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
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's move to buy IFA Willis National, do you see
many other lenders buying distribution channels in advance of the FSA's
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
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
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's 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
If the price war drives more lenders out of the market, then competition
will slacken and lenders' 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's 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't
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
No doubt, innovation for niche areas will continue but simple ideas will
always suit the mass markets.
Wyles: Skipton's 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's
Mortgage brokers earn no fee from lenders for declined applications, so it
seems fair that the applicant pays for the broker's 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's 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