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Cost crunch

Andrea Tryphonides on why many believe the FSA has got its sums wrong on the cost of mortgage regulation

One year into the regulated mortgage market, the Council of Mortgage Lenders believes the transitional costs of mortgage regulation weigh in at double the FSA’s estimate.

One year ago, the FSA said that one-off set-up costs would total 136m, of which 83m would be incurred by lenders. Lenders would also thereafter have to pay an annual cost of just under 68m.

Total one-off costs of the regime for the FSA are set at about 5m and total ongoing costs are about 7.6m a year, according to the regulator. This includes policy decisions and supervision.

But many are now scoffing at these figures which the regulator is standing by.

Stroud & Swindon chief executive John Parker came up with a stratospheric 500m cost last November – more than four times the FSA’s figure – but the CML’s estimate is “about double” that of the regulator’s although no exact figure has been given.

CML senior policy adviser Kate Davies puts the FSA’s misjudgement down to timing. Its original figures were calculated over two years before mortgages came under the regulator. She says: “At the time, it was the best guess they could give. No one knew of the complexities to planning for regulation. Even after implementation, lenders had to make great adjustments and developments as they have gone along.”

Davies says she doubts that the FSA will make a move to find out the cost of mortgage regulation as she thinks the regulator views it as “all a bit academic now and water under the bridge”.

But Association of Mortgage Intermediaries director Chris Cummings believes the only way the FSA can appear to be accountable is by conducting a review of the costs of mortgage regulation.

He says: “At a given point, it should make an evaluation of costs and benefits to make the market look like it is accountable, otherwise firms will get the feeling that this is a one-way street. The market must feel like it has an accountable regulator.”

The FSA has already committed to an overall review of regulation and its affect on consumers but will not incorporate mortgages in the review which Cummings believes is an error of judgement.

He says: “When the FSA announced that it will be calculating the ‘real cost’ of regulation, we urged them to look at and include mortgages. The FSA refused on the grounds that it has no previous data in which to assess the impact.” According to Cummings, the regulator says it will “consider” looking at the cost of mortgage regulation two years into the regime.

The AMI believes that the one-off cost of regulation is underestimated not only by the FSA but also by the CML as its calculations are weighted towards the costs towards lenders and not the entire industry.

The Mortgages Practitioner sole trader Danny Lovey says: “The problem is that the cost of regulation, which we all know to be a lot higher than the lenders are reporting, may not be proportionate to what we are getting out of it. But how will we know until a true cost analysis can be published? What I do know about is the impact on time, especially when completing the RMAR obligations. Of course, it is the old phrase again – time is money. We all support regulation but at times it is hard to negotiate real time with clients and form-filling.”

Marlborough Stirling conducted its own benchmarking study last month. The report calculates that mortgage lenders’ processing costs have increased over the past year by as much as 69 per cent – around 123m for the sector as a whole. The report also states that the average cost of processing mortgage applications has increased from 89.97 per case in 2004 to 146.49 in 2005, a rise of 69 per cent.

Mortgage business managing director David Edwards says: “The improvements in mortgage processing by most lenders in 2004 appear to have been reversed in 2005. Regulation was probably a major factor. Many lenders have found it difficult to reconcile the needs of M-Day with maintaining low-cost high-quality services.”

Edwards goes on to say that more lenders now fall into low-quality segments and half the lenders sampled fall into high-cost sectors, suggesting that some lenders are struggling with the affect of regulation.

Indeed, regulation and the ensuing costs will become more complicated the longer the FSA ignores the calls to make the necessary calculations. Edwards warns that lenders still have the considerations of Basel Two, home information packs and the European Credit Directive to figure into their systems.

The FSA has said in its review of MCOB that it is extremely unlikely that it will initiate any major changes and as a result lenders will not have to worry about further costs.

But as Mutual One commercial director David Charlton reminds us, the FSA has not strictly speaking left everything unchanged. Six months into the regime, the FSA said that it sees no reason why lenders could not make the majority of their key facts illustrations five pages long.

Charlton says: “Why tell this to the industry? Why didn’t they just be specific in the first place? In the interests of treating customers fairly, there must be some lenders wondering whether they may get a friendly prod from the FSA to shorten their documents. This, of course, will come at some expense.”

The CML, the AMI and other organisations agree that it is difficult to come to a real figure for the cost of mortgage regulation but it is certainly not impossible. As Cummings says, it is only by conducting thorough examinations of a new regime that the regulator secures an open and transparent relationship with the regulated.

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