When you next find yourself browsing the bookshelves at the airport before jetting off to enjoy the last spoils of the pre-FSA regime, let me suggest an excellent piece of poolside reading – The Da Vinci Code. This book weaves a fascinating tale from the challenging idea that Jesus had a child with Mary Magdalene, whose descendants live today.
Whether or not you are a practising Christian, the idea that this formed the basis of a long-term persecution of the fairer sex by the Church in Rome demonstrates yet again that most authoritarian moves to benefit a particular group actually disadvantage the majority while protecting a small minority. Our industry would never have needed statutory regulation if it had not been for the willful malpractice of a small minority.
Over the longer term, FSA regulation will narrow margins and push up the real cost of borrowing for most of our customers. Most lenders I speak to concur that the ultimate price of regulation will end in two places – the consumer and those intermediaries who retire either voluntarily or otherwise as a result of the new regime.
From a socio-economic perspective, this is no bad thing – any society except the mortgage broking fraternity should recognise that the many should pay to protect the interests of the less well-off. However, this environment will fundamentally change the role of the intermediary. While I do not foresee any less competitive an environment for interest rates, overall costs will go up as lenders maintain or increase their margins as rates rise.
FSA regulation places far more onus on price as a deciding advisory factor. Only a few high-quality fee-charging brokers will be able to sustain fee levels and profitability. By contrast, the focus on price in the mainstream market will be much stronger. Here, the reality is that 90 per cent of the customers qualify for 90 per cent of the loans. For these borrowers, best advice will mean cheapest unless the broker can demonstrably add in service and reputational factors. Add the cost of regulation and I am beginning to see carnage among mainstream brokers.
There is, however, a big plus for the market. Remortgage activity will continue to grow in real terms, with some lenders projecting that it could represent over 70 per cent of gross lending next year. Although serial refinancers will drive this, a new breed of remortgagers will emerge as rates go up and lenders hold their margins.
When base rates hit 5 per cent, these borrowers will question why their rate is higher than last time they saw 5 per cent base rates. So, as more remortgage and fewer are left on variable rates, which will be at higher margins over base than historically, one side-effect of regulation will be to increase the differential between the haves and have nots in mortgages. I do not just mean borrowers, either.
Mark Chilton is chief executive of Clearly Financial