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Long arm of the law

What impact will the FSA&#39s decision to force lenders to police intermediaries have on the market?

PB: Many were disappointed that the FSA did not go further and regulate mortgage business fully. Effectively, this step should see a much closer focus by lenders on who is introducing business to them. This will benefit the consumer by weeding out those intermediaries who are not following the basic requirements of the mortgage code, which has to date been successful.

RV: Lenders will be responsible for product disclosure at point of sale. This is a specific activity rather than a global responsibility for policing intermediaries and the impact need not be negative provided a pragmatic approach is adopted, for example, using the existing MCCB arrangements to meet a number of the requirements.

Overall the FSA, with the industry, must be careful to ensure that the new regime does not result in a red-uction in consumer choice – a healthy intermediary market with lots of competition is the best guardian of consumer interests.

GB: If the FSA follows through with its decision to force lenders to police intermediaries, there are many potential issues and problems.

There are three main areas of concern are. First, on all intermediary-introduced cases (60 per cent of all mortgages), a lender only becomes involved in the mortgage transaction after the sale is made. Second, customer choice and product selection by the intermediary may be affected by a lender&#39s regulatory discipline. Third, will lenders have the resource and budget to regulate the process without having to increase their charges and interest rates?

A number of major lenders are not working with initiatives such as Ifonline to produce a common trading platform. Why do you think this is, and are they right not to?

PB: Lenders will have their own distribution strategy, which may or may not include e-commerce, introductory channels or a combination of the two. Their decision to embrace Ifonline will undoubtedly be influenced by their own strategy. What Ifonline does not allow them to do is communicate the benefits of their own brand – it merely serves to compare products and pay rates. As long as a lender has a clear distribution strategy which is sustainable in the long-term, it should have nothing to fear. If not, then it will be forced to join the platform.

RV: Lenders are right to look to their own sources of business as a priority, rather than divert resources to develop an industry platform. Therefore, big relationships will benefit first. For example for a number of lenders, Legal & General&#39s Mortgage Club is a priority. Wider industry initiatives may follow later.

GB: Many lenders have already embarked on their own e-commerce strategies and may not want to duplicate or dilute their own work. Some have not done anything at all because they cannot see that there will be sufficient demand through this platform.

Also, would it be in your best interests to have product selection based primarily, if not solely, upon price when other factors should be taken into account?

However, I do believe that online business to business mortgage origination will be an important part of any lender&#39s distribution mix. Any lender which wants to originate volume in the intermediary sector must offer this service to their introducers whether outsourced or in house.

As more mainstream lenders enter the sub-prime market, what specialist market niches are left for lenders to explore?

PB: Although we have seen lenders such as Bristol & West and Chelsea open the door to borrowers with adverse credit history, we are yet to see whether many others will follow or indeed whether there will be a long-term commitment to this area.

However, in today&#39s competitive market, lenders are looking to attack any area they can and we may see more activity in the buy to let, policy loan and equity-release market. The margins in these areas will undoubtedly attract lender attention.

RV: Niche market opportunities will focus not so much on products but on the service and functionality that lenders can provide. Niche lenders will capitalise by offering truly adaptable mortgages where advice and service are an integral part of the package and the mortgage is regarded as a true financial planning tool rather than a millstone round borrowers&#39 necks.

The growth in take-up of flexible mortgages has shown the UK public&#39s appetite for products that accommodate today&#39s lifestyles. The growth in availability has demonstrated the desire to fulfil that appetite. It is now time to demonstrate full support for the users of such products.

GB: I think that the residential mortgage market is well and truly catered for. Clearly one of the most unexplored areas in our market is service. Perhaps the next revolution will be in this area.

We are seeing a rise in the number of long-term fixed mortgages on offer. Do you think borrowers are now looking more to the long-term, rather than at low headline rates for short periods?

PB: The attractive rates which are being offered over the long-term, for example, Britannia&#39s recent introduction of a 5.69 per cent 15-year fixed rate, are certainly going to catch the eye of some borrowers. However, the lack of flexibility in most of these deals will make them unsuitable for many borrowers. How many people&#39s circumstances remain the same over 15 years?

With the consumer becoming more aware of the advantages of shopping around and looking for more flexibility, I think we will see continued popularity of the cheap rates available in the short- to medium-term market.

However, we have seen some lender awareness of borrowers&#39 needs, with Leeds & Holbeck, Newcastle and Birmingham Midshires all having recently introduced long-term products with a degree of flexibility in the redemption penalties imposed.

RV: No. With attractive two- to three-year rates without extended redemption penalties and with a backdrop of possible base rate reductions, together with customers&#39 desire to remain flexible, the longer-term fixed-rate products have an uphill struggle as far as generating significant volume is concerned.

GB: Borrowers will seek the most advantageous product for them, depending on personal circumstances and their view of economic trends in the UK. Fixed rates over longer periods currently represent some of the best rate bargains, coupled with the fact that the borrower may perceive that the variable-rate market has reached an all time low.

Therefore, now is a good time to fix or cap. Redemption charges are also much improved which means the borrower is now more inclined to choose one of these products for protection. Borrowers choose these products if they are available because it presents them with the ability to budget with certainty.

Now that compulsory insurances are less common, have you seen the take-up of insurances policies drop? If so, what measures are you taking to reverse the trend, if at all?

PB: The consumer is now more astute and looks out for these types of contract terms in order to avoid them. Borrowers&#39 conception of these “tie-ins” is that they can find better value elsewhere and the pressure on lenders is to abandon these terms altogether.

The knock-on effect of this will be to force lenders to provide their insurance schemes at a more competitive cost to compete with the direct insurers. Maybe we will see lenders begin to broke their insurance policies for customers to provide reasssurance on the premium payable. The bottom line will remain, however, that you should always shop around.

RV: There will always be a difference in customer take-up rates for products that have to be taken compared to those that should be taken. Our experience is that more and more of the type of policies that were compulsory as part of a mortgage package are now being effected through advisers.

In particular, MPPI policies are benefiting from greater understanding, advice and the product benchmarking established by the ABI/ CML initiative.

GB: No, this is not an issue we have had to contend with as we have never made the purchase of insurance products compulsory alongside our mortgage products.

As an intermediary only lender, our take-up rates have always been on the low side, preferring our intermediaries to arrange suitable cover. However, last year we did launch an MPPI product paying commission to the introducer to stimulate take up of this important cover.

The Government wants 50 per cent of mortgages to be sold with MPPI. Do you think this is a realistic target?

PB: Clearly, the penetration rate of MPPI is nowhere near where the Government would like it to be at the moment with estimates more in the region of 20 per cent. State benefits are being slowly but surely eroded, increasing the need of borrowers to protect their ability to pay the mortgage. MPPI does represent a cheap form of cover to protect what is most people&#39s primary commitment but, based on progress to date, it will be some considerable time before anywhere near the Government target is met.

RV: The research that led to this target is certainly plausible but the target itself is very challenging. The barrier to customers who want to protect their homes fully is cost. We are constantly improving products and price and the more customers that buy these products the better the overall cost that can be obtained – we are already part way into the circle that starts with awareness.

GB: No, I think it should be higher. The serious erosion of state benefits will in the future have disastrous results upon many home owners and their families. Not only are homes at risk but also borrowers credit ratings and profiles, which are all so important these days with the growing use of credit-scoring.

We have found borrowers in the non-conforming sector are more likely to buy this cover as they have experien- ced difficulties in the past

and can more easily see the benefit of this cover.

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