View more on these topics

Credit crunch

What impact will the new European directive on consumer credit have on remortgaging, equity release, offset and flexible mortgages it if comes into legislation as the CML fears?

Charlesworth: Between the European directive and CP146, the equity-release remortgage market could be significantly compromised, with the biggest impact coming from the proposals in CP146. The concern is that conflicting requirements between the FSA and the EU directive could create unnecessary confusion. The biggest potential impact of the EU directive is on the flexible mortgage market where by every transaction on a flexible account could constitute a new credit agreement, this would be unworkable in practice & could act as the catalyst for the demise of flexible mortgages.

Clifford: Any piece of legislation which threatens to make such products less accessible has to be resisted. Some analysts suggest that the result would be compulsory advice (as opposed to information-only or execution-only), together with a requirement that no fee is charged for such advice. But to keep this in context, it might only apply to products containing drawdown facilities – and not all flexible and offset deals, as some fear. I am hopeful that the directive is somehow adopted to provide consumers with protection against ropy consumer credit products where existing legislation fails them but with a blanket exception for residential mortgages, given the major regulatory shelter being provided to consumers by the FSA from 2004.

Prust: My understanding, from reading the CML literature, is that the EU rules will affect the process of borrowers taking the drawdown lump sums and/or payment holidays that are popular features of most flexible mortgages. Here, if EU proposals are adopted, the borrower would have to re-apply to the lender on each occasion they wanted to use such a feature. This is presumably for the borrower&#39s own “protection”, as both these facilities are, in effect, increasing their indebtedness to the lender.

With regard to remortgaging and equity release, these are both subject to a fresh application from the borrower in any case, so I do not see how the new EU rules will have any effect on them. I am sure that lenders and advisers will adapt by developing easy-to-use documentation. It is probably the least of their concerns at the moment, within the wider issues of pending FSA regulation.

Is the FSA right in its proposal in CP146 to ban cold-calling and unprompted emailing of potential customers to drum up new business?

Charlesworth: My first reaction is to say yes. Cold-calling has a stigma attached to it and is widely disliked by the public. However, the definition of cold-calling in CP146 – “firms must not make an unsolicited real-time qualifying credit promotion unless the customer has an established relationship with the firm and the relationship is such that the customer envisages receiving unsolicited promotions” – does raise some serious concerns. Does this mean that the only way to attract a new customer is to wait for them to approach you? How would that work for referral cases or a person buying a property through an estate agent? In such cases, would the above qualifying criteria be met to allow you to approach the customer? Further clarification is required.

Clifford: It is highly questionable because regulation should not seek to change the natural market forces and operating practices of an industry, provided that the consumer is not being disadvantaged. The FSA should be concerned about appropriateness of advice and professionalism – not marketing meth- ods. The Office of Fair Trading has for many years had a clear position on unsolicited canvassing and, for instance, prohibits cold-calling by telephone after 9pm.

The key issue is that the mortgage industry should not be faced with a heavier regulatory hand in this respect than the home improvement industry or the energy supplier marketplace. As a consumer, I do not particularly welcome the 8pm canvassing calls from an electricity supplier or the double-glazing firm but to ban such a practice would appear to be a little over zealous.

Prust: Apparently, the FSA&#39s intention is to bring mortgage selling more in line with the rules for selling investments. While I am all in favour of consumer protection, I cannot see how banning telephone marketing of mortgages will be beneficial to consumers in the same way as banning it for investments. With investments, consumers are always taking some sort of risk tied to the performance of the stockmarket. With a loan secured on property, there are inbuilt safety factors, such as LTV and income multiple limits.

The large volume of business that is generated through mortgage telesales shows there is a healthy market for it. My experience is that many customers who are approached by telephone do not realise they can save money by switching to lower rates. In these cases, banning cold-calling would be to their detriment. So, I think it should be left alone.

Do you think the MCCB will be able to police adequately which brokers are qualified following its exam deadline on December 31?

Charlesworth: The MCCB has not made any public announcement of how it plans to tackle the issue. Considering the size of the task and the limited resources available to the MCCB, it is probable that some unqualified brokers will continue to provide advice in the period between the deadline and the April re-registration. After April, I believe that the MCCB will focus its attention on brokers who are not qualified and are registered to provide information services.

Clifford: Yes, I am certain that the MCCB will treat this as a top priority so that any advice found to have been given by an unqualified adviser would lead to some measure of disciplinary action and perhaps deregistration. Clearly, no regulatory body can have access to all transactions and be aware of the activities of all practitioners but the broker market can expect a number of measures to be in place – some overt and some less transparent – which will catch any unqualified brokers giving advice.

Lenders are keen to uphold the code and the mandatory qualification requirement and, as such, it is likely that lenders will be among the whistleblowers who alert the MCCB to any breaches by unqualified advisers.

Prust: I do not think the MBBC sees its role to be “policing” the qualified/unqualified status of individual mortgage advisers once the deadline has passed. This is because any unqualified advi-sers will simply be unable to re-register with the MCCB the following April, taking themselves out of the market anyway. This will also help to get a much more reliable figure of how many mortgage advisers are really active in the current market. At the moment, 84,000 are registered and only 37,000 qualified. I think we will see a substantial reduction in registrations next year.

Is the Consumers&#39 Association&#39s endowment action campaign over the top in inciting people to claim, as some in the industry believe?

Charlesworth: Yes. The CA is often over-zealous in trying to whip up mass consumer hysteria. The FSA has taken a thorough look at the market and has put procedures in place to identify and handle genuine claims of misselling.

Clifford: Absolutely. Tens of thousands of consumers have repaid mortgages early, been compensated in the event of a critical illness, taken a surplus tax-free lump sum and enjoyed cost-effective life cover. There is no smoke without fire and we all know about some unscrupulous life insurance salespeople, and even life insurers, whose products have been mediocre at best and terrible value for money in the worst-case scenarios. These, unfortunately, give the consumerists fuel to criticise the entire endowment regime inappropriately.

They should meet some of the clients for whom an endowment coughed up enough cash to pay off the mortgage and to fund a world cruise. Or meet some of the widows we meet who receive a cheque upon death of a loved one and breathe a massive sigh of relief as the endowment repays their debt.

Such generic pro-litigation campaigning will always solicit complaints and generate a disproportionate level of retrospective dissatisfaction.

Prust: Over the last few years, the Consumers&#39 Association seems to have changed from being a very useful source of information about the best washing machine or lawn mower on the market to being a very strident voice in campaigning for and championing the rights of consumers. Would it be too cyn- ical to suggest that this is more about creating publicity for itself and its spokespeople than it is about giving useful information to consumers?

The question of mortgage endowment shortfalls is already being addressed and everyone with savings and investments tied to stockmarket performance is suffering at the moment.

I would suggest that the real timebomb ticking away is the growing number of mortgage borrowers who have opted for interest-only repayments and are making no provision to pay back the capital when it is due. How about that one, Ms McKechnie?

Do you think more investment and pension IFAs will follow the lead of Hargreaves Lansdown and Towry Law in entering the mortgage advice market?

Charlesworth: Undoubtedly. As the potential earnings from pensions and investment markets continue to be squeezed companies offering financial advice to their customers will become increasingly active in the mortgage market.

I believe that the only reason they have not been so active in the mortgage market in the recent past is because the earnings&#39 potential and the activity in pensions and investment kept them very focused in these areas.

Clifford: No, the reverse. Most IFAs will increasingly specialise in investment and pensions, giving mortgages a wide berth, based upon the hassle, costs and increased regulation. Our evidence is that IFAs tend to polarise into those that do arrange mortgages and those that deliberately do not. The latter either miss the opportunity or pass mortgage clients to a specialist broker. There may well be some IFA businesses who feel they want to own their mortgage service rather than outsource but many of these will set out to do so and ultimately turn their back on it.

It can be a marginal businesses with complexity and cost – a major frustration for most successful IFA firms. We are seeing dozens of IFAs, some very well known names, enter into partnership with firms like ours in order to continue offering a quality mortgage service but without complicating their core investment proposition.

Prust: The sort of mortgage market these life and pension brokers want to operate in is very attractive – high-net-worth individuals, low LTVs, high-value transactions. In other words, substantial introduction fees but not very hard work.

The sad truth is that – like any other market – there is a limit to the amount of business available so only a few new players are likely succeed.

In our own niche/non-conforming market sector, we are likely to remain unaffected by such investment adviser firms turning their hands to mortgage advising.

Is Mortgage Brain and Mortgage 2000&#39s move to join forces to create a common trading platform good for the industry or is there a risk that it will restrict broker choice?

Charlesworth: The association between Mortgage Brain and Mortgage 2000 has made the delivery of a common trading platform far more likely, but whether there will be significant broker demand for the facility is another issue.

The fact that the facility will be available is good for the industry if it speeds up processing time and reduces transaction costs, providing it does not become a closed shop and that other sourcing systems can link to the service, so maintaining a degree of market competition.

Clifford: With Mark Lofthouse at the helm and with the lender consortium of shareholders, Mortgage Brain is destined for the best of breed position, whoever it merges with or partners along the way. Provided that a common trading platform does not determine which point-of-sale sourcing system a broker uses, then there should be no risk of a monopoly or choice restriction.If, as many commentators suggest, any of the software providers go as far as deliberate restriction of e-access to their shareholding lenders, then we do face a market discontinuity which brokers should strongly object to.

There is nothing wrong with a particular lender backing one rather than all of the sourcing systems so long as the broker still has genuine choice in terms of which sourcing engine to use and exactly how he trades with the lender. Mortgageforce introduces volume lending to both Abbey and Halifax and would not benefit from any posturing by these lenders which made it difficult to submit electronic applications.

Prust: The Mortgage Trading Exchange – the new partnership between Mortgage Brain and Mortgage 2000 – has got to be a very strong contender to become the common mortgage trading platform.

However, I have my doubts that only one universal common platform will prevail. For example, within the non-conforming/sub prime sector, the way that mortgage products are constructed mean there are many variations open to borrowers and they cannot be fitted into the sort of product pigeonhole idea that electronic trading platforms are based on.

With regard to restricting broker choice, if a monopoly emerges in any field, then it can dictate prices for using the service. However, diversity of product choice lies in the hands of the lenders – not the platform owners.

Mark Charlesworth, managing director, The Mortgage Operation

Robert Clifford, managing director, Mortgageforce

John Prust,sales and marketing director, Southern Pacific

Recommended

Regulation will cut mortgage advisers by a third, says Pru

The number of tied mortgage advisers will fall by almost a third when full mortgage regulation is introduced as they shift to offering a wide range of loans, says Prudential.Prudential Premier Mortgage Club national manager John Malone, predicting the shape of the market after the onset of FSA regulation in October 2004, says the proportion […]

Credit Suisse and Threadneedle funds get AA rating

Credit Suisse&#39s smaller companies fund and Threadneedle&#39s UK growth, UK select growth and UK institutional growth funds have been awarded AA ratings by Standard & Poor&#39s Fund Research. Credit Suisse says this in recognition of fund manager Crispin Finn&#39s performance since he took over the fund in July 1999. Threadneedle says all three of its […]

65% slow to realise debt levels

Two-thirds of people only start to worry about debt once it is too late, according to research commissioned by Kensington Mortgages.It says the amount of money that people owe has reached historic highs – currently £140.1bn excluding mortgages and up by 122 per cent since 1995 – and that we are not a nation of […]

TEP market maker targeting young policies

Traded endowment policy market maker Neville James is looking to buy unitised and unit-linked policies that have been running for less than 10 years. Neville James says its trading platform is currently experiencing a high demand from people wanting to buy policies of this type. It is offering IFAs £50 commission for each policy bought […]

US equity income: the standout market

By James Hackman, head of US Equities at Neptune With a growing dividend market, very low payout ratios and high dividend cover, the US is one of the standout equity income markets globally. It is also one of the most unloved. James Hackman, manager of the top-performing Neptune US Income Fund, highlights six key facts […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment