Is the Consumers' Association acting with double standards with its
endowment misselling campaign by ignoring its own advice supporting
the products in its Which? publication of April 1988?
Smith: The mortgage market has changed enormously over the last 15
years. While endowment mortgages were popular then, repayment
mortgages are now the most popular type of loan. In its heyday, many
commentators as well as adv-isers and providers supported the
endowment concept. Under regulations, advisers and providers have to
justify their recommendations. Commentators are free to continue
Hurst: I think the honest answer is, no more than anyone else. I am
not convinced that if we were to delve into the archives of any other
trade or consumer finance publications, similar recommendations would
not have been made. Hindsight is a wonderful thing but it is only
sensible to vilify those who, when all the facts are known, continue
to make inappropriate recommendations. I would like to see some
reference made in these campaigns of the changing situations.
Announcing that all endowments are bad advice (seemingly irrespective
of the fact that some were taken out 20 years ago and did very
nicely, thank you very much) risks damaging relationships bet-ween
brokers and their clients and as such is unacceptable.
Bolton: Hindsight is 20:20 vision. The fact that the Consumers'
Association is moving to support customers who feel they were missold
an endowment has to be a good thing. There needs to be an
understanding between a product that has been missold and a product
that is not performing very well because of almost three years of
consecutive falls in the stockmarket.
Consumers need to be aware that they should only consider investing
in the stockmarket if they can leave the money invested in the medium
and long term.
Will Hargreaves Lansdown's move to rebate part of the procuration fee
to clients who go execution-only cause a price war among mortgage
Smith: No I don't believe so. Theirs is a specialist operation
dealing direct with consumers and does not pose a real threat to
mainstream mortgage brokers. Time after time, research shows that
consumers want to deal with real people face to face when arranging a
mortgage. In addition, hard disclosure of procuration fees has been
with us for several years under the mortgage code and has not proved
to be a problem in front of clients.
Hurst: I do not believe that this will be the case. It is more
feasible that the distribution of part of the fee by some brokers is
merely an individual selling point similar to exclusive products.
Customers will still review overall costs, including access to
individual products, and process support from intermediaries before
making a decision to go with one broker simply because they rec-eive
an extra couple of hun-dred pounds from a lender.
Bolton: No, I don't think so. If there is any activity, it will be a
small price war in what is essentially a small part of the market.
The vast majority of customers are looking for adv-ice. There are a
vast amount of products and customers are well aware that there are
some very competitive rates to be had. The last thing they want to do
is jump for a product and hear from their mates down the pub that
they could have got a much better deal.
Is the war with Iraq causing the housing market to stagnate as people
are being deterred from moving home?
Smith: Market observers have been saying for some time that there
will be a slowdown in the rate of house price inflation due to
affordability constraints starting to bite and this is what we are
seeing now in the South of the country. Out of London, however, the
market continues to move ahead – war or no war. But since we are in
uncharted territory in so many aspects of the economy and in world
affairs, it is more than ever difficult to predict what is now going
Hurst: Although this may be a contributing factor to a general
slowdown, it is more likely that fears about job security are
curtailing the overall market. The continuing str-ength of the
economy is heavily reliant on consumer confidence and the housing
Although the war in Iraq will certainly dent this confidence, it
seems realistic that it will bounce back if there is an expedient end
to the conflict. We have witnessed a sustained period of buoyancy in
the housing market and a slowdown is more likely to come simply from
a lack of affordable housing.
Bolton: We are not seeing any signs of this. Obviously, the quicker
any conflict is resolved, the better for confidence in all the
markets. It is important to remember that the factors that drove the
market last year continue to be very much in place. The housing
market is underpinned by very strong fundamentals – high employment
levels, very good affordability and low interest rates. The
fundamental factors driving the housing market are set to remain
supportive over the coming year but I still expect a gradual slowdown
in house price growth.
The rising numbers of first-time buyers who are finding it more
difficult to get on the housing ladder will increasingly curb demand,
causing house prices to rise more slowly. We expect annual house
price inflation to slow from 26 per cent in the last quarter of 2002
to 9 per cent at the end of 2003.
Do you agree with Intelligent Finance's claim that all the other
offset mortgage products on the market are “poor imitations” of its
Smith: No. We tend to view the Woolwich Open Plan Offset as the
market leader in this field. It has several important advantages over
the IF deal. The fact that it is a tracker rate for life – not simply
a lender variable – coupled with the greater accessibility to account
advice, since customers can use branches as well as phone and
internet, and the innovation of third-party offsetting clearly put
the Woolwich Open Plan ahead on functionality and transparency to
Hurst: I think that at best this type of claim is a little spurious
as “imitated” suggests that theirs was the first offering in the
market, which is plainly not true. They may feel that they have been
successful in refining previous product offerings but anything more
is rather hard to swallow. Could it be that such a claim is merely an
attempt to obtain some controversial PR coverage? If so, I suppose it
has worked as we are talking about it.
Bolton: Absolutely. Intelligent Finance is the only player in the
market that offers a true offset product that can combine mortgages,
current acc-ounts, credit cards, savings and personal loans. Plus
Intelligent Finance gives consumers the flexibility to choose as many
or as few of these elements as they want. Competitors are trying to
copy the idea but with only certain elements of the product offering.
Will the housing industry be able to find and train the 7,000 extra
surveyors needed to complete home condition reports which are
compulsory once packs are introduced by 2006?
Smith: This is the main stumbling block on the road to seller's packs
and it is far from certain that the problem will be solved before the
intended implementation date. One of the main issues is the
continuing level of uncertainly over how and when legislation for
packs will be implemented. A change of the magnitude that the
implementation of seller's packs represents needs lots of time for
planning and proper implementation and the sooner it can be got on
with the better.
Hurst: This is going to be a massive issue for the industry if
seller's packs are introduced. There will be huge pressure placed on
the surveying industry as properties will not be legal allowed to be
marketed without first obtaining a HCR. In light of the obvious
shortfall in professionals in this market, will the government's core
objective of speeding up the house sale process really be met? Let us
not forget that there is still a huge degree of opposition to the
introduction of the packs and some robust arguments being pushed
forward by various trade associations and individuals.
Bolton: There is no time to waste. The industry needs to take a look
at how it is selling itself to young people considering a future
career direction. The industry that shouts the loudest and gets the
most publicity seems to attract the majority of the talent. You only
need to look at the IT industry for evidence of that. There needs to
be a co-ordinated and concerted effort starting from now. As an
industry, we have loads to shout about and we should not hide our
light under a bushel. If we adopt a laid-back approach, we will
simply see the best talent creamed off by other industries.
Will the sub-prime market contract as lenders try to avoid “high risk
borrowers” because of the risk assessment aspects of the Basel II
Capital Accord set to be introduced in 2006, as the CML highlighted
in its res-earch launched this month?
Smith: Credit risk is only one of the determinants of the level of
capital required for a lender under the Basel II rules and I think it
is likely that lenders active in the sub-prime market will already be
using the additional margins they earn on more risky business to
build up the capital and res-erves they will need.
Hurst: The future for many lenders will be made uncertain by Basel
II. One advantage that sub-prime lenders have over their high-street
counterparts is a foundation of pricing for risk. It is important not
to forget that many other industries such as general insurance and
car insurance have highly sophisticated pricing for risk models that
allow them to construct a more balanced book or portfolio.
There is no reason why len-ders cannot accomplish this using their
experience and by introducing more sophisticated credit-scoring
models. Obviously, fulfilling the requirements of capital adequacy
ratios are made easier if the specialist lender is in a position to
leverage a global balance sheet.
Bolton: The market will not contract but the shape of the market is
likely to change. The bigger lenders will be the ones who are likely
to emerge as the winners, with the smaller len-ders likely to fall by
the wayside. This is probably accelerating a change that was likely
to happen anyway.
Mainstream lenders have entered the market and chan-ged the face of
sub-prime with flexible and transparent rates that mirror, in terms
of app-roach, many of the high-street deals. There is no room for
sub-prime players who still insist of trading on complexity and
inflexibility. The change is another step in the evolution of
Stephen Smith,director of housing marketing Legal & General
Richard Hurst, communications manager,Future Mortgages
Michael Bolton,Director of mortgages,BM Solutions