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Cross purposes

Lenders are cautiously waiting to see whether the FSA will impose rules proposed in the Miles review on cross-subsidy mortgage rates within the treating customers fairly regime.

It was originally expected that Miles’s proposals would be incorporated in the pre-Budget report last year but it now looks as if the FSA is taking a different approach.

Lenders have been aware since last March that their prerogative of offering different rates to new and existing customers may end. Coincidentally or not, the author of the report, Professor David Miles, is now on the board of the FSA.

The report says the differential pricing between new and existing borrowers leads to switching costs for moving a mortgage and thrives on a shortfall in information on different prices across the mortgage market.

If implemented, Miles’s proposals could require all lenders to offer all products to new and existing customers.

FSA spokesman Robin Gordon Walker says: “We are committed to looking at the use by lenders of cross-subsidy in their mortgage books, by which we mean the different rates they offer different customers. This would come under the category of our treating customers fairly initiative.”

The Council of Mortgage Lenders says many lenders, including Nationwide and Alliance and Leicester, already do this. Nationwide says it welcomes the move and it has been campaigning for Miles’s recommendations to be implemented.

Nationwide is encouraging lenders by saying it has ret-ained more customers since introducing this regime in 2001. Head of external affairs Tim Hughes says it makes good business sense. He says: “Clearly, implementing this affects margins in the short term but this is met with improved retention levels as you are able to offer all your customers better deals.”

Hughes believes that incorporating Miles’s recommendations into the TCF regime is exactly the right way of going about it. But he says: “Looking at the history of the FSA, it may take time to take this forward.”

Some lenders feel that any changes implemented within the TCF regime would not necessarily make much difference to what is already on offer.

Halifax says its lenders are segmented to incorporate the best deals for new customers, first-time buyers and existing accountholders.

Senior press officer Paul Fincham says: “Borrower types are segmented into type differentials between new and existing customers. Over specific ranges, they are segmented depending on loan to value and type of risk. We successfully have helped one million customers move on to better deals in the last year in our annual mortgage review.”

The Mortgage Place senior mortgage adviser Dave Crowley says: “Some lenders are already putting into practice what Miles suggested. I guess the problem is that lenders can genuinely charge a different price for products depending on the risk they are undertaking.”

Therefore, it can be argued that a lender should be able to charge different prices as there are many different risk characteristics which a lender has to take on.

Crowley says: “Lenders have their own commercial priorities. As a mortgage intermediary advising for the whole of market, I always source the best deal for my customer in a very large and competitive market.”

Charcol senior technical manager Ray Boulger believes the FSA should not necessarily insist on lenders having to do this. “It needs to be a commercial decision and depends on the business model of the lender,” he says.

Boulger warns that lenders make it clear exactly what they are offering. For example, First Active, which is part of the Royal Bank of Scotland group, has spent a lot of time and finances on its campaign “That’s the way mortgages are meant to be.”

First Active’s deals are open to all customers and says its rates start low and stay competitive so customers do not have to change mortgage companies every few years.

Boulger says: “This is OK as long as it is clearly stated in the mortgage offer so it is written out, cut and dried.”

Despite some misgivings, some lenders appear to be keen to adopt the spirit of the Miles report. Money Marketing last week revealed that Woolwich has been piloting a scheme allowing intermediaries to introduce their clients to high-street products while still being able to get a form of procuration fee. Initial feedback suggests there is a lot of support from intermediaries taking part in the pilot.

If the FSA implements the cross-subsidy recommendations, it is likely that it would need to pre-announce a date from which it would do this so that it does not lead to significant market disruption. The Miles report recomm-ended two years as a plausible upper bound.

The eventual removal of barriers to existing borrowers taking advantage of the bestpriced deals may lead to a fall in the number of borrowers paying standard variable rates over time. This may lead to less scope to offer big initial discounts on variable and short-term fixed-rate deals. The price of discounted mortgages could, therefore, rise while the average interest rate on existing mortgages falls.

But Hughes says the change in the market is likely to be short-lived. He says: “Once customers see the benefits and repay the lender through their loyalty, the market will even out.”

The FSA has made it clear that it is not its role to regulate products but it is keen to point out that brokers and lenders should be clear, fair and not misleading. Some would argue that this is best achieved by the lenders making it clear exactly what they are offering in the mortgage offer and not necessarily by the FSA cracking down on cross-subsidy rates and interfering in commercial marketing decisions.

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