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Compliance classes

The Government-backed Julius report into banking codes has recommended

that mortgage firms should be given compliance ratings of good, average or

bad by the MCCB. Is this either a good or practical idea?

Cherry: Enforcing transparency about the compliance record both of

mortgage lenders and intermediaries has got to be a laudable objective, as

it gives borrowers more information and enables better informed choices to

be made.

If the “good, average, bad” classification was intended as a permanent

yardstick of classification, then I would say that it is too simplistic to

be meaningful. However, from my reading of the Julius Report, I understand

that this is a temporary measure until more sophisticated compliance tests

can be developed which will allow individual data to be published.

Verdin: The Review of Ban-king Services Consumer Codes recognises that the

rating of firms is more complex than this, and that much work will be

needed to develop a grading system that is both fair and objective. It is

unlikely to be simply green, amber or red.

In addition, the report emphasises that any grading is not an indicator of

prudential risk but simply one of service standards. If developed properly,

in conjunction with the industry, and if explained properly to consumers,

this could be a useful spur to improving and demonstrating improvements in

standards across the industry.

Wyles: Julius is calling for graded league tables indicating how well

institutions comply with the banking code. The report does not explain what

objective meth-odology could be employed for grading the institutions

concerned and there is a grave danger that this kind of approach may become

at best highly subjective and at worst downright unfair.

Following Bristol & West&#39s move to buy IFA Willis National, do you see

many other lenders buying distribution channels in advance of the FSA&#39s

decision over polarisation?

Cherry: If regulation reduces the number of mortgage brokers – as many

predict – then lenders will certainly want to secure their own wholly-owned

distribution channels.

The best-regarded brokerages will be able to command a premium purchase

price, so possibly Bristol & West has been wise to be among the first in

the field.

Once lenders have had their pick, however, smaller brokerages may find it

difficult to market themselves for sale successfully.

Verdin: There is a great deal of activity in the IFA community and it is

not restricted just to lenders. Let us not forget that the Willis National

deal is one of ownership of an IFA passing from one bank to another.

Clearly, different lenders have different strategies and views of the

market and the opportunities they present.

Wyles: The final outcome of the FSA&#39s review of polarisation is still very

unclear and it seems unlikely that financial institutions would make a

significant investment based upon a speculative view.

Some of the recent investments made by lenders are more likely to have

been motivated by a desire to diversify their revenue away from the core

savings and loans business where margins continue to contract.

It may be that, in some cases, there is an intention to follow the lead of

Brad-ford & Bingley and scale down lending on balance sheet in favour of

the role of intermediary.

MGM Assurance is setting up a franchise network of mortgage brokers as

part of its diversification drive. Do you think that broking – rather than

lending – is now the most attractive way for firms to enter the mortgage


Cherry: At the moment, it is hard for high-street mortgage lenders to make

money on their loan products – whereas this is not the case for mortgage


This runs contra to most economic models which would see the operation

taking the most risks (the lender) taking the highest rewards. Cut-throat

competition has driven product pricing down to the point where, for

example, Bradford & Bingley has taken the decision to stop lending and only

do broking.

If the price war drives more lenders out of the market, then competition

will slacken and lenders&#39 profits will rise.

Certainly, setting up a mortgage brokerage is a sound move in a

diversification drive – but the pendulum may well swing back to lending as

the more favoured activity in the market, in the future.

Verdin: The market for mortgage lending and the provision of associated

financial services remains strong.

However, UK consumers are increasingly realising the benefits of getting

advice in the increasingly complex mortgage market and this offers

opportunities for mortgage brokers.

The FSA&#39s proposals for mortgage regulation make it clear that the

encouragement of consumers to “shop around” is one of their main objectives

– good news for the broker market.

Wyles: Mortgage broking is just as competitive as mortgage lending and

depends more on the continuing willingness of customers to change their

mortgage provider regularly.

Most mortgage lenders appreciate that customer retention is preferable to

customer replacement and we expect existing lenders to get much more

aggressive in this regard.

In addition, we have seen some evidence of a spread in mortgage pricing

between purchase and remortgage -if this trend continues customers may find

that the economic justification for rate hopping is progressively


Skipton has introduced a mortgage based on US short-term interest rates

rather than on sterling. Will this type of innovation in the mortgage

market spread as competition becomes increasingly fierce?

Cherry: There are issues with this type of innovation. First, the

underlying variable rates for different tracker products could, currently,

be Bank of England base rate or sterling Libor. In fact, standard variable

rate could be construed as a tracker product.

Borrowers will need to have a moderately sophisticated knowledge of these

base rates to make an informed choice. Perhaps introducing a rate based on

US dollar Libor will confuse the issue even more?

Second, borrowers buying a tracker mortgage must judge whether short-term

rates (and therefore their own mortgage rate) will remain stable – but do

many ordinary borrowers have sufficient knowledge to make this judgement

about interest across the Atlantic?

My belief is that this product, although innovative and interesting, won&#39t

fly because it is one step beyond what the average UK borrower is prepared

to take on board – or actually understand and feel comfortable with.

Verdin: There have been similar innovations of small tranches of funds

lent in sterling with rates linked to other economies with varying results.

Most, but clearly not all, consumers will find the concept of foreign

interest rates difficult to understand and may be confused with foreign

currency loans.

No doubt, innovation for niche areas will continue but simple ideas will

always suit the mass markets.

Wyles: Skipton&#39s idea is interesting and creative but is hardly suited to

the mass market. There are obviously incremental risks for any financial

adviser in encouraging a customer to take interest rate exposure to a

currency less familiar than sterling.

The UK mortgage market is already very innovative and has been for quite a

few years – there is no reason why this should change but in practice

really good new ideas are very few and far between.

Should the DTI raise the £5 maximum brokers are currently allowed to

charge clients for giving advice on a mortgage which the lender

subsequently turns down?

Cherry: Any 27-year-old rule setting maximum charges (whatever their

value) is overdue for review. Using the latest retail prices index,

something costing £5 in 1974 would cost around £32 at today&#39s


Mortgage brokers earn no fee from lenders for declined applications, so it

seems fair that the applicant pays for the broker&#39s time in processing the


However, it must be with the proviso that the applicant is made aware of

this charge at the outset and that there is complete transparency.

Verdin: This fee no longer bears any relation to the abortive costs

incurred by a broker in making enquiries about loan availability for

consumers who then do not proceed.

However, there should still be a limit, and any change should do nothing

to encourage anyone to take advantage of consumers through this route.

Wyles: In practice, most experienced mortgage intermediaries have a pretty

good idea of how acceptable an individual application is likely to be.

For more marginal cases, it is normally possible to obtain a decision in

principle without a fully completed application form. It therefore seems

fairly reasonable that the introducer&#39s economic interest should be aligned

with that of his client.

Cheltenham & Gloucester is set to become one of the few lenders to offer

non-conforming mortgages under its own brand name. Can you see many other

lenders adopting this approach to the non-standard market?

Cherry: Over time I would predict that more mainstream lenders will use

their own brand for non-conforming mortgage lending – which itself will

become just another part of the general mortgage lexicon.

Rigid structures around prime and sub-prime lending are disappearing fast,

and we are already seeing lenders currently classed as sub-prime starting

to offer prime products under their existing brand names.

Verdin: The spectrum of standard to non-standard has always been a feature

of the mortgage marketplace, but has only recently become more clearly

defined by the emergence of lenders specialising in this particular market


A mainstream lender prepared to take a pragmatic approach to the

individual needs of a particular customer, and look at his/her position in

detail may well do lots of business.

We all know of “difficult” cases that have been placed in the past with

high-street lenders, with a little bit of work, to the satisfaction of all

the parties involved.

Wyles: C&G is by no means alone in offering non-conforming mortgage

products under its own brand name. The key issue is expertise in this

market. In practice, a number of lenders entering the non-conforming market

have done so through the acquisition of an existing expert player.

Under those circumstances it does make sense to maintain the integrity of

the specialist brand. However, where lenders go for a start up in the

sub-prime market the argument for a separate brand is not compelling.

Bill Cherry,Managing director, SPML

Richard Verdin,director of housing and protection markets, Legal & General

Matthew Wyles,Operations director, Portman Building Society


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