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Fees anomaly leaves buyers in the dark

Over recent months, it appears the Mortgage Code Compliance Board has started to make waves in the twilight zone of mortgage packagers. The position of packagers in the mortgage origination chain is being reviewed with particular reference to their regulatory position under the mortgage code – or rather the lack of one.

There exists the anomaly of third-party businesses operating outside the mortgage code and, therefore, not having to disclose the fees they receive from lenders, unlike you, the IFA.

Of course, it is not a simple argument. There are more questions than answers at the moment, varying from “What is a mortgage packager?” to “If a packager has to disclose its income, should high-street lenders have to break down their cost of distribution by apportioning their branch network cost per mortgage?”

But the blossoming in numbers of mortgage packagers compared with three or four years ago almost tells the whole story. Recent estimates put the number of packagers at more than 100 compared with 20 a few years ago.

The real issue, as with other financial services products, is the scope for misselling. Product bias is rife, particularly in the sub-prime sector. It would be extremely naïve to believe that substantial incentives such as £1,800 (a typical fee available to a packager on a £60,000 loan) or share options would not sway the argument compared with a fee of £350 (which is also available on that typical £60,000 loan).

Nobody is advocating restrictive practices and if a lender, as part of its sales strategy, wants to pay a certain fee level, that is its choice. In today&#39s competitive market, such differences can be expected as lenders compete against each other.

The argument, however, rests on fee disclosure. The client should have all relevant information to hand and that should include all fees that are being paid as a result of the mortgage application. The client can then be satisfied the mortgage recommended is the most suitable for them, regardless of the fees paid.

If lenders can get away with paying higher fees and charging a higher rate as a result, then so be it. The endowment scandal was not about the endowment per se but the lack of disclosure of commission being paid. There were and are thousands of happy owners of endowment policies – as there are mortgage holders – but it was the lack of fee disclosure which opened the door to misselling.

As more intermediaries become packagers, it is clear the rationale behind this is the lack of a requirement to disclose fees under the mortgage code. It is this grey area – when an introducer is also the packager – which is being fully exploited before any legislation bites.

The argument is not about fee levels, nor about sub-prime mortgages. Overall, the impact of sub-prime mortgage products can only be viewed in a positive light. They have enabled a substantial proportion of the working population to move back on to the property ladder, re-establishing their credit record where previously they had no opportunity. However, it was the arrival of sub-prime mortgages which has thrown this issue under the spotlight. Unfortunately, it is those people who are in the least position to afford it that are most at risk.

The other major loophole under the mortgage code is that there is no compulsory requirement to join it. Both a lender and a broker can operate outside the code and, to make matters worse, the client who unfortunately finds himself at the receiving end of this particular chain will be none the wiser. There is no requirement to clearly state that his mortgage is being processed outside the protection of the mortgage code and there are lenders and brokers operating in this manner. This could be rectified very easily by insisting that all lenders and brokers in the UK sign up to the code and that the lender joins the industry&#39s trade body, the Council of Mortgage Lenders.

Statutory regulation is now on its way and history dictates that certain things will happen. The cost of compliance will rise and this will undoubtedly drive a significant number of intermediaries out of the mortgage market. There are currently around 40,000 registered under the mortgage code – perhaps a more realistic number is a third of that figure.

Should this be welcomed? Perversely, yes, and particularly by mortgage-based intermediaries, because the cost of compliance will ultimately only leave enough room for serious mortgage-based introducers. If the market is left with predominately mortgage specialists, it is difficult to imagine a role for third parties which thrive on introducers only writing occasional mortgage business and thus needing advice.

If you, the IFA, have to disclose your commission under the mortgage code, then why shouldn&#39t all parties involved have to disclose? Clearly, there is no defence to this argument because it provides a level playing field for all.

How many more Newspaper headlines do we have to face before this issue is resolved? Does the industry seriously believe that MPs are going to let this issue die now they have got their teeth into it? It is time for the debate to move on. The consensus has been established.

If some people have a problem with fee disclosure, they should be widening the debate to ensure that the mortgage-introducer side of the market is not disadvantaged compared with the high-street direct distribution route.

How can borrowers make an informed choice of mortgage when packagers are not obliged to disclose their fees?

Balancing act: Clients need all the relevant information to be satisfied their mortgage is the most suitable. But packagers are not required to disclose their fees

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