Panel Members: Mark Underhill, Product development manager, Yorkshire
Building Society; Michael Bolton, Head of lending, Birmingham Midshires;
Mortgage network director, Zurich IFA Group.
If, as some industry figures are predicting, statutory regulation prompts
lenders to leave the mortgage code next year, what do you think could
happen to the CML and the mortgage code?
Underhill: The implications for lenders of the proposed legislative
arrangements are considerable, given the costs of providing the required
information to prospective borrowers and ensuring intermediaries have
complied with the requirements.
For some lenders, these costs may be too great and so it is not surprising
that they may question whether to continue with a commitment to the
mortgage code. The CML has an important role to play as the representative
and discussion forum for lenders and this role will no doubt continue.
Bolton: From a regulatory point of view, I do not think it will pose any
big problems so long as statutory regulation does accommodate the mortgage
code which the industry has worked hard to develop.
I do see the CML continuing its role, albeit in a slightly altered form,
as the representative voice of our industry to the media, the Government
and regulatory bodies.
Young: First, I sincerely hope that lenders continue to support the
mortgage code. I believe that, in the absence of full statutory regulation
of mortgage advice, the only viable and workable option is for the code to
continue alongside FSA regulation, with the Mortgage Code Compliance Board
continuing to monitor and police all activities of the code. If some of the
major lenders in the UK were to withdraw from the code, it could destroy it
completely, reducing consumer protection and damaging the CML's
credibility. It would probably take the mortgage industry back five years.
The CML is urging the FSA to ensure brokers in the sub-prime market are
closely monitored, with regular compliance visits. Is it fair that brokers
in this area should be singled out for special attention?
Underhill: It is interesting that the number of lenders in this area has
grown considerably. This has to be a reflection of the margin that can be
obtained, which can only be gained from the borrower. This in itself points
to the suggestion being correct although the level of work undertaken by
the intermediary needs recognition.
Sandiford: It is never fair that any one body or group is placed in the
limelight. However, this is simply a matter of investing in our future as
an industry and ensuring that we are not storing up trouble for the future
by turning a blind eye to any problems we might have. We all know the
sub-prime market has earned itself a bad reputation although, admittedly,
one that is not fully deserved. The image problem is down to us to sort out.
Lenders and brokers alike have to prove that sub-prime lending is no less
responsible than the mainstream market and that malpractice will not be
Young: No. Just because a mortgage broker operates in the sub-prime market
does not mean they are any less professional or ethical than those in the
full-status market. If the CML has concerns relating to fees and product
bias, then it should make this clear in the rules and ensure this is
covered on compliance visits.
I do not, however, believe such activities are rife among mortgage brokers
in the sub-prime market and do not believe they should be singled out for
The FSA is proposing that lenders' pre-sale disclosure documents should
carry a recommendation that borrowers should shop around and look at its
mortgage comparative tables before signing a contract. Is this a good idea?
Underhill: This probably represents a lack of understanding of how the
ket works. If the borrower has arranged the mortgage via an intermediary,
he or she wants the shopping around done for him or her. Borrowers who
approach lenders direct have usually done their own shopping around and the
end-result is the mortgage application and illustration. The proposal is
therefore not necessary.
Bolton: Any move to increase the transparency of the mortgage market is
undoubtedly a good thing for the borrower. It is part and parcel of a
market driven by choice and competition that is coming of age. The
industry needs to take collective responsibility for ensuring that suitable
regulation is in place to protect the lender, the broker and the borrower
from any confusion.
Disclosure is a process that is being recommended as this protection for
all parties and, although it will inevitably mean a cost burden, it can
only be a good thing in the long run.
Young: It is a daft idea. For one thing, most mortgage applications are
now introduced to lenders by mortgage advisers, who would have already done
the shopping around on behalf of the borrower. Second, I do not believe
mortgage comparative tables make it a clear-cut decision as to whether one
particular mortgage better suits a borrower's needs than an alternative
one. Good quality face-to-face advice is what is needed.
Skipton has become the latest mainstream lender to enter the sub-prime
market. Do you think we will see all lenders offer a sub-prime range
Underhill: Competition has increased and this, together with warnings on
the future direction of the economy, suggests there is not a lot of scope
for further entrants. The sale of a number of sub-prime lenders supports
Sandiford: This is the question of the moment. If the rumour mill is to be
believed, we are set to see a few more mainstream lenders move into
sub-prime, either through acquisition or controlled growth. However, I am
not convinced the appetite will be there for all lenders unless there was a
proven demand from their existing customer base.
Don't forget, it is still a very specialised market and demands an
approach which is directly opposed to the processes and systems that many
mainstream lenders currently have in place. There is a big difference
between dipping a toe in the water and choosing to become a specialist
Young: I am sure more mainstream lenders will enter the sub-prime market
because it makes so much sense. Offering a wider range of products that
satisfies a greater number of borrowers will help lenders grow their
mortgage books more quickly in a market that commands a wider profit margin
on pricing because of the higher risk element.
There may be an issue with brand reputation but, as Nationwide has done
with UCB and Halifax with Birmingham Midshires, the answer may be in
providing such loans via an alternative specialist lender in the group
under a different brand name.
There are two proposed trade bodies for brokers, the National Association
of Mortgage Brokers and Advisers and one being supported by three MCCB
board members. Which do you think shows the most promise at this stage or
should they pool resources?
Underhill: Resources should be pooled since it is pointless to have more
than one trade body representing the broking fraternity. This would
preclude any possible confusion from a consumer's perspective.
Bolton: Clearly, intermediaries are considering how they will be
represented as a collective body in the light of forthcoming regulation. I
think it is too early to say what the end result will be at the moment.
However, we are certainly watching these developments with interest and
wish both bodies success for the future.
Young: As I understand it, Namba is the only current proposed trade body
for mortgage advisers but is not yet operational. There have been rumours
of an alternative trade body being formed but as yet I have heard nothing
from any such body. One thing is certain, a formal trade body is needed to
represent mortgage advisers more extensively than has been possible to date.
Following Bristol & West's acquisition of Willis National, do you see many
other lenders snapping up distribution channels in the near future?
Underhill: This depends on the strategic choice of lenders. I cannot see
it being followed by many due to the high costs involved in initial
purchase and subsequent admin and regulatory requirements.
Bolton: Although I do not think there will be a wholesale movement of
lenders buying their own distribution channels, I do think we will see
a few more brokerages either being snapped up or lenders forging strategic
alliances with individual brokers.
For some, this will be the most cost-effective way of containing the cost
of further regulation. However, it is very much dependent on the individual
lender's business model and business strategy.
We have already seen lenders such as Bradford & Bingley move towards
becoming a retail outlet for mortgages rather than a manu- facturer.
I think this is probably far more likely to be a growth area, particularly
as lenders look for ways to use the strength of their brand to diversify
away from core business, where margins are diminishing, and carve a niche
for themselves in an extremely com- petitive market.
Young: I am sure more lenders are likely to acquire their own distribution
channels as, quite clearly, in the UK mortgage market, distribution is
king. Although many major lenders have developed close working
relationships with big distribution organisations such as Allied Dunbar and
Legal & General, there is always an element of risk to such arrangements.
So, for some lenders, captive distribution could be the answer although
let us not forget that acquiring distribution in this way is not cheap.