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Disclosure deluge

There has never been a more competitive time in the mortgage market. Borrowers are enjoying low interest rates. The big lenders have been sharpening their pencils and some have been cutting rates until it hurts. This is driven by massive competition within the market, with new entrants and incumbents fighting for a bigger share of a stagnant market.

In fact, a typical mainstream mortgage product makes a very poor return for the average lender. The return is often so low that the only way a lender can justify doing the business is by making incredibly optimistic (and probably unrealistic) assumptions about likely revenues from cross-selling of ancillary products or by projecting that loans will be redeemed long before maturity.

The share price performance of many mortgage banks (former building societies) demonstrates that the City has also spotted just how tough things have become in mortgage lending. One or two major lenders are even questioning their whole business strategy and are looking to become mortgage brokers rather than providers of under-priced assets.

This may seem a surprising turn of events since we have one of the highest levels of owner-occupation in the world, both as a matter of Government policy and due to the flexibility and responsiveness of the many players in the market. Over 40 per cent of all households have a mortgage and the outstanding stock of mortgage loans exceeded £500bn at the beginning of 2000.

It does mean, of course, that consumers enjoy the benefits of a flexible, responsive and low-cost mortgage market, which has consistently shown itself willing to develop new products and solutions to meet borrowers&#39 changing requirements. There is a much wider range of products in the UK than in many other countries, such as Germany where uniformity is the watchword.

In some 20 years&#39 experience in the industry, I have noted that, given the huge size of the market, there seems to be negligible complaint from consumers. Recently, we have seen customers in record numbers moving loans between lend-ers to get a better deal. This all points to one thing -a competitive market.

It was into this environment that in November 2000 the FSA published its consultation document on regulation in the mortgage market, following the Government&#39s decision that mortgage lending would become a regulated activity under the Financial Services and Markets Act. The implication seemed to be that in “Rip-off Britain” the mortgage market needed additional control and regulation and customers needed help in understanding what was available to them and in making the right choices.

A key element of the proposed regulation relates to provision of information. But I am far from convinced that this requirement would do anything to encourage lots more competition or to look after the best interests of the consumer.

Let us take a quick look at how customers tend to behave in the mortgage market. Most tap the market in one of two ways, either through an intermediary or by shopping direct with one or more lenders. Those who go thr-ough an intermediary have access to the full range of products available from that source and, in my experience, most of them do not look any further, generally following the recommendations of their chosen adviser.

In this scenario, it is the borrower who elects to follow the advice of an expert he trusts. Why should he be interested in wading through reams of extra paperwork?

Those who go direct tend to visit three or four lenders to compare offers. Surely, the extra information requirements will help customers make an informed choice? In theory, yes…but will borrowers be willing to go through this process repeatedly with a whole series of competing lenders? In the end, it is the law of diminishing returns – the fewer lenders you deal with, the simpler life is.

So what are the implications of the proposals for intermediaries? Will we see shrinkage in the intermediary sector such as happened following regulation of the life and pension industry?

The proposals would make each lender individually responsible for providing full information and for checking that this has been done by introducers. And – just in case – lenders would make the same information available with the mortgage offer, after completion, and with every year&#39s annual statement.

How does all this paperwork really encourage competition? Armed with all this information, does the average consumer shop around any more? The answer is an emphatic no.

More seriously, there could be a detrimental impact on the dynamics of the market. Will lenders want to distribute their mortgage products through intermediaries when they (the lenders) take on responsibility for compliance? Or will they find the incentive to form tied networks, which would limit consumer choice further? One step further, we could see lenders boosting their direct operations to gain greater control over their destiny and to limit their compliance exposure.

One thing is certain – all these measures would increase costs. Most lenders&#39systems are not geared up to support the repeated disclosure requirements and would require upgrade.

So the net result of all this looks like a market with less competition and more cost. Life and pension disclosure was supposed to cut commission rates and charges but in fact led to more cost in traditional distribution channels and increased commission levels and charges to support the higher cost base. It also spawned numerous “information-only” direct channels resulting in a reduction in advice available to customers.

Do we want an innovative lending industry intent on finding more ways to meet the needs of the public in a dynamic market? Do we want an industry based on quality advice enabling the customer to select the best product? Yes, of course, but to me this does not look like the right way to achieve it.


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