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Fairly liquid

Our panel of experts consider whether the FSA’s Treating Customers Fairly initiative should stay guidance or become regulation.

D oes treating customers fairly need to become rules rather than guidance to enable lenders to carry out the directive effectively?

Clifford: Yes, if the regulator intends to take sanctions against firms failing to demonstrate compliance with trea- ting customers fairly principles, as I suspect the FSA will. TCF has received some raised eyebrows and the cynical view that it is little more than back-door regulation due to its detachment from the rulebook itself. But it is very clear that TCF is hugely important in terms of firms having due regard at the highest level, for consumers’ interests. The concern is that a guidance-based approach gives more latitude for firms to miss the regulatory target and fail to comply fully.

Dring: The industry is working hard to ensure the objectives of this directive are met. Turning this guidance into “rules” would probably create unnecessary regulation and would not necessarily ben- efit customers. Lenders will change to comply with the directive, for example by incorporating treating customers fairly principles into every stage of the product development process. Directives are subjective and there are many different definitions of a customer. Lenders should have a sound strategy in place to honour this directive, paying particular attention to how customer- facing staff interact with customers.

Batchelor: The FSA’s requirements are a principle-based regime and it is for senior management to decide what TCF means to them and then ensure it is implemented. Therefore, making TCF rules rather than guidance would go against this aim and their commitment to reduce the cost of regulation. We support the Association of Mortgage Intermediaries and the Council of Mortgage Lenders in their stance to ensure that TCF stays as guidance. The lending industry should use both organisations to ensure that TCF does not become a burden to the ind- ustry while still being a ben- efit to the customer.

Are lenders in danger of incurring the wrath of the FSA with the sale of payment protection insurance on mortgages?

Clifford: MPPI is not inherently poor value for consumers and the Government itself has publicly stated objectives in terms of increasing the percentage of borrowers with adequate payment protection provisions. It is the industry’s duty to encourage more borrowers to seek and obtain satisfactory cover against loss of income and ultimately loss of their home.

The onus on the adviser to ensure that any regulated product recommended is suitable in relation to the customer’s existing circum- stances and their future preferences. Single-premium PPI is almost always of questionable value and might distinctly attract regulatory attention.

Dring: Companies will face the wrath of the FSA if their sales strategy is designed around volume and not around treating customers fairly. Some lenders appear to be aggressive in this area, selling to those who may not require the product. As the mortgage arena is now regulated, non-secured lending is a more vulnerable area and, as a result, may attract the FSA’s wrath. Most lenders are aware that their sales practices are under close scrutiny from organisations such as the FSA as well as by the media. Products are likely to become more tailored to individuals as companies apply customer segmentation.

Batchelor: As many policies available are one size fits all, it is possible that policies are unwittingly being sold to clients who either cannot make a claim under the policy or do not need the type of cover on offer. It must also be remembered that MPPI is just one option to protect a mortgage and so lenders and brokers must consider other products such as critical-illness insurance and income protection. As with all forms of protection insurance, the client’s individual circumstances need to be taken into account before a recommendation is made.

The CEO of Nationwide says the building society will not be considering equity release in the near future as he still believes it could be the next misselling scandal. Are his fears well founded?

Clifford: No. Given Ship negative equity guarantees, the matured credit experience of participant lenders and general consumer sense, lifetime mortgages are a great product type and will provide a inval- uable facility to increasing numbers of asset-rich, cash-poor, property owners. The CML and the AMI assist with codes of practice guidelines and advisers must, of course, demonstrate their knowledge of this specialist niche. I respect fully any lenders which determine it is not for them but many more will seize a worthwhile market share. One key aspect is the sales process and it is this which lenders and intermediaries alike need to concentrate on getting absolutely right.

Dring: Now rolled-up interest loans are regulated, there is unlikely to be a misselling scandal in this area, and lenders and trade bodies, such as Ship have a code of conduct to ensure best practice. Home-reversion loans may be more vulnerable to misselling while they are not regulated but plans have now been made for regulation. The equity-release market has huge potential as products become more flexible and the concept becomes more popular. Lenders such as Standard Life Bank are trying to ensure that the life- time mortgage process is built around the customer and their dependants to ensure they are fully aware of the implications of taking out such a product.

Batchelor: It is no accident that the FSA classified this product as high risk and it is clear that the level of advice needed is much more than a standard mortgage. Most specialist mortgage lenders operating in the intermediary sector, such as ourselves, are monitoring this market closely and we have already seen some mortgage brokers specialise in this market and set up referral arrangements with others who have decided not to deal in this sector.

Any lender deciding to operate in the equity-release market must be comfortable with the sales process and the quality of the advice given. If this advice is being given by an intermediary, the restricted availability of the product to certain groups of intermed- iaries who have demonstrated a solid sales process may be an option.

Mortgage plc says there are now 20 “super-packagers” in the market accounting for 90 per cent of mortgage business. What is the fate of the smaller packagers and is there room for new entrants?

Clifford: There is no question that the historic 200-plus firms called packagers will reduce dramatically to a more powerful minority. One of our packaging arms is a member of the Professional Mortgage Packaging Alliance which currently has 21 members and originated a significant amount of the mortgage market’s packaged business in 2004. I am unsure as to how many of these packagers would be in Mortgages Plc’s “super packager” bracket but when added to the Ramp members and then the half dozen or so big packagers which immediately spring to mind that are not in either body, there are going to be quite a number of firms which contend the view.

Dring: Mortgage regulation has had a financial impact on everyone in the industry, particularly smaller players. Consolidation and/or mergers are likely for those of a smaller scale. Packagers with no sound business plans are particularly vulnerable. New entrants who can deliver added value or niche products and services may have a chance but are more likely to succeed if a wealthy parent backs them.

Batchelor: There is no doubt that there a small number of packagers now dominating the market and for those lenders which have dealt with these firms for a number of years, it was clear that firms like these would thrive in the new regulatory environment.

Their investment in technology and their relationships with the big networks and mortgage clubs has meant that those packagers which failed to grasp the opportunities that regulation has brought are now seeing reduced levels of business as a result.

Undoubtedly, there are some which will not survive and it is difficult to see where new entrants could fit in, although, with the packag- ing service proposition changing, there may be room for a company adopting a new and fresh approach.

Is the 35 per cent rise in property repossessions in the first quarter of this year a sign that the mortgage market is in decline? How significant is this rise reported by the Department of Constitutional Affairs?

Clifford: The rise in repossessions could in part be rel- ated to lenders taking a less tolerant approach to arrears’ situations. Many consumer pundits and some lenders believe we are entering a sustained period of higher interest rates and that increased arrears are a natural phenomenon so some might well adopt a tougher approach to recovery.

Naturally lenders need to avoid a burden of unmanageable debt, as was experienced in the early 1990s. It certainly suggests a reduced level of confidence in borrowers and their perceived ability to repay, which runs the real risk of having an impact on supply and demand and ultimately on house prices. The rise in repossessions is also a result of some groups of borrowers not fully anticipating the impact that higher interest rates would have on their monthly repayments. Just two to three years ago, fixed rates were priced as low as 3.75 per cent and there is a payment shock at today’s variable rate.

Dring: The mortgage market appears to be relatively stable and the reported rise in house repossessions is unlikely to be a sign that it is in decline. In January, the Council of Mortgage Lenders reported that the number of repossessions and the number of long-term arrears cases (more than six months) remained flat.

In addition, the affordability policy that most lenders generally have is designed to protect borrowers from getting into difficulties. In March, Standard Life Bank announced our annual results which revealed that our arrears (customers three or more monthly payments down) were 0.12 per cent at the end of December last year, about a sixth of the industry average. The Council of Mortgage Lend- ers’ data for the final quarter of last year show mortgage arrears of three or more monthly payments down, standing at 0.8 per cent.

Batchelor: Such a reported rise cannot be ignored, although it must be made clear that this increase was related to the number of possession proceedings that have been issued. The number of ord- ers of possession showed an increase of 25 per cent although these do not ref- lect the number of properties taken into possession as many of the orders may not have been enforced.

As a lender operating in the non-conforming sector for a number of years, we have experienced the highs and lows of the UK mortgage market and have always based our pricing for risk strategy on the fact that such changes in the market are possible. If this trend continues throughout the year, this will have an impact on the UK mortgage market and result in tighter credit being applied.

Are lenders making desperate attempts to claw back revenue after M-Day with exit fees of up to 225, the use of 0870 numbers rather than local rates and other administrative fees in the small print?

Clifford: Probably. Most lenders have imposed increased exit fees which many consumers see as a opaque way of profiteering, particularly since M-Day. One lender’s fee rocketed to 295, which seems punitive for the deeds’ release task performed and which should perhaps attract regu- latory attention.

The counter-argument is that mortgage products do need to deliver a return and an oversupplied mortgage market with fierce competition creates churn and reduced profitability for some lenders. Any moves to restrict lenders directly from using ancillary fees could in turn lead to a lack of product innovation.

Dring: M-Day has been expensive and the competitive market continues to put pressure on lenders’ margins. Retaining customers has been and will continue to be a major issue for all within the industry, and this has contributed to a rise in arrangement and exit fees. However, there are still many competitive mortgage deals in the market and lenders are working to create more value for existing customers.

Batchelor: I do not believe there is any big conspiracy behind the use of 0870 numbers and although there are claims that some lenders changed over to these after M-Day, I feel this is purely coincidental. Regarding exit fees, all lenders must ensure they can justify any fees charged to the borrower under the FSA’s Treating Customers Fairly guidance notes.

Although the price differentials between lenders are relatively small sums of money, the broad issues surrounding pricing, transparency and fairness apply and I am sure that the FSA will be reviewing such fees at some stage in the future.

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