The expected death of packagers since M-Day has not come about. Is it yet to come, if not, how are packagerssecuring their futures?
Clifford: Packagers which simply perform a master broker role have become virtually extinct, proving many pundits right. The survivors have tended to morph into networks or compliance support firms which have at least extended their services and changed shape significantly. This is a people business and many specialist lenders, in particular, have developed deep and enduring relationships with packagers. It can be assumed that these packager relationships either deliver service enhancements or access to new distribution or perhaps both. Packagers which solely provide a third-party admin service are not likely to survive in the long term.
Smith: Packagers have been under challenge to prove the value that they add to lenders and intermediaries. Some have shown this and seem to be becoming successful. Others have clearly been having a more diffi- cult time. The trend seems to be towards mergers of packaging firms, presum- ably to achieve sustain- able scale. This could be the strategy for securing their future in the short to medium term.
Beech: Packagers are having a tough time, with volumes down in many cases. Many are grouping together, forg- ing fewer, closer relationships with lenders and even investigating lending in their own right. There seems to be a polarisation between those which remain niche, small and nimble and those which are much bigger and maybe have diverse distribution channels. Extinction usually only happens because the species fails to adapt to a change in environment.
will home information packs be a reality in January 2007, as hoped for by the Office of the Deputy Prime Minister?
Clifford: There appears to be a real political intent to make this happen, whether or not real consumer bene- fits can be assured. Only recently in a trade maga- zine, a broker listed many factors which must be overcome if Hips are to become workable and if housebuyers are to see the benefits happen by 2007. One clear ind- ication that the market ingeneral expects Hips to finally arrive is the extent to which many estate agency, conveyancing and systems firms are shaping their commercial propositions to participate in the Hips food chain. Some appear to have a strategy which virtually relies on the delivery of Hips.
Smith: I think a January 2007 launch is unlikely, given the amount of work needed to be done, by all parties, between now and the suggested start of the pilots in July 2006. In particular, there is continuing uncertainty over the supply of home inspectors and the ODPM has previously committed that Hips will not be implemented until all the appropriate resources are definitely in place. I think later in 2007, perhaps at the mid-year, is far more likely.
Beech: Surveying firms hope so. I am not convinced due to the costs and potential delays which could affect an already fragile market. There are a number of initiatives being set up by interested parties – some of which may well succeed. It is a pity that the Government is spending so much time on this minor aspect of the transaction chain and not enough on regulating estate agents. There is much more debate to come on this one.
Has the FSA managed to tackle non-compliant mortgage advertising? What challenges are still ahead for the industry?
Clifford: The FSA has given financial promotions real focus and rightly so. It has significant resources to moni- tor non-real-time promotions but some commentators claim the benefits may not outweigh the costs incurred by firms, particularly when an on-the-page advert is unlikely itself to result in consumer detriment. The area where the FSA could make a difference is by addressing real-time promotions, such as cold-calling by firms which are flouting the rules. This may be achieved by mystery shopping followed by punitive action by the regulator. Regulated firms could benefit from training to ensure financial promotions rules are complied with.
Smith: We are only a few months into a new regime governing advertising and it is not surprising that it is taking time for the industry to adapt to the requirements. We are all aware of the importance of getting financial promotions right and the FSA is clearly active in policing this part of the regulations. We know the FSA is carrying out some themed visits on financial promotions and will clearly be keeping a close watch on the mortgage sector and encouraging firms to comply with the regulations. Our view would be that once the industry has got used to the requirements, there will be little problem in this area.
Beech: Yes, advertising is much more consistent, almost being bland. The FSA is still learning on the job, as are lenders. Next year will see the FSA beginning to exert real influence on the extremities of our business. There is a clear distinction between consumer advertising and that aimed at the intermediaries. Everyone has a responsibility to be vigilant and alert the FSA when advertising is not following the letter, or the spirit, of the regulations.
Mortgage regulation is costing £123m a year, according to a study by Marlborough Stirling, while lmla says intermediatries’ costs are up by 60 per cent. How will the sector reconcile the ongoing needs of M-Day with maintaining innovation and srvice levels?
Clifford: There is no question that increased direct regulatory costs coupled with an intermediary’s greater indirect operational costs in the regulated environment threaten the sector. Marlborough Stirling states that lenders’ processing fees have risen but so have lenders’ fees and charges. It is clear that more intermediaries are turning to fee charging, such that increased costs are passing in no small measure to consumers. Despite the reality that consumers will face higher charges, over- supply and fierce competition among lenders and brokers should maintain innovation in terms of product design and intermediated distribution.
Smith: Alongside this evidence are anecdotal reports that more intermediaries are charging fees than before M-Day, so this is part of the equation. The keys to reconciling these needs have to be investment in technology, building systems which deliver compliant sales and growing businesses to achieve scale economies. For robust compliant sales to be delivered, management and compliance infrastructure must be in place within firms and a certain scale is needed to achieve this.
Beech: Costs of origination have risen across the industry, resulting in rising costs for customers. Innovation and service levels have not suffered. In fact, they have moved ahead as all face greater competition for customers and, for many, changing patterns of customer loyalty put a strain on retention levels.
Is a review of MCOB something the industry wants or needs?
Clifford: A year into MCOB regulation, the industry is beginning to get to grips with the FSA rules, and many firms are gaining confidence in applying these rules. A review of MCOB so early in the new regime could be counterproductive, given that it is bound to lead to many changes. Any review should be considered carefully and consequent changes implemented gradually and with long lead times. Advisers must have adequate time to be trained to maintain their competency, so new practices are implemented efficiently.
Smith: The review of MCOB is only just getting underway and will take some time to complete. Thereafter, consultation on proposed amendments will be needed before new rules are implemented. So it is likely to be well over two years from M-Day before there are any changes. The industry should welcome the review and the opportunity it presents to influence change where they think it necessary.
Beech: There are certainly areas of MCOB, such as responsible lending, that require clarification to preserve a level playing field. There seems a reluctance to revisit the rules and address areas open to interpretation, with more emphasis instead by the FSA on principles.
Is the endemic non-compliant behaviour of sub-prime mortgage advisers a failure of regulation or an embedded cultural flaw in this sector?
Clifford: It is wrong to suggest those advising on non-prime products are generically failing to comply with FSA rules. The FSA has perhaps not yet got to grips with the perpetrators of bad practice but it is only a matter of time. Any sector which generates higher-than-average income streams for mortgage advisers stands the risk of attracting sharp practice. Disclosure of procuration fees should have helped to alert consumers to poor advice and bad practice. The reality is that there are still some advisers who are prepared to give poor advice to maximise their income. This is not peculiar to the sub-prime market.
Smith: What a Paxman-like question. I do not accept the premise of endemic non-compliance, nor regulatory failure, nor embedded cultural flaws. Advising and lending in the sub-prime sector is a sensitive market, where advisers are often dealing with customers with financial problems. But it is import- ant for these customers to get proper advice. Obviously, there is potential for things to go wrong. However, advisers and lenders know they are doing customers no favours if they help them enter into financial commitments that they cannot meet, so we do not see this as an area where there are real problems.
Beech: This question makes a lot of assumptions. There is certainly non-compliant behaviour with some applicants. Lenders are blacklisting more advisers, solicitors and valuers and will continue to shut them out of the industry. Everyone needs to be vigilant and act as one to stamp out the fraudulent and incompetent.
Will the departure of nine directors from HBOS group demand a rethink in strategy as its stars set out to set up a rival business?
Clifford: HBOS group has survived more serious setbacks. I traded with Halifax in my early career 18 years ago and suspect I will always be doing so. There will always be an HBOS and there will always be up-and-coming staff that will take their business forward. But there is no question that this could cause very unwelcome discontinuity because so many key staff have departed at the same time. Mike Culhane is a Midas who would have assaulted the UK specialist lending market come what may but, with his HBOS team, will succeed more quickly.
Smith: With few exceptions, no individual is bigger than the company they work for and very few can be described as stars. HBOS will doubtless treat this as an opportunity to promote new talent from within the group of companies and will probably benefit enormously as a result.
Beech: Change in senior management always prompts a rethink. This is what drives business forward. It will not happen overnight, leaving opportunities for the nimble player to grab some of the action. The HBOS machine is probably sufficiently big and robust to not to be too damaged by the departures.