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Double vision

Is the Consumers&#39 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&#39

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&#39s move to rebate part of the procuration fee

to clients who go execution-only cause a price war among mortgage


Smith: No I don&#39t 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&#39t 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

to happen.

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&#39s 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&#39s 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&#39s 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&#39s 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&#39s 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


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