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MMR sets the industry in the right direction

Jonathan Whiye PTFS 2012

After months of speculation the FSA finally set out its rules for mortgage distributors with the publication of the mortgage market review at the end of last month.

Not surprisingly there has been mixed reaction to this from across the industry, but in reality most of the rules will not come info effect for another 18 months, around April 2014.

So, what are the main issues here?

From our point of view, particularly as mortgages and protection are the main focus for the network, putting clients first and ensuring we are regulatory-led has to be the biggest priority.

Disappointingly, industry focus seems to have been predominantly on wealth-management/investment advisers, portraying them as having the most major headaches getting up to speed with all the new qualifications and standards needed for RDR.

In truth, I believe the MMR is having just as much effect on many mortgage brokers and non-investment focused advisers.

We all have to cope with the huge increases in regulatory costs and closer to home, the additional investment that has to be made in our systems, staff, resources and all the training required to ensure we are ready for the new era.

Not only that but there is a huge educational campaign still outstanding in many ways to show clients and prospects what the new regulatory era will mean for them.

While the MAS has introduced a few new TV adverts and the odd leaflet, I think we would be daft to believe that ordinary members of the public have any real understanding of what the changes will be post 2013 and more importantly, why they are being made.

As an example of this, let’s look at what the FSA is planning to do with regards to the non-advised mortgage sale process.

In reality, this really refers to ‘interactive sales’ and essentially means that after April 2014 all sales done face to face or over the phone must be done on a professional, advised basis. This has to make good sense.

Unfortunately, as with many regulatory issues, there are still far too many grey areas and exceptions to this rule.

Call me a sceptic, but is it any surprise that with the economic and political fortunes of the big bancassurers already under threat, the Regulator has had to bow down just a little bit.

Allowing non-qualified ‘administrators’ and ‘call centre staff’ to make mortgage variations, such as rate switches and repayment terms, will be a huge relief to the goliaths of the mortgage industry. But where does it fit in terms of following the ‘spirit of the rules’ if we all agree that the customer must come first.

Surely electing to change a mortgage rate or extending a mortgage term should take a bit more thought process than just picking up a phone and choosing to do it – ‘execution only’?

For mortgage advisers to be truly recognised as the professional, highly qualified experts that they are, this to me seems very disappointing indeed.

We can only hope that with the passage of time more voices will be heard and the debate continued – so that advisers and their clients can truly reap the benefits of all the time, money and effort which we all continue to invest in the new era of openness.

Jonathan White is commercial director of Personal Touch Financial Services

MMR Final Rules
  • Lenders are ultimately responsible for affordability checks, not intermediaries

  • Income must be verified in all applications

  • Lenders must take account of the impact of market expectations of future interest rate increases on mortgage payments

  • Interest-only is available but only where there is a credible repayment strategy

  • Non-advised sales are banned except in “non-interactive sales” such as online and postal deals, contract changes and for high-net-worth borrowers.

  • HNW borrower is defined as those who earn £300,000 a year, down from £1m.

  • Initial disclosure document are replaced with a requirement for firms to disclose “key messages” to customers

  • Intermediaries must only produce a key facts illustration when a product is recommended, not when information is given

  • Every seller is required to hold a relevant mortgage qualification

  • Lenders are only permitted to apply fees for missed payments twice in a month

Paul Broadhead 480

After three years, many consultations and much discussion, the policy statement and final rules for the FSA mortgage market review were published on 25 October.

Given the high level of contact over a sustained period between the FSA and a wide range of stakeholders – including the BSA – there were very few surprises in the content. 

One change was good news – that the implementation period will be 18 months, rather than the widely expected 12-month period.

In making this change the FSA was clear that it had listened to concerns expressed by the BSA and others and appreciated the amount of work that would be necessary to ensure “policies, processes, systems and staff training” were ready and in place. The rules will therefore come into effect on 26 April 2014.

One rule was introduced by the FSA immediately – an evidential provision MCOB 11.8.1E. This provision is intended to protect existing borrowers who find themselves unable to remortgage and prevents lenders from taking advantage of their situation by treating them less favourably than other customers.

Overall, the publication of the final rules is to be welcomed, as they offer a broadly common sense approach to the new regulations – many of them are already part of the lending practices of building societies and other mutual lenders.

However, some things have not changed.

While we have consistently held the view that the case for a fully advised mortgage market has not been adequately made, the FSA plainly disagrees.

Despite this, it is at least now possible for BSA members to begin preparing for the changes and to make clear to customers how they will be affected by them. It is likely, for example, that the mortgage application process will be longer, with applicants asked to provide more information than they do today.

In addition, the lender will be required to factor in potential interest rate rises by ‘stress testing’ the affordability of loans over a five year period.

Given some of the current background noise emanating from both the media and Government, it is helpful that the FSA has used this opportunity to make clear that interest only mortgages do still have a place in the market, being suitable for some borrowers provided they have suitable repayment strategy in place.

We look forward to the conclusions of the FSA thematic work into legacy interest only loans in the New Year.

The true test of what the FSA has said is its “hard wired common sense” approach, will be the manner in which these regulations are transferred from policy to supervision and then enforced.

Early proof is needed to show that the FSA is, in practice as well as in principle, delivering against its stated objectives.

We have stated publicly that, without visible assurance from the FSA, it is likely that lenders will tighten their lending criteria until clarity on the supervisory stance can be assessed. It is also worth adding that the MMR implementation takes place against the backdrop of the creation of two separate regulators with overtly different priorities.

Clear, consistent communication between them will be vital on this topic as with many others.

Paul Broadhead is head of mortgage policy at the Building Societies Association

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