a very dangerous bubble will turn out to be defaulters.
    Of course contributors to this piece are hardly likely to advise prospective FTB just to rent and wait until prices cool – after all there is no proc fee or life commission in that. That is precisely why the FCA should have masde it a level playing field and banned commission (and proc fees) for everything. We might then just see some genuine advice instead of selling.

  17. I think that we have to remember that the Government stepped in and removed the threat of repos by reducing the waiting time from 9 months to 3 months. Very few lenders have the stomach to evict for just 3 months arrears.

  18. 1an H0m3w00d1234 16th May 2014 at 9:11 am

    abacus test comment – please ignore

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