When FSA chairman Howard Davies reports to the Treasury select committee this autumn, how should it grill him over the endowment crisis?
TJ: The FSA set out its conclusions in some detail in its recently published progress report. The main concern now for everyone involved in the industry, including the media, regulators and Government, should be to ensure that investors with shortfalls are in a position to repay their mortgages at the end of the day.
Whatever your views on the endowment issue, everyone must recognise the industry cannot afford a situation where projected shortfalls become actual shortfalls in the future.
The Treasury select committee will need to be satisfied that the ABI's reprojection exercise is having the desired effect and investors are responding when they need to.
GB: Perhaps the questions should be: “Is there a crisis? If so, to what extent and what is being done about it?”
Personally speaking, I do not believe there is a crisis and the claims so far have been widely exaggerated. Tarnishing every adviser and provider is unfairly giving our industry a bad name and causing unnecessary consumer concern. Once the extent of the issue has been established, Davies should be asked to deliver an objective message to the media and consumers to explain the situation and provide a cost-effective process to resolve any issues.
Yes, no doubt there will be some cases of endowment misselling and the committee should ask how these can be easily identified and rectif-ied without onerous expense which ends up being paid for by the consumer.
JM: The focus should be on the drive for increased and more effective regulation to ensure best advice is practised throughout the industry.
Will the MCCB plan for compulsory qualifications decrease the number of brokers operating in the market?
TJ: Yes, I believe it will but not as a result of exam failures. Mortgages may only be a small part of the total services that many financial advisers offer. These advisers may have questioned whether it was worthwhile registering for MCCB in the past. The need to invest time to get qualified may be the final straw.
Also, with specialisation within many broking firms, it is not essential that everyone offers a mortgage service. A number of brokers may choose not to take the exam if there is another specialist mortgage broker within the firm.
Finally, just as with the FPC exams, there will be an element within the non-regulated broker market who just do not like exams. We saw a number of people move out of the industry due not to lack of competence, just lack of desire to take the exams.
GB: There is no doubt in my mind that compulsory qualifications wil
l reduce the number of brokers operating in the mortgage market in the short term. While this might help eradicate the minute number of rogue brokers, I do fear we will lose some very good advisers who, for a number of reasons, decide not to take the exams.
This could be because they do not write sufficient mortgage business and will refer clients to another broker. Whatever the reason, we will see a decline in numbers in the short term but I expect this to address itself in the future in a similar way to when the Financial Services Act demanded compulsory qualifications for advisers. Advisers will be enticed back when consumer confidence in mortgage advice leads to more consumers seeking advice from qualified practitioners.
JM: Many MCCB members are FSA-regulated and are therefore used to taking exams and being part of a strict regime of competence testing. We are supportive of any measure that helps improve the overall standard of broker advice and increase the confidence of customers in the advice they are given.
Why is the self-employed market booming? How long can this be sustained?
TJ: I am not sure I understand the term “booming”. The number of self-employed, contract and part-time workers in the UK has been rising for some time now and this seems set to continue. Personally, I have noticed an inc-rease in awareness that you can get competitive mortgages with this employment pattern and this is a huge shift. We have offered a flexible mortgage product with Bank of Scotland for 12 years targeted at this sector and it has been our best seller for many years.
Our biggest single objection to overcome is: “Are you really sure I can get the mortgage?” Loan to value is critical in this sector but, with growth in property prices, particularly in the South-east, it will mean mortgages are available to many more people. If the objection to changing employment style was fear of not being able to move, this is no longer the case. Flexible mortgages are key to fluctuating income and I expect this market to continue to grow into 2002.
GB: There is a growing trend in the UK away from tradit-ional full-time employment to more flexible alternatives. This change is reflected in workers wanting to maintain flexibility in their careers combined with companies wanting to maintain flexibility in their workforce. We have seen ever increasing use of contract workers and self-employed consultants, for example. This allows companies to more easily manage the peaks and troughs of the business cycle without expensive redundancy and retraining programmes.
Technology is also acting as a catalyst as many workforces do not have to work on site.
JM: The labour market is becoming increasingly diverse. At the same time, lenders in general are narrowing their criteria and employing rigid scoring techniques. The increase of self-employed workers signifies a large growth area for innovative lenders and, at Kensington, we look at people on an individual basis rather than relying on computer scoring systems.
We believe this trend will be sustained for as long as working patterns continue to be so varied.
How will the mortgage industry overcome the decline in business confidence in banks and building societies identified by the Confederation of British Industry?
TJ: The key thing for the industry must be not to stand still. I think banks and building societies have to look hard at current consumer and business needs. Everyone wants to pay less interest on borrowings, yet earn more interest on savings. The mechanics do not work but, when you consider the opening gap between existing borrower rates and new borrower rates, this could be one of the causes of just such a decline in confidence. Offering real value on additional services is one area that can impact on perceptions.
GB: I feel the mortgage industry does not need to do anything radical, despite the reported decline in business confidence by the CBI. The main reason for the fall in optimism is that the financial services market is going through a phase of increased competitive pressure. Competition is a good thing, as it forces industry to stay on its toes in an effort to find all avenues of competitive advantage available to it.
Individual mortgage lenders will have to make their own decisions based on their outlook and positioning, perhaps improving their efficiencies and product ranges to remain competitive and maintain healthy profit margins.
JM: We are strong advocates of statutory mortgage regulation. We believe it is essential that the whole industry competes on a level playing field and is above reproach.
We do not believe there is widespread bad practice in the industry but consumers do have the right to full and clear information about the products and services they buy. The industry now seems to be looking closely at regulation so business confidence should improve.
When do you anticipate the mortgage market to pick up?
TJ: At around 1.15pm on April 16, 2001. If the megawatt brains within the economic forecasting sector cannot forecast it, I think I am up against it. My view is that transactions look like they will remain stable for some time in the purchase market regardless of increases in value. If base rates remain as they are now for a further six months, there will be a knock-on positive feeling in the purchase market and spring purchases could be the first chance to see a significant increase over previous years.
However, I do predict that remortgages will continue to grow. They continue to be one of the greatest marketing tools for genuine face-to-face advice. If Allied Dunbar figures are a yardstick, remortgages could represent over 30 per cent of transactions over the next six months.
GB: For something to pick up, it has to have fallen in the first place. From our perspective, the market remains reasonably healthy although compared with last year it has clearly slowed down. Having said that, 1999 was an exceptional year and we could not have maintained such growth without running head on to a slump.
What the industry and economy require is a market with steady growth, not boom and bust. Healthy levels of price competition will maintain strong levels of remortgage business. House purchase business, given the current state of the macro-economic environment, should remain at a steady and manageable level.
JM: One of the most important features of the modern mortgage is there is no single market. So, while the mainstream lenders may be experiencing a lull, the non-con-forming lenders have benefited from a growth of sales. At Kensington, we are experiencing strong growth in lending volumes. This looks set to continue for the near future. We are encouraged by the growth of innovative lenders and believe this will stir up consumer confidence and boost sales further.
Is it time the Bank of England's monetary policy committee significantly altered interest rates?
TJ: There are so many factors to consider when setting rates and no one wants a knee-jerk reaction fuelling a boom and bust. Personally, I would say this is not the time to alter rates. Holding rates at current levels will be seen as a positive step by homeowners.
Rate falls could fuel the fire on spending as borrowers release equity, while any rise in rates will definitely have a detrimental impact on the housing market on the back of indirect tax changes, the loss of Miras and the impact of annual rate reviews which will increase costs. My crystal ball says keep the ship on course with stable rates for as long as possible and avoid buying new navigation tools that say otherwise.
GB: As the sales and marketing director of a mortgage lender and not an economist, it is difficult to comment on something that has such wide economic implications. The committee must balance all the relevant factors such as inflation, employment and exchange rates. But as I said, I am not an economist and I do not have all the facts and figures at hand to objectively answer such a question.
All I would say is don't fix something that is not broken. From my perspective, the current interest rate levels seem fair for the economic climate.
JM: While there has been clearly a slowdown in house moves over recent months, there seems to be a large North/South divide in the market. According to brokers outside the South-east, houses are taking a long time to sell and the entire process is steady at best. However, we do not think the current interest rate policy is adversely affecting current market conditions. Mortgage payments remain very affordable, particularly compared with the early 1990s. We think the benefits of continued economic stability outweigh any short-term benefit of stimulating the housing market.
Tim Jones,Mortgage marketing manager, Allied Dunbar
Guy Batchelor,Sales and marketing director, Platform Home Loans
John Maltby,Chief executive, Kensington Mortgage Company