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Comparing notes

New regulations and consultations are arriving at a dizzying speed. Mortgages in particular have been on the carousel. Now the Treasury has released its consultation paper on the statutory regulation of mortgages with a punctuality that has surprised the mortgage industry.

While it seems to contain few surprises, those involved with selling mortgages are still digesting the contents.

No sooner had the FSA assumed its full powers last November than the Government did an about face and decreed that mortgages and general insurance would also have to fall under its remit, removing the prospect of triple regulation by the FSA, GISC and the MCCB.

The Treasury will be hoping it is third time lucky. It has already consulted on mortgages in 1999 and 2000.

The FSA&#39s consultation paper 98 was overtaken by events and awaits cannibalisation. In any event, the FSA is going to issue its own fresh consultation on mortgages to glean opinion about the rules it will be introducing.

The bare bones of the document are this. Anyone advising or arranging the sale or variation “by way of business” of a regulated mortgage contract will have to be authorised by the FSA.

Generic advisers such as the Citizens&#39 Advice Bureaux would not be covered by the proposals. It would not only affect brokers or other intermediaries but others such as estate agents or housebuilders would also need to be regulated.

However, there is an exclusion. If the person who refers a potential borrow on does so to an independent adviser, they would not have to be regulated.

This exclusion will not apply to introductions to tied agents because in the words of the consultation document: “The Treasury takes the view that referring a potential borrower to a tied agent restricts in advance the range of options which might otherwise be available.”

Here, the proposals will depend on other regulatory upheavals – many in the financial services industry believe only the top 20 per cent or so will preserve independent status, servicing the more affluent end of the market.

Halifax manager of mortgage regulation Celia Rowland thinks the model of appointed representative is just a translation of present practice in life industry to mortgages. But she asks: “The FSA is consulting on CP121. Is that same model going to apply to mortgages?”

Pink Home Loans sales and marketing manager David Copland points out that the current practice of some brokers of being independent on the mortgage side but tied on the life side would no longer be permitted.

The consultation makes a distinction between arranging a mortgage and advising on one. Prudential Premier Mortgage Service national mortgage manager John Malone thinks this new terminology will need some further clarification. His understanding is that arranging means execution-only business.

Packagers would seem to have been left outside the regulatory umbrella. Copland points out that it is often inv-olved in advising the brokers who come to them and wonders exactly where they will be in the advice chain.

Some lines in the document have had people sputtering incredulously.

It says Cat standards are “already stimulating mortgages lenders toward delivering fair value to their customers”.

Mortgage Force managing director Rob Clifford says: “I feel this is largely inaccurate, as the take-up of Cat mortgages has been extremely low. I am hearing lenders talk of less than 5 per cent of all deals sold. I don&#39t think that Catmarking has even dented the surface.”

Likewise, the cost benefit analysis. “We do seem to have conveniently forgotten that fewer than 0.5 per cent mortgage holders complain about their mortgage arrangements. It is relatively speaking ext-remely rare, yet we are regulating it just like the far more contentious investment world,” says Clifford.

One thing broadly welcomed is the proposal to do away with the old £5 rule. Section 155 of the Consumer Credit Act restricted the broker to retaining this nominal sum from the fee for advice when the transaction fell through which many felt was an impediment to fee-based advice.

Malone says the industry will look for guidance about what would be a reasonable maximum level. He says: “We want to stop this from being a charter for cowboys to make money from borrowers.”

Buy-to-let mortgages will again escape the regulatory net. Malone thinks that while this is appropriate for the professional investor, it is not for the one-off purchaser of a buyto-let mortgage.

He says: “The professional old hands who invest in property for a living have their own kind of protection but the person who just buys a flat in a university town should have some kind of protection. But God knows how you go about creating a definition between the two. Perhaps the first one or two purchases should be covered.”

As always, this is a consultation so submissions to the Treasury could result in chan-ges, perhaps significant ones. Malone believes much of the consultation is quite deliberately vague to invite responses from the industry.

He also says the full picture will only become apparent once this paper is put alongside the FSA&#39s CP121 and he believes the FSA will issue a paper on unregulated mortgages – which the regulator denies – and which he expects some time this month.

The latter could well clear up the confusion surrounding the status of packagers, Malone believes. “Once we have seen that we can have a more informed opinion and give a proper response,” he says.

Rowland says the group will be working on both the Treasury consultation and CP121 together.

A spokeswoman for the FSA says it will shortly be issuing a guidance booklet for intermediaries about the timetables and procedures for the statutory regulation of mortgages and general insurance.

Once legislation is in Parliament, the regulator will consult on “near final rules” and says it will be able to utilise much of the work done for the aborted CP98.

Consultation on the Treasury paper ends on April 30 so there should be time for a rounded response to be formulated. Then, of course, there is always the FSA consultation to look forward to.

Responses to: Kevin Dignan, HM Treasury, Allington Towers, 19 Allington Street, London SW1E 5EB or kevin. dignan@hm-treasury.gov.uk

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