What do you think of the FSA's plans to reduce professional indemnity insurance and capital-adequacy requirements for some mortgage brokers?
Batchelor: We felt that to impose a capital resource requirement on some mortgage intermediaries who have already had to cater for increased PI premiums could prove overly oppressive, particularly if they are not holding client money, and result in a reduction in the number of mortgage intermediaries operating after Mortgage Day.
These new plans are welcome and are simple, fair and good for the overall market.
Sturges: Good news and continuing evidence that the FSA is listening to the industry and adjusting its rules and requirements in a pragmatic but controlled and sensible fashion. It is this style of approach that will help encourage mortgage intermediaries to embrace the regulatory process more fully.
This has to be welcomed by all of us with a continuing interest in the health and diversity of the market. Also, by making this particular decision, the FSA has acknowledged that the giving of mortgage advice is a lower-risk activity than, say, selling endowment or pension products. Most reasonable people would agree with this and would therefore expect a different level of treatment for the respective groups of intermediaries.
Bolton: This has to be good news for brokers, especially the smaller brokerages of one to five RIs. Professional indemnity insurance and capital adequacy are still big issues and moves to make these requirements less onerous have to be welcomed. It is good to know that the FSA is listening to the concerns of brokers and of those lenders who are fighting on behalf of brokers.
BM Solutions is launching a range of initiatives to help brokers on the way up to mortgage day. Most recently, we have launched a deal with the Association of Mortgage Intermediaries to offer smaller brokers (one to five RIs) free membership to the AMI for a year. The more brokers that get on board with the AMI, the stronger voice it will have to fight the brokers' corner on N4.
Barclays and Bradford & Bingley disagree over whether buy to let is a risky market to be in. How can there be such diverging views surrounding this market?
Batchelor: It is interesting to see two major high-street lenders disagreeing. Our view is that it is not a high-risk market and it is one we wish to participate in.
The CML has recently stated that only 0.42 per cent of all buy-to-let loans were three months or more in arrears as at the end of last year, which is less than half the equivalent proportion for the whole mortgage market. We would rather lend to people on a buy-to-let basis than lend at 100 per cent to first-time buyers on a big income stretch. With a maximum loan to value of 85 per cent and the lending being on residential property, we see no reason to review our strategy.
Sturges: Disagreements between players over products are nothing new and help keep the mortgage market competitive and vibrant. Buy to let is a specialist lending area that has polarised the industry for some time, both from a risk and regulatory perspective, and in some ways perfectly illustrates the different approach to lending that is taken by mainstream and specialist lenders.
The latter, for example, have fully embraced the sector and now offer a wide range of attractive products to both portfolio investors and those seeking a more modest presence in the buy-to-let market. Coupled with their tried, tested and flexible risk assessment processes, this has allowed the specialists to capitalise on the tremendous growth in this niche sector without compromising the quality of their mortgage books.
Regarding risk, I see buy to let as continuing to form a legitimate and growing part of the mortgage landscape. While it is true that certain hotspot locations have become saturated to the extent that supply of rental properties outstrips demand, these are generally limited to specific and identifiable parts of the country. Elsewhere, demand remains good, often fuelled by would-be first-time buyers denied access to home purchase by high prices. Judicious underwriting and realistic property/rental income valuations will ensure that lenders choosing to operate in this sector continue to enjoy low delinquency levels while building asset value on their books.
Bolton: It comes down to two things – understanding the customer and being in touch with the market. I was surprised, as were many people in the industry, by Barclays' comments. It is clear that buy to let is still growing and that consumers are moving into the market for the long term. They are approaching buy to let in the right way – as a business, checking out the local area in detail, looking at the potential for rental demand and so on. The market is here to stay and its clear that it will not be a case of boom or bust.
Barclays should try speaking to some buy-to-let customers and take the time to assess the market. Maybe then it will realise that its views regarding it are way off.
Cheltenham & Gloucester is planning to enter the offset mortgage market next year. Do you think this is a growing trend?
Batchelor: Yes, although an offset mortgage will not suit every individual. If you are a major high-street lender, it is becoming almost mandatory to have an offset product in your range. If you do not, you run the risk of losing certain types of borrowers who are attracted to such schemes.
Sturges: Yes. Offset mortgages have the potential to become a well-established offering in the mortgage market. As the product becomes more widely available and accessible, I feel sure that the many borrowers who fit the lenders' criteria will find it an attractive product and well suited to their financial needs. In the main, I see the established mainstream lenders such as C&G best placed to take advantage of this potential market. More narrowly focused lenders, such as igroup, are less likely to play a significant part in its growth.
Bolton: Intelligent Finance has led the way in offset mortgages since launch, offering a true offset product. As we have found with BM Solutions, when you are leading the market, competitors tend to follow in some shape or form. This appears to be the case with C&G, as with some other players in the industry.
Do you think some mortgage networks are scaremongering brokers into joining up with them?
Batchelor: There is still a lack of knowledge and understanding with many mortgage brokers and many are still slow in realising the impact that regulation will have on them. Mortgage networks are raising awareness and so this can only be a good thing.
However, brokers need to consider all the different options and take time out to visit roadshows, like the current Mortgage Next shows. They should also seriously consider joining the AMI if they have not already done so as the AMI will help educate brokers in the various issues that will affect them leading up to October 2004. Finally, until costs and requirements are known, it is very difficult for any broker to make such an important decision at the moment.
Sturges: Scaremongering is too strong a word although I agree that some networks are taking full advantage of concerns and confusion over regulation to promote themselves as the ideal compliance solution. In a free market, many would argue that this is a perfectly legitimate tactic and one that will work in some cases, especially among smaller intermediaries. However, joining is only a part of the solution, the harder part being able to make the network function consistently and effectively over the long term. Failure to do so will see a clear drift away by disaffected members at the expense of the credibility of networks.
For our part, we are seeing very little appetite among introducers to join networks in response to regulatory demands. Instead, our supporting introducers are electing to follow the direct authorisation path or are combining in loose “networks” to pool resources to buy in specialist compliance advice. We are pleased to see them take either approach as, ultimately, we believe that the most effective and efficient introducers post-mortgage day will be those who take responsibility for their own compliance obligations.
Bolton: Publicity from the mortgage networks has played its part in raising awareness about regulation. Brokers need as much information to hand as possible to make an informed choice. Most brokers I speak to prefer to hear the arguments rather than not.
Guy Batchelor, Sales and marketing director, Platform
Head of communications, GE Consumer Finance, igroup
Michael Bolton, Director of mortgages, BM Solutions