It is difficult to feel sorry for a regulator but the FSA has probably done the best it could with an ill-thought through hospital pass from The Treasury. There was a great opportunity to create a single regulatory framework for the mortgage industry while meeting the objectives of raising public awareness and increasing consumer protection.
The draft mortgage rules will compromise the independence of IFAs and in turn consumers will be disadvantaged because potentially they will not have access to truly independent advice in one of the areas that they need it most.
Having previously been a regulator, I know they are sometimes the recipients of difficult issues but this fudge will undoubtedly influence the polarisation debate. While intermediaries will not be directly regulated by the FSA, under the proposed rules, they cannot escape its interference.
The increased regulation of lenders will undoubtedly imp-act heavily on intermediaries, particularly as lenders are made responsible for ensuring intermediaries abide by the proposed disclosure regime.
How can this be done without compromising independence and what are the professional indemnity insurance implications? If the cost of monitoring all intermediaries conducting mortgage business becomes too high for lenders, they may decide only to work with bigger brokers, effectively driving smaller players out of the industry.
Likewise, if the cost of disclosure becomes too much of a burden on smaller intermediaries, they may stop advising on mortgages voluntarily or be forced into networks. The key here is that the proposed mortgage rules are likely to force a change in the distribution patterns of the mortgage market.
All the effort put into transparency has not had the desired effect, which is why I believe the Government introduced low margin products such as stakeholder. If we end up with smaller IFAs not having access to all mortgage lenders because the lenders can not afford to deal with every intermediary in the market and if bigger IFAs have reduced numbers of lenders on their panels because they can not afford to support disclosure from all the lenders, then independence is lost.
What is clear is that the industry needs to find a way of supporting the proposed individually tailored disclosure regime so that we do not see mass consolidation of the mortgage market or a move to multi-ties via reduced lender panels.
The key to achieving this is technology. There is no other way that the necessary pre sales disclosure information can be distributed cost-effectively to the consumer via the intermediary market.
Intermediaries are going to have to prove to regulators, via lenders, that they have provided the necessary information to their clients before, during and after the sale of a mortgage. They are going to have to keep detailed records as proof of their actions. If the audit trail is kept electronically, not only does it make it easier for the intermediary to monitor but makes it more accessible to lenders or the Mortgage Code Compliance Board.
I hope that the lenders see sense in delegating the work of monitoring intermediaries (but not the responsibility) to the MCCB. It is not an ideal position we find ourselves in, but I believe technology can play a key role in the future competitiveness of the mortgage market without compromising independent advice.
Jim Gaskin is managing director of The Exchange