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Boulger on mortgages

Three months into statutory mortgage regulation and the phony war is about to end. So far, the FSA has adopted a light-touch approach to regulation to give firms a period to iron out any unforeseen problems in complying with the new rules. Three months is clearly not long enough for some firms as there are still an awful lot of non-compliant financial promotions around, with some broker websites, for example, even still saying the firm is regulated by the MCCB.

It is worrying when one hears the apocryphal comment from a broker that they are quite happy with the MCCB and have decided to stick with them rather than move to the FSA. The FSA’s consultation paper on their fees, CP05/2, issued last week, shows a typical sixfold increase for brokers compared with MCCB fees. The FSA’s proposals highlight just what an efficient ship the MCCB ran, especially as the number of mortgage complaints going to the MCAS in each of the last two years of MCCB regulation was only just over 100.

The Competition Commission’s mission statement includes making markets work well for consumers so they benefit from lower prices and a wider range of choice. Perhaps after such a huge increase in fees they should investigate the market for regulation to consider the FSA’s monopoly.

One aspect of statutory mortgage regulation that has slipped off the news agenda in the last few weeks is making the KFI more user-friendly.

After looking again last week at some KFIs produced by MBL, we at Charcol see no reason to change our original decision that only KFIs produced by the lender can be given to clients – not because these are always a model of clarity but at least if they are wrong the legal responsibility is on the lender. Lenders have found it difficult enough to produce compliant KFIs for just their own products and so I don’t underestimate the immense difficulty for any company trying to produce KFIs for over 100 lenders.

With the benefit, if that is the right word, of three months’ experience of using KFIs, most brokers will have some thoughts on how they could be improved. Some desirable changes will require the FSA to specify them but others will not. If enough brokers request lenders to implement changes and there is a broad consensus on some of the improvements requested, most lenders will want to consider these requests.

One of the most documented complaints is about the length of some KFIs. All lenders should be aiming for a maximum KFI length of four pages. As the FSA has pointed out this document is called a key facts illustration, not a key features illustration. Making it too long can easily mean it ceases to meet the FSA’s fundamental requirement to be “clear, fair and not misleading”, which makes it non-compliant. Lenders’ legal departments that insist on excessive back-covering need to balance their defensiveness with the need to be “clear, fair and not misleading”.

Another feature I would like to see in the KFI that I am not aware is offered by any lender is to allow the broker or borrower to select a start date for the mortgage. This is largely irrelevant on mortgages where the deal is for a set period from completion, but can be very material on deals which are end-dated, especially on short-term deals with extended ERCs. Currently, lenders generally assume the mortgage will start on the date the KFI is produced or on a pre-determined date two to six weeks hence. A more sensible default start date is needed but allowing the broker or borrower to input an anticipated completion date would often allow for greater accuracy. The FSA should make this requirement mandatory, as it should a requirement to state whether interest is calculated daily, monthly or annually.

Ray Boulger is senior technical adviser at Charcol

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