Over the past few months, while negotiating the structure of Pure!y with our investors, the word lacuna kept cropping up, meaning a hiatus or gap in the logic of an argument. I think I have found a lacuna in the mortgage market.
Come M-Day, the FSA will place more emphasis than ever on price as an element of best advice. There will be cases where you could justify not using a price-leading lender on grounds of service and some will be able to justify not using the best price where the lender has a reputation for less than straightforward practice, such as erratic treatment of SVRs. But the onus will be on the intermediary to provide the best price for the product.
Now that the FSA has effectively banned panel entry fees and incentives, the whole-of-market model is undoubtedly going to be the winner. This puts even more focus on the diligence that an intermediary can demonstrate in arriving at the best price. Most intermediaries will be forced to use one of the major sourcing engines as the source of best price data but, with advances in underwriting technology, this route may no longer be accurate.
The root of the problem lies in the highly sophisticated credit scores used by an increasing number of lenders. Income multiples are not an accurate filter because these lenders use their own model. A lender with a stated maximum income multiple of 3.75 could lend far higher multiples in certain instances. Yet they may never appear in tables of best buys because you will have filtered them out on the data held within the sourcing systems. To fulfil the best price requirement, the intermediary should carry out full AIPs on a range of lenders, whose models work in this manner.
There is no ready solution. You cannot criticise the lenders, which are producing a more customer-friendly process, or the sourcing engines, which have built their filtration models on relatively solid ground. It is a structural problem in the industry and lack of standardisation of credit scores.
The FSA is seeking to pursue the US model where price is king and brands no longer count. This is the worst possible scenario for the big-brand lenders in the UK. But the lack of a uniform credit score structure for the mass market, that has long been a feature of the US market, makes it apparent that their model is not transferable.
I think I have a solution but if I give it away now I would lose a serious commercial edge. But this structural inefficiency will be another factor leading to the streamlining of distribution channels over the next 18 months.
Mark Chilton is chief executive of Purely Financial