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Cross words

Our panel of experts give their opinions on cross-subsidies, the prospects for single ties and sourcing systems.

Is the FSA right to be considering incorporating the Miles’ report’s recommendations on cross-subsidy rates into the treating customers fairly regime?

Clifford: There is no question that consumer opposition is building. No consumer likes the principle that their own interest rate is directly subsidising new business rates which attract new borrowers. However, it is imperative that the TCF regime does not score an own goal by stifling product innovation.

What is crucial is that complete transparency exists so borrowers know precisely how their product works and how the interest rate is charged and may be altered. It would be wrong to suggest that lenders should not offer reduced-rate products to win new business.

Smith: It should not come as a surprise to the industry that the recommendations of the Miles’ report have not gone away. David Miles is a non-executive director of the FSA and in a position to influence future policy.

Taking his recommendations into the treating customers fairly proposals is perhaps a more flexible and pragmatic approach than act-ual formal regulation by the FSA and there will be a good deal of debate allowed before proposals are adopted across the lending industry.

Barrett: Cross-subsidy rates have a valid role to play in the market. Lenders respond to demand and the more choice brokers can offer their customers, the better. It is all about needs. Each customer is unique and providing choice and making sure that product features are fully explained and understood plays a big part in treating customers fairly.

Will we see the regulation of all packagers in the near future following the FSA’s sudden interest in this sector of the market?

Clifford: No. The FSA has limited jurisdiction over firms which are not dealing with consumers. To some, it seems perverse that any sector which deals with personal finance should be exempt from regulation but one has to remember that many pure packaging firms are performing a third-party admin function for the lender. Where the work of a packager is much like any other outsourced lender service, there is no argument for regulation. Quite rightly, the FSA will have a strong view about any packaging business which can influence advice given to consumers at the point of sale.

Smith: I do not believe the FSA will want to regulate packagers. The actual packaging activity they carry out is not a regulated activity – it is an admin function that lenders contract to outsource to the packaging company. It does not involve advice. It does not involve lending. Why should the FSA regulate this and not, for example, call centres or credit bureaux. I believe lenders which use packagers will have the contracts they have in place, scrutinised quite closely by the FSA when they visit, to ensure consumer interests are protected.

Barrett: Regulation in this area is essential if packagers are to continue playing a role in the mortgage market. Other imp-ortant areas to consider include buy to let and second-charge. By extending FSA regulation across the whole of market, the opportunity for confusion is dramatically reduced.

Will the mortgage market shift towards a completely single-tied environment, as predicted by intermediary group Cartel?

Clifford: No. It would seem highly unlikely that as regulation points more toward customer choice and most suitable advice, intermediaries would start offering one lender’s products. It would make it extremely difficult, particularly in the sub-prime environment, to have one set of products to recommend from, given that such clients have complex circumstances and requirements by nature. Whether through a panel of lenders or complete market access, brokers need to offer choice and consumers naturally expect an impartial approach.

Smith: I do not believe that a single lender tie will prove viable for all but the most niche of markets. If there is one thing the UK public has got used to over the last 20 years, it is in having a choice of mortgage products and lenders and good mortgage intermediaries are well placed to del-iver to this need. A broker selecting from the whole of market will always be able to find a better deal than any organisation using only the products of one lender. I see this as a one-off and I do not believe it will become common.

Barrett: There have been reports of brokers moving from directly authorised to appoin-ted representatives since regulation but it is early days. The market is still settling down so time will tell. What we have seen is a flight to quality in the market after regulation and I am sure this will continue.

Four months on from mortgage regulation, have the sourcing systems got it right yet?

Clifford: No, but many feel this is a result of late changes to the regime coupled with unrealistic parameters set by the regulator – 1 accuracy KFI and timescales in relation to the issue of these are examples. We need a realistic and flex-ible approach to how clients are informed during the process to ensure fairness and clarity. Press articles and market intelligence suggest that mortgage clients only want to know three things – can I get it, what are the repayments and what are the charges? It is regrettable that the intermediary market is so reliant upon the sourcing systems and that there was a lack of readiness for October 31. As British Rail said, we’re getting there.

Smith: Sourcing systems still have some issues to resolve which have previously been reported. The industry needs to find some new solutions which remove the inherent difficulties that exist in the way that data is collected and distributed. We recognise that this is not a simple fix but as lenders move towards credit scoring to determine affordability rather than standard lending criteria, it will only hasten the need to do something different. Relying solely on lenders’ websites to access KFIs is not a workable solution for many businesses so it is urgent that the industry addresses this.

Barrett: There is no doubt that since M-Day, sourcing systems have moved forward and continue to do so. Whether they are adjusting fast enough, however, is a different concern. It is fair to say that they certainly have not reached perfection yet and the fact still rem-ains that the only KFI brokers can rely on is one obtained from the lender.

A recent report says nearly half of broker have seen profits fall since M-Day. How are these brokers going to regain ground in a market which is slowing down?

Clifford: A professional, impartial service will always have a place in the personal financial services marketplace. Broker fees will be more prevalent, where brokers did not historically feel the need to charge. Pressure from big originators to raise procuration fees may occur and, if this happens, some lenders will certainly break rank and up the ante.

Increased specialisation will occur with some brokers setting out their stall to attract more lucrative work such as commercial mortgages, sub-prime cases, lifetime mortgages and so on. To a lesser extent, true electronic trading with all lenders will drive down a broker’s operating costs and give lenders more margin to increase procuration fees.

Smith: Getting to grips with new sales processes, new customer disclosure requirements and, in some cases, new systems was always going to take a little time and I believe the recent survey on this subject has come too soon to provide any real insights into longerterm trends. However, it has been clear for some time that, for advisers to make a good living, they need to look not just at the mortgage but also at all the insurance needs that a customer and his or her family have regarding their home finances. Selling the full range of products to meet customer needs will provide a good income for professional mortgage brokers.

Barrett: It is difficult to pinpoint whether these reported profit falls are a direct effect of mortgage regulation or just a general reflection on market activity. Lenders and packagers which failed to be ready and support brokers after M-Day may well have contributed to this reported loss although many figures indicate that there were more than enough lenders which had prepared. Technology can certainly help brokers increase business volumes due to decreased application processing times, among other benefits.

Can lenders realistically be more innovative with inc-ome multiples and affordability for first-time buyers? Are products that offer 130 per cent LTV the answer to help FTBs?

Clifford: Yes. We are blessed in the UK with a mortgage market which has an over-supply of lenders and products coupled with a resilient and mature intermediary sector. The fierce competition between brokers and between lenders seeking broker origination results in regular product innovation and sensible pricing. The 100-130 per cent market can certainly help and is arguably no different from FTBs buying a property and obtaining goods on credit elsewhere, particularly if the higher percentage lending is unsecured.

Smith: We really could do with the tabloid press not getting so worked up whenever a lender is brave enough to try some innovation in the mortgage market. There may be all sorts of answers to the issues faced by first-time buyers and Mortgage Express should be commended for coming up with a new slant. Given the still relatively low interest rate environment, with a pretty stable outlook for years to come, this sort of arrangement could be very appropriate for some, not all, customers.

Barrett: Innovation is always welcome in the market. However, as the MCOB states, responsible lending must take place and loans must be affordable. None of the recent products in the market, such as 130 per cent LTV, addresses the fundamental problem preventing FTBs getting on the property ladder, that is, the disparity between income and property prices. What we are seeing as lenders is that FTBs are saving more to put down a bigger deposit. The average deposit now stands at over 20 per cent.

Robert Clifford, chief executive, Mortgage ForceStephen Smith, director, housing marketing, Legal & GeneralColin Barrett, head of products, BM Solutions


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