Do you think that the recommendations in the Miles' report have been shelved?
Warren: When the Miles' review was first announced, I seriously wondered whether the Chancellor had forgotten about the existing shake-up of mortgages already taking place under FSA regulation. Perhaps the Miles' report is just one set of recommendations too many at the moment for an industry which is currently experiencing severe change, management overwork and fatigue.
Lenders which have introduced long-term fixes have not met with any great success, one even withdrawing its products completely as a result, and many commentators believe that the idea will shortly join Catmarked mortgages in the financial services long-stay car park. Apparently, the Treasury is still discussing the matter with stakeholders so let us see what the pre-Budget statement in December brings.
Clifford: No. Longer-term mortgages will remain on the agenda. Lenders are currently preoccupied in preparing for regulation and will no doubt return to product design of this kind. The central plank of the Miles' report was the philosophy that very longterm fixed rates would have a stabilising effect on both the economy in general and house prices in particular. But current UK market practice would have to shift massively to make a difference, given that consumers have voted with their feet, with very little long-term fixed business being written.
Mountney: No doubt. The market knew the results even before the questions were asked. There is no doubt that it was purely political and hence was always likely to produce a result which was wholly impractical and imp-ossible to implement. The UK mortgage market-makers know what clients want. The politicians do not.
To what extent do you bel-ieve lenders will adopt market intelligence systems such as the Touchstone database offered by Workload, which gives providers information on which intermediaries are writing the most business?
Warren: In Money Marketing (September 16), the Touchstone spokesman said that this mortgage database will “rem-ove much of the unknown” for sub-prime and self-cert lenders operating under FSA regulation. This is a big claim and it would be very interesting to hear how Touchstone would back it up as market intelligence is probably way down the pecking order when it comes to current concerns over the introduction of statutory regulation.
Big mainstream lenders are reported to have signed up for the scheme but they have the need for bulk information, very big coffers to pay for it and presumably no problem about sharing their market intelligence with competitors. The niche and non-conforming markets are more fragmented and move very fast, with products and initiatives changing all the time. I doubt that lenders in this sector will be currently looking for this sort of mass-market information.
Clifford: I hear that Touchstone has for some years pro-ved useful as a marketing tool for the life insurance sector and our contacts at Abbey claim to have first discussed the concept of extending the scope of Touchstone to mortgages four years ago as well as now supporting Touchstone in its efforts to get the project off the ground.
It seems to have taken lenders in general a long time to come to appreciate the possibilities. One implication, should it be widely adopted, is that broker business volumes will become transparent for the first time. A broker over-egging his volumes might be caught out by lenders formally comparing notes.
Mountney: There is little doubt that distribution will be king after M-Day. We have already seen so many moves by lenders and major networks to confirm such. Any information on distribution is vital to keeping ahead of the competition.
Do you think the Santander bid for Abbey will, if successful, potentially lead to further transnational transactions?
Warren: This is really something that interests shareholders in the UK financial institutions and that market analysts will have a view on. With sophisticated IT and telecommunications, the world is now a very small place and financial institutions can be run from pretty well any where.
As with takeovers and mer-gers within UK-based organisations, it is the benefits to stakeholder that will really count rather than the nationalities of the merging companies. I do believe more will follow but on a smaller scale and perhaps focused on the non-conforming market, where currently reasonable margins can be obtained. Just as certain intermediaries have started development in Europe, the European companies will seek further acquisitions of mortgage networks and intermediaries.
Clifford: There is bound to be great interest in current events of this sort. A successful amalgamation could well encourage others but, even if successful, it will take time to prove if it was an astute investment. If it is, we may well see other pan-European mortgage lending groups, as already seen in the banking sector. We may well even see UK outward investment in European product providers to redress the balance.
Mountney: Of course. The Yanks are here and have been for a while. Their success will obviously have raised an interest with European counterparts and the UK market is such a size that the returns can be very attractive.
How keen do you think lenders would be to subsidise mortgage intermediaries' levies to the FSCS?
Warren: As an AMI board member, I support this AMI initiative and have every confidence that lenders will res-pond positively. Many lenders are heavily dependent on intermediaries to source their business and have proved themselves willing in the past to provide support to their key intermediaries on an individual basis.
If a fair system is worked out to help intermediaries through the transitional per-iod, then it should prove to be mutually beneficial to lenders and intermediaries. It will be of particular help to those small to medium-sized businesses which are bearing the additional cost of FSA compliance over a smaller income base.
Clifford: Lenders achieve intermediated mortgage lending in staggering volumes at a ridiculously low acquisition cost, even compared with a typical lender's retail acquisition costs. If the regulatory costs, including compensation sch-eme levies, rise significantly, smaller intermediaries may well be forced out of the marketplace, which will reduce consumer choice. Direct subsidies may well be sensible but lenders might instead consider paying a more equitable level of procuration fee which properly rewards a broker's work and the true cost of customer acquisition.
Mountney: The same has not been seen in investment and I am shocked that the final dec-ision by the FSA – to reduce the onus on lenders and to put so much more pressure on intermediaries – could possibly have been allowed by the trade associations without kicking up a fuss. The AMI needs to sharpen its teeth on this one. Of course, the lenders should take a greater share of the burden. It will not be in their interest if swathes of mortgage advisers buckle and fold under the weight of this and other regulatory costs.
Mortgage Next warns that brokers are unaware of FSA regulation banning unsolicited real-time promotions and that a perm-ission letter must be sent to all clients to continue business after October 31. Is this the case?
Warren: I agree that many intermediaries who have hitherto generated their business by cold-calling may have failed to understand the full implication of the FSA's rules for financial promotions. In future, these “unsolicited real-time promotions” will be illegal and firms which formerly relied on cold-calling must find ways of generating in-bound customer enquiries.
Writing to existing client databases to seek a positive opt-in is a must and it would be a cost-effective way of starting this process but no intermediary firm can just rely on existing customers to grow their business so I expect the volume of direct-response mailings and advertising will start to rise steeply come November 1.
Clifford: It might be true for Mortgage Next brokers if they have not been adequately briefed by their network. There has been huge publicity with regards to unsolicited real-time promotions in the industry press and we explicitly and repeatedly communicated this to brokers months ago. However, many intermediaries do seem to bury their heads in the sand in relation to regulatory requirements. T&C schemes should rectify this issue.
Only existing customers where no permission has been obtained by the intermediary before October 31 would require a letter. Any intermediary should at present and after M-Day be obtaining the client's permission while carrying out fact-finds.
Mountney: It depends on the content of the firm's terms of business letter. If that includes reference to forward contact and preferably signed by the client, then that is the consent for express request purposes. However, if no such audit trail is in place, then it would be wise to capture as many ERs as is possible before M-Day. Advisers should consider the email and SMS routes for greater speed and cost efficiency.
GMAC RFC chairman Ste-phen Knight says KFI writing should be a professional discipline like medical writing. To what extent would this be of benefit to the consumer?
Warren: I think this is the classic problem about where the dividing line lies between the responsibility of lenders and advisers to provide clear and accurate information and the responsibility of borrow-ers to manage their finances sensibly. FSA regulation stipulates that lenders and advisers must give accurate information. Stephen Knight's point is one about appropriate language (that is, “clear fair and not misleading”) being used to convey this information in such a way that it can be more easily understood by the mortgage applicant.
FSA regulation also stipulates that lenders and advisers must be confident of the borrower's ability to repay the loan. However, with the best will in the world, clear accurate information and simple language only has limited power and cannot force borrowers into managing their subsequent financial commitments and loan repayments responsibly. Only better consumer education will be able to acc-omplish that.
Clifford: I agree but potential consumer benefit is undermined by the fact that most do not bother to read the full detail or content. As you would expect from a statutory regime, FSA requirements are well prescribed. Regulation, coupled with properly qualified intermediaries, should ensure that KFIs are appropriately written. While owing the customer a duty of care, like any medic or lawyer, attention to detail, ability to describe accurately a lenders' products to their customers and KFI writing should be a professional discipline. However, care must also be taken to ensure that any descriptions are in plain language and provide a consistent description of the lenders' terms.
Mountney: The reality is that only a small percentage of KFIs will actually be read and digested by consumers. That is a fact of life. That being so, the KFI will therefore be ano-ther “cover yourself” document alongside the suitability letter which, in my opinion, is as important to the adviser, if not more so.
The KFI will actually be more automated than the suitability letter and, because it is prescriptive, it cannot be personalised to the same degree. Hence, we will be using both documents.
Bill Warren,compliance director, Complete Mortgage and Loan Services Mark Mountney, managing director, PMM
Rob Clifford, chief executive, Mortgage Force