OK, “lenders ordered to stop trusting brokers,” is not exactly what the FSA has demanded within its mortgage regulation proposals under the Financial Services and Markets Act.
But mortgage brokers must be very clear that their relationship with lenders is about to change forever.
So, if you do not know your CP98 from your ZX81 or your SC430, please read on. I aim to focus on some of the key implications of the new regulatory regime for mortgages.
While Sir Clive Sinclair might doubt it, I believe the outcome of CP98 will have a more significant market impact than his industry-leading ZX81 computer.
And if CP98 does not bring about significant changes to the draft rules for mortgage selling, then mortgage brokers will definitely be cancelling their order for a new Lexus SC430.
The FSA published its Draft Mortgage Rules Consultation Paper, CP98 on June 14. Brokers and lenders had until September 17 to produce a response.
While lenders typically have teams of specialists to pore over such material, brokers could be forgiven for not requesting a copy of all 426 pages of the FSA document.
Instead, I suspect that most brokers have ignored the consultation process (perhaps having faith in lenders to bring about a practical outcome for the intermediary market). On the assumption that the FSA's “draft” rules will survive the consultation unchanged, let us look at some of the implications.
The rules affect the sale of virtually all residential mortgages on UK property. While the draft rules do not regulate “advice” and do not directly regulate mortgage brokers, brokers are inevitably caught by elements of the regime.
For instance, “promotion of mortgages” will need authorising by a regulated individual, which inevitably affects the way brokers will advertise mortgage services.
The draft rules dictate what information clients should receive during the process – prior to application, when receiving the offer, at completion and post-completion.
Brokers are perhaps most affected by the proposed common “pre-application illustrations” or PAIs. All honourable mortgage brokers would agree that client quotations should be clear, balanced and not misleading.
However, you may now need to issue FSA-standardised mortgage illustrations, currently five pages long, which many regard as too long to achieve the objective of being an effective comparison tool for the consumer.
Call me old-fashioned, but I always believed that the mortgage broker was the comparison tool – the very reason that consumers took professional advice, rather than trying to make sense of 10 different lenders' quotes.
It is now very likely that an industrywide standard illustration format will emerge. We can only hope that the FSA sees sense and compresses the proposed five pages into something more digestible.
Another far-reaching implication of the draft rules is the suggestion that a PAI should only be issued to a client after a credit search has been carried out. I agree that a PAI needs to add real value to the client by being as meaningful as possible.
A PAI which is also an “approval in principle” can achieve this. Thankfully, the FSA recognises that this potentially subjects consumers to being repeatedly credit-checked (as they shop around for the best deal). We should all hope that the final rules only call for a credit check upon application, rather than every time a client asks for a quotation. Imagine the extra costs and the effect of footprinting if agencies register all these searches.
You have spotted the paradox. The FSA does not wish to regulate advice or brokers, yet you must comply with the regime, including the extensive provision of information requirements.
The FSA has suggested that it would aim to apply a rule “requiring lenders to take reasonable steps to ensure that intermediaries provide PAIs”. This brings about the biggest potential change of all: lenders will have to exert some control over all intermediaries introducing business.
Are you ready to have 10 or 15 lenders all rifling through your filing cabinets? Lenders would have serious difficulty in controlling the thousands of smaller brokers and might even refuse to deal with anyone other than the big franchises, clubs and networks.
These implications and others make the new regime a ticking timebomb for the typical independent mortgage broker – significant new compliance requirements and the threat of lenders having to exert control over your business.
It is inevitable that brokers will need assistance and protection from experts or must, at least, get their house ready for the new regime. Or they risk becoming pretty much extinct – just like the ZX81.