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Giving up the chase

Our experts discuss whether the use of third parties in endowment claims should be discouraged, plus marketing and self-cert rates

Should lenders stop handling mortgage endowment comp- laints via third parties, as Brad- ford & Bingley has announced?

Yousefi: Given the level of complaints over the misselling of endowment-linked mortgages, a number of third-party companies have taken advantage of the position and are operating a no-fee, no-win service. I believe it is more appropriate for consumers to deal direct with lenders and insurers because they have an obligation to deal with every claim for compensation in a transparent manner and to send an initial response within eight weeks. If the consumer is not happy with the way that a lender or insurer is dealing with the claim, they have the opportunity to raise the matter with the Financial Ombudsman Service, which will investigate it fully.

Montlake: I think this is something that more providers will look at doing. B&B is right that people may end up being put at a financial disadvantage by using some of these firms. There should not be a need to resort to using such firms if providers have their own complaint service. I would have thought it would be quicker to deal direct with a lender, rather than a third party and lose some more of the monies to such a company that should have been used to pay off the mortgage.

Batchelor: We see this as an issue of treating customers fairly, regardless of whether they choose to contact their lender direct or via a third party. B&B has said it will deal with third parties if that is what the customer wants. Britannia is happy to deal with third parties although it has taken the decision that if the individual is entitled to a payment of any kind, it is paid direct to the policyholder and not the third party, as the contract is between Britannia and the policyholder, not Britannia and the third party.

Will the new home inspectors be able to cope with demand once home information packs come into place and is their expertise trusted by the industry?

Yousefi: There is still an enormous amount of work to be done to train and allow home inspectors to obtain professional qualifications prior to home information packs becoming compulsory on January 1, 2007. It is believed that the industry will ultimately rise to the challenge and will train and provide accreditation to sufficient numbers of people to act as home inspectors to cope with the huge volumes of Hips. Provided that adequate training, their expertise will ultimately be trusted by the industry as a whole. Professionally-qualified chartered surveyors may wonder how people from outside their profession will cope with the rigours of training required for the new home inspectors, especially where they have no previous experience in assessing the condition of residential properties.

Montlake: This sudden amplified demand for these types of reports may hit the inspectors like an avalanche. Whether there will be enough inspectors to meet demand remains to be seen. It does seem that the industry is regarding the expertise of these inspectors with distrust. There is no guarantee that lenders will accept reports from a new source such as this, especially as they will not be done by one of the reputable surveying firms. Also, there is the question as to whether buyers can legally rely on such reports, so they may opt for their own valuation anyway. I think some more thought is required from the Government. Batchelor: There are still a lot of unknowns relating to Hips and the use of home inspectors, such as the qualifications inspectors will need to have and the availability of suitable indemnity insurance. There is also a general question surrounding impartiality, as we must determine who the inspector is acting for. The Office of the Deputy Prime Minister has stated that the certification scheme for home inspectors will be approved this autumn, in readiness to issue licences in 2006, so I am sure we will find out more in the next few weeks.

Are brokers shying away from marketing and promoting their businesses because of confusion surrounding the financial promotion rules?

Yousefi: While there is anecdotal evidence that some brokers have reined back on advertising and marketing activity, it is believed that only a small minority have done so because of the financial promotion rules. Most brokers have been rather more innovative and proactive with marketing and promotion since M-Day.

Montlake: It seems that a lot of confusion surrounding the financial promotions rules stems from the fact that once you have produced a piece of marketing material, you cannot check that you have complied with the rules by ticking boxes on a checklist. This is not deemed as an adequate measure of control. It is very clearly stated that, as well as adhering to strict guidelines, material used must meet with the principles of the rules. This could lead to misunderstanding as principles are intangible and arguably come down to the interpretation of who is reading the rules. I think the confusion will lead brokers to approach their marketing material with a lot more caution, propa- gated by fear of the hefty fines the FSA will levy for not adhering to the rules. But if the principles are interpreted correctly, one can see the rules are designed to ensure that marketing is done in a way that is fair, clear and not misleading for the customer.

Batchelor: Possibly, especially as many ads before reg- ulation targeted consumers who were unable to obtain a mortgage via a mainstream lender. Since M-Day, any brokers wanting to promote services for such customers have had to conform to complicated rules, which undoubtedly have dissuaded many from undertaking such advertising. I still see many ads which do not follow the rules to the letter. It will be interesting to see if the FSA takes a tougher stance about such advertising following its warning in June.

How close are we to seeing self-cert rates fall close to mainstream rates? What is prompting the fall in rates?

Yousefi: We have seen a great deal of competition among lenders in mainstream, buy-to-let and self-cert markets in the first half of 2005. It is not uncommon for self-cert pricing to be no more than 0.5 per cent higher than mainstream mortgages. This is likely to con- tinue as long as self-cert lenders are looking to expand and grow business volumes, despite a market which is tougher than in the last couple of years. The reduction in money-market rates has also made it possible to offer fixed rates in the self-cert market at margins akin to mainstream markets for the first time in the last 18 to 24 months.

Montlake: The main driving force behind falling self-cert rates is competition. As we have seen in the buy-to-let market, where rates have fallen dramatically, battlegrounds have been set within differing sectors as there is little ground to be gained in the mainstream market with margins so slim. Lenders’ attentions have therefore switched to more profitable sectors where there is room for manoeuvre in cutting rates while still being profitable.

Batchelor: They are getting closer but mainstream rates have also been falling, so the relative difference is only changing slightly. Before the recent Bank of England base rate cut, the cost of fixed-rate money did reduce, so we have seen a raft of launches in the last two weeks by lenders which have taken advantage of this. From our experience, two-year fixed rates are by far the most popular product in the self-cert sector.

Will commercial mortgages become a more popular income stream for brokers, particularly as we approach A-Day?

Yousefi: Buy-to-let mortgages will become a more popular income stream for a significant minority of brokers as a result of A-Day and one could potentially see a boost of 10 to 20 per cent in new buy-to-let lending in 2006. It is not every day that the Government provides higher-rate taxpayers with such a fantastic tax concession, as well as enabling everyone, even those with occupational schemes, to buy property under the wrapper of a Sipp. Brokers who have excellent links with solicitors and accountants for referral business, or a large number of small and medium-sized businesses as clients, are likely to prosper most by diversifying into the commercial mortgage market.

Montlake: Commercial mortgages have always been good income-earners for those in the know but there has been a certain mystique about the sector and a belief that too much hard work is needed to get one deal through. But with more information available, more lenders openly advertising their commercial sections and the Sipp factor, I feel that this will be a growing area.

Batchelor: Buy-to-let mortgages are already very popular but many are sold by pure mortgage brokers and specialist buy-to-let brokers, some of which are not authorised by the FSA. These types of broker cannot advise on Sipps, so this may force some to link up with IFAs to take advantage of these new rules. Many professional landlords are not interested in putting property into a pension, as they cannot just sell the property and take the money. There is no doubt these newrules offer great opportunities for people to use buy to let to fund their retirement but caution must be applied.

What potential is there for big packagers to becomelenders in their own right?

Yousefi: There is no doubt that a select number of bigpackagers have the ability and infrastructure to become niche lenders. The best opportunity is for bigger financial institutions to buy packaging firms which have the management capability to turn themselves into a lender, while benefiting from the financial support of a bigger parent to expand cautiously while being able to sustain potential losses in the first two years of operation.

Montlake: I have always thought this would seem a logical next step for bigger packagers. Packagers have long bemoaned the fact that they do not get rewarded adequately for the alleged value they create for lenders by distributing their products and this would seem to be a good way of refocusing. There have been notable successes in the past with Private Label and GMAC. The key issue is being able to raise the capital required to do this successfully and produce competitive products that appeal to your customer base.

Batchelor: There has always been the possibility for bigger packagers to secure their own funding lines but very few have taken this step over the years. With current mortgage regulation and Basel II round the corner, it is more difficult than ever for this to take place without significant backing from a bigger parent company. It is clear that many foreign firms are still interested in the UK specialist mortgage market, so the purchase of a stake in a big packager firm or an outright purchase may be a viable course of action.

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