The FSA has pledged to conduct reviews of mortgage and general insurance regulation. What would be your advice to the FSA and on which areas should it focus?
Sturges: The FSA has set out a clear programme for its intended post-implemen tation reviews. Focusing on disclosure requirements, advice and selling standards makes good sense as a way of measuring the impact on consumers. It also makes sense to conduct such reviews a full year on from M-Day as authorised firms should by now be familiar with the core principles and rules. We think the regulator has got the balance about right. Such reviews could become a regular feature of the FSA’s activities. If so, they will become more targeted as a result of previous reviews.
Beaumont: The FSA should focus on areas where a cost- benefit analysis shows there are significant benefits to be gained by implementing further change. It should also take note of the need to keep any further changes proportionate. The last thing intermediaries want at this stage is further layers of complex legislation which deliver questionable benefits. It is important to carry out reviews and be willing to make changes if necessary but there have to be significant identifiable benefits to justify this cost.
Paterson: Greater tolerance should be given to the accuracy of key facts illustrations. At the moment, none of the sourcing systems is able to comprehensively – or even partially, for that matter – produce KFIs within the tolerance levels set by the FSA, largely because lenders are unwilling to disclose their algorithms to the sourcing systems to enable them to do this. I would also ask if it could make KFIs prescriptive in the same way as initial disclosure documents. There is too much in KFI construction that is open to interpretation and I have seen KFIs ranging from two to seven pages. How can this be good for the customer?
The latest Association of Mortgage Intermediaries census says intermediaries are continuing to offer suitability letters to clients despite them being obsolete. What can the industry as a whole do to help intermed- iaries understand the mortgage regime better?
Sturges: Regulation of mortgage advice under the FSA has been a massive undertaking in intellectual and financial terms. Lenders and intermediaries have generally adapted well to the new environment. In large part, this can be attributed to effective communication between the commu- nities. This will become even more important as the FSA introduces more principle-based initiatives such as Treating Customers Fairly. Being non-prescriptive, such initiatives will force lenders to work more closely with intermediary partners to achieve common levels of understanding.
Beaumont: I do not think this indicates a lack of understanding of the mortgage regime. My belief is that 86 per cent of intermediaries are continuing to offer suitability letters because they feel it is best practice and in their clients’ interests. There is nothing wrong with intermediaries providing this information and it is encouraging that the majority want to continue to do so. They also believe that having a suitability letter on file is a good belt and braces’ exercise if any issues arise with a specific case in the future.
Paterson: This is a bit of a red herring because while formal suitability letters are not required under MCOB, the FSA does still require some evidence that we have demonstrated to the client why the product best suits their needs. If that is not a suitability letter, then I do not know what is.
Should the FSA conduct a study to find the true one-off cost of mortgage regulation to the industry? In what ways will this figure be helpful?
Sturges: It is difficult to see who this would help other than the FSA and commentators interested in the figure as a story in its own right. The numerous businesses directly involved in the initial regulatory process will know well enough the cost to themselves. These have now been accounted for although overall costs will continue to accrue as the regulatory regime deepens. Whether many of these businesses would want to devote time to participating in a study with unclear and uncertain benefit to them is doubtful.
Beaumont: I do not believe the exercise would be of any value. We all know the cost of implementing regulation has been significantly more than forecast but there is nothing to be gained by knowing if it has been two, three or four times more expensive. It would be more productive to study how effective regulation has been. My view is that although consumers are undoubtedly better protected, I am not convinced they are any wiser about financial matters.
One objective of regulation was to promote public understanding. I suspect that most feel weighed down by more paperwork but are not necessarily any wiser as a result of having received it.
Paterson: I am not convinced that the FSA really cares about the cost of regulation to the industry as it makes it self-financing to a large degree in the fees we are charged and the fines the FSA levies. Individual businesses know the cost implications to themselves and have to run their business accordingly. The one-off costs are history. We just need to move on.
Possessions have increased by 66 per cent, according to the Department of Constitutional Affairs, and may continue to rise. In what way could this change the industry and the products available?
Sturges: The percentage rise refers to the number of possession orders granted by the courts. This is different from actual repossessions of property and is accounted for in a number of ways. For example, lenders may be making greater use of litigation and the court process as a way of persuading hard-core defaulters to meet their financial obligations. Most lenders will only resort to repossession as a last resort. It is far preferable to reach an agreement allowing the customer to stay in their home while continuing to redeem their debt. This is reflected in the figures for repossession, which remain historically low.
Beaumont: The number of possessions in 2004 was the lowest on record. Although possessions have risen during 2005, they have done so from a very low base which makes the percentage increase appear high. It should also be borne in mind that although there were 54,300 actions entered into and 32,400 orders made in the first half of this year, only 4,600 homes were taken into possession. This is because lenders will sometimes use court orders as a way to encourage people in arrears to take their finances more seriously and will drop possession proceedings right up to the last minute if borrowers agree to keep up with future payments. The Council of Mortgage Lenders is forecasting a modest rise in possessions to 12,000 in 2007 but I do not believe this will have a major impact on product development plans.
Paterson: For a long time, due to increasing property prices and low interest rates, lenders were offering high multiples thinly disguised as affordability calculations. Since interest rates have increased – and let us not forget that a 1 per cent rise in interest rates is equivalent to a 25 per cent increase in mortgage costs for most people – this policy has started to create problems as affordability comes under pressure. Products must get more flexible and underwriters will have to reassess their affordability calculators.
Will home information packs force any changes in the distribution market?
Sturges: Some commentators have speculated that the advent of Hips will see mortgage business drain away from mortgage brokers to estate agents because of their point-of-sale advantage. But brokers have time to devise strategies to ensure this does not happen. It is also interesting to note that some Law Society members believe the introduction of Hips should be postponed or abandoned on the grounds that they will increase costs without the benefit of improved consumer protection. This debate will continue.
Beaumont: Hips pose both a threat and an opportunity for intermediaries. The threat results from others, particularly estate agents, offering a combined Hip and mortgage package to clients at the time they put their property on the market. However, the extent to which this will happen may be exaggerated. Although some estate agents, particularly bigger groups, have improved their financial services offering, many of the smaller, independent agencies have been slow to capitalise on the opportunities. What’s more, many are unsure how they will go about offering a Hip service. Undoubtedly, Hip providers will offer packages which brokers can sell to clients. Intermediaries should therefore plan ahead and consider ways in which they can benefit from this new development to protect and strengthen client relationships.
Paterson: Yes, the entire face of distribution will change and we need to be ready for it. We are likely to see lots of players move into the Hips market and the most obvious threat to us would be lenders looking to offer them to customers as a retention tool. There are also some opportunities for brokers to offer Hips to clients as part of a package and they could become a valuable source of additional business.
Recent research indicated that consumers are still being misled by mortgage advertisements. Is there a level playing field and, if not, why is the FSA not cracking down?
Sturges: Consumers have become more financially savvy and inclined to complain in the event of perceived mistreatment. The mechanisms to do so are also much improved. All this is no bad thing and it is right that firms which flout the rules are brought to book. That is the job of the regulator and it will take note of findings like this. It is in no one’s long-term interest to permit misleading advertising. Firms which persist will be reprimanded but the cost to the reputation of the whole industry could be significant.
Beaumont: When we reviewed mortgage advertising in leading consumer financial publications in September, nearly a third of ads were non-compliant. This puts companies that do take the time and trouble – not to mention the expense – to produce compliant ads at a distinct disadvantage. It is important that the FSA clamps down on wrong-doers. I believe there is a lot more going on behind the scenes than we realise. The FSA will only go public about a firm breaching the financial promotion rules once it reaches enforcement stage. Before this, the FSA contacts firms to explain why it feels their promotions are not in line with the regulations. If anyone in the industry sees non-compliant ads being used, they should not hesitate to inform the FSA. The solution is not simply about financial penalties, it is about education.
Paterson: I do not know why the FSA is not monitoring these. It is, after all, meant to be concentrating on enforcement. Instead, it is adopting a reactive approach and dealing with these ads when someone complains. I also think that the “overall cost for comparison” is in itself misleading as it often allows for no meaningful comparison of different products, which is what it was initially intended for.