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Loan agreement

The forthcoming review of mort-gage regulation by the FSA will attempt to look back at the problems of recent months and put in place procedures and controls to prevent the possibility of a re-occurrence of the elements that led to the weaknesses in the markets.

In order to do this, it is clearly essential that there is an understanding of all the various elements that caused the problems, with responsibility and blame being allocated as appropriate. Sadly, there has been plenty of evidence of politicians, regulators, lenders, intermediaries, consumer groups and borrowers all blaming one another while often failing to fully acknowledge their own part in the problem.

Their arguments each invariably have some merit but until real responsibility is taken and the parties all start to work together, a long-term and lasting solution will continue to prove illusive and we will finish up with a partial solution that will only survive until the next crisis. There are two key issues which involve several of the parties and seem to be fundamental.

First, there needs to be a clear recognition of the role adopted by the various parties in a mortgage transaction which is arranged through an intermediary. By definition, a broker is acting on behalf of his client and as such is primarily concerned with seeking out the most appropriate deal for his client’s needs.

The practice where the broker also acted on behalf of the lender would always lead to a potential conflict of interest. Ultimately, a lender has to be responsible for assessing the suitability for any advance made by them.

Second, there is the matter of consumer responsibility. Like many consumer purchases, the importance of the financial arrangements involved are often not fully recognised by the buyer who is more focused upon acquisition of the asset. In the same way as the bright shiny new car in the show-room is of much more interest than the lease arrangements, so the chance to live in a new house overshadows the details of the mortgage advance. Whether the sale is advised or non-advised, it is impor-tant that the consumer fully recognises the real impact of the transaction and takes out adequate insurance to cover themselves for the worst of their financial risks. To buy a property without insuring it is a very significant risk.

Consumers also need to understand all aspects of the transaction and to ensure that they take advice when they need it. There is a strong argument that the FSA needs to re-consider its definitions of an advised sale as a part of the review, aligning them if possible with the descriptions given in other parts of the market. In future, consumers should be left in no doubt as to the nature of the service they are receiving, with suitable, clear risk warnings where necessary.

Richard Fox is chief executive of the Chartered Insurance Insti-tute’s society of mort-gage professionals

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