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At a stretch

Providers and advisers must play by the rules as a mortgage debt crisis looms.

The latest findings from the FSA on mortgage advice make for worrying reading, particularly if the doomsters are to be believed and Britain is on the brink of a personal debt crisis.

There is certainly evidence that problems lie ahead. Bankruptcies and IVAs are at record highs and the latest interest rate rise will just be starting to filter through. If people have been allowed to stretch themselves beyond their means – and the FSA reckons they may have – the situation could be graver.

That lenders have been overzealous with their lending in recent years is also probably not in question. They have moved to tighten up their acts in more recent times – HSBC has capped the amount that advisers can lend without referral while Nationwide now requires proof that borrowers wanting an interest-only loan have a repayment vehicle in place – but the damage may already have been done.

Financial promotions pushing available credit has been relentless. Go back three years and the financial sector spent £652m on direct mail and in 2004 they spent £621m. That was £500m more in both years than retailers, the second-highest spending sector.

The banks have also dragged their feet on data sharing, where both negative and positive information on a customer is shared between lenders. Many lenders shared only negative data – information on whether people were in financial difficulties such as missing payments or defaulting on a loan. That has now changed thanks to a voluntary agreement but it took a long time coming.

Soaring house prices have forced lenders to look for ways to get first-timers on the property ladder and Abbey is the latest to come under fire for its five times salary mortgage aimed at first-timers. Its argument is that, with interest rates far lower than in the late 1980s, a joint income multiple of 5.5 times today is equivalent to an income multiple of 2.75 back then. The bank also claims it has put stringent checks in place to safeguard would-be borrowers (and itself) if disaster strikes.

Abbey may well be telling the truth. After all, the bigger lenders and intermediaries were not found as wanting as the smaller networks and adviser firms by the regulator. Several unnamed firms had such significant failings that the FSA referred them to enforcement.

One excuse doing the rounds for the smaller firms’ failings is that they do not have experience of compliance with a regime similar to that of the FSA, which is a feeble argument. Consumers have to take responsibility, too, but providers and advisers – no matter how big or small – have a duty of care and should follow the rules which have been in place for more than two years.

It is worrying that in the short space of time that mortgages have been under the beady eye of the FSA that it has unearthed discrepancies and not just with advice for traditional homeloans. It has already carried out damning mystery shops on equity release and self-certification mortgages. In the next few weeks, it is expected to come down on lenders and exit fees.

Mortgage exit fees are on the rise. Ten years ago, borrowers paid an average of £300 in arrangement and exit fees but the average borrower now pays about £900 although fees of over £1,000 are not uncommon today.

But the FSA has found that some customers are being harshly treated because some fees have been increased without prior knowledge. Discussions between the FSA and the Council of Mortgage Lenders are ongoing but an announcement is imminent.

Of course, the mortgage crackdown is just part of the TCF agenda and one gets the impression that this is only the start. The Association of Mortgage Intermediaries admits to being concerned about the latest findings and agrees that more work needs to be done to meet the guidelines. It is right but it should not be simply so firms escape the wrath of the regulator.

Playing by the rules should help limit the damage if the UK economy bombs and the personal debt crisis really does take hold.

Paul Farrow is money editor at the Sunday Telegraph.

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