Some packagers will be falling outside the regulatory net after October 31. What regulatory risks are posed for lenders and intermediaries who use them?
Webb: It is true that some packagers will be regulated by the FSA and some will not. Those which will not are ref-erred to as pure packagers. A pure packager is one which does not undertake an activity requiring regulation. Lenders and intermediaries alike must satisfy themselves that any packager with which they deal will add value to their business and will only undertake activities for which they have the necessary permissions.
GE businesses, which inc-lude First National and igroup, require packagers with which we deal to enter into a terms of business agreement which clearly defines and governs the terms and conditions of our business relationship.
Grayson: The regulated firm will probably carry the can. The FSA has spent a considerable time putting together MCOB. It is essential that as many firms as possible emb-race the spirit of regulation. What reason do they have for not campaigning for regulation? It is unhealthy for the mortgage market to have a two-track system.
We have already seen Pink Home Loans complain that both Kensington Mortgages and Platform have announced that unregulated packagers will not have to declare fees whereas they will have to. We believe that pure packagers will eventually be regulated. They need to drive this change rather than avoiding the spirit of regulation.
Smith: Mortgage packaging is not a regulated activity so, by definition, all mortgage packagers fall outside the regulatory net for all the packaging business they do. What will matter is for lenders to have satisfied themselves that these firms are fit to undertake the outsourced activities that the lender has delegated to them and have put proper contracts in place. We expect lenders to pay advisers for advising and packagers for packaging and not to mix the two.
Can IFAs remain truly whole of market if lenders are choosing to restrict the number of principals they deal with after M-Day?
Webb: I believe so. The concept of whole of market is used to describe a panel of lenders whose products are representative of the whole of market spectrum rather than every lender in the market. Networks will be mindful of this requirement when forming their lender panels. It follows that IFAs will take this factor into account when choosing a network.
Grayson: IFAs need to dem-onstrate that they can access a cross-section of the market and they need to consider these factors when deciding on their principal.
Smith: The whole of market definition is intended to des-cribe the service that the intermediary offers customers rather than reflect any restriction that may have been imp-osed through regulation. The same principle applies where a lender which only lends in a certain geographic location or indeed does not accept business from an intermediary at all. I do not therefore believe that whole of market or post-M-Day regulations will be a problem for intermediaries in restricting their business.
Will the softening of the property market continue into next year and will this have an impact on consolidation across the lending arena?
Webb: There is clear evidence to suggest a slowdown in the housing market. It is well documented that the MPC has used interest rates to put the brakes on house price inflation. Inevitably, this translates into increased caution on the part of borrowers. This may continue into next year but it is not necessarily a precursor to consolidation across the lending arena.
Many other factors, in addition to the housing market, will determine merger and acquisition activities. The UK housing market remains a vibrant and innovative arena and one in which GE has tremendous confidence going into 2005.
Grayson: There are many factors driving market consolidation among small to mid-size players. A gradual slowdown in property prices is just one relatively small factor of many. The fundamentals supporting the economy such as low unemployment and relatively low interest rates remain strong.
The real drivers in consolidation are such issues as mortgage regulation and Basle 2. As well as mergers and acquisitions, we are also increasingly seeing companies share back-office systems and processes. This is entirely logical and we will see more of this over the coming months.
Smith: We anticipate a continued slowdown in the rate of house price inflation into next year, probably settling down in single figures, and with housing transactions remaining at about their current levels. Whether remortgaging activity starts to pick up will depend in part on whether base rates have peaked, as some commentators now believe.
What is the future for buy to let as applications slow down and the base rate looks set to rise again in late 2004/early 2005?
Webb: There is no doubt that the interest rate regime has an impact on market confidence and transaction levels in this sector as it does in all sectors of the housing market. Nevertheless, buy to let still appears to be a relatively buoyant sector. As we know, for the time being, this remains an unregulated sector and, provided that the principles of responsible lending are adh-ered to, there is no reason why this sector should not con-tinue to be attractive to len-ders, intermediaries and borrowers alike. Fundamentally, buy to let is an investment activity and the caveat that the value of an investment may go down as well as up must be observed by the investor.
Grayson: The buy-to-let market is calming down to what we see as long-term sustainable levels. The market is driven by tenant demand and that is still very healthy as first-time buyers wait before moving into the market. In fact, there are a variety of social trends which point to a healthy fut-ure for buy to let. The arrears levels for buy to let are very low despite recent base rate rises. Buy-to-let investors treat their investment on the whole like a business and therefore legislate for increa-ses in base rate.
Smith: This is a market sector that has proved itself very valuable both to intermediaries and to consumers. It appears to be maturing well and we believe that it should prove resilient to whatever market conditions develop over the next couple of years.
The FSA believes the next big misselling scandal will come from the equity-rel-ease sector. Is that right?
Webb: This is a sector which lenders, intermediaries and consumers justifiably app-roach with caution. The reasons for this are numerous and include historical events, the age of the consumer and the relative lack of consumer choice as a result of the small number of lenders who are active in this sector.
UK demographics and the vast amount of personal wealth tied up in property dictate that there is massive potential for growth in equity release. Again, the principles of res-ponsible lending must be adhered to by all parties and, in addition, it is highly recommended that prospective borrowers take independent financial and legal advice bef-ore proceeding.
Grayson: The equity-release sector will not move forward significantly until the bigger high-street players move in. The potential of the market is undeniable, with thousands of baby boomers moving into retirement.This puts the size of the perceived risk into context, that is, despite the potential, high-street lenders are still not moving into the market. There is no doubt that it is a complex proposition involving the more vulnerable members of society and the potential beneficiaries. The fact that home reversion has been regulated is a big step forward but there is a long way to go. Therefore, equity release will remain in a Catch 22 situation until lenders see the temptation as too great to resist.
Smith: Given the checks, balances, controls and qualifications that have been imposed on the selling of lifetime mortgages, it would seem pessi-mistic to believe that this is the area of the market where new regulation is most likely to fail. I would like to look forward to a future where there are no more misselling scandals, where regulation works and where the media undertakes balanced and informed reporting on issues.
Do you think lenders are ready to start paying procuration fees through networks or do they need to improve their back-office systems first?
Webb: In general, we at GE are ready to pay procuration fees via networks. The challenge for us and for all lenders is that networks have differing requirements. The complexity lies in the variety in payment and reporting requirements. Some are straightforward and some are complex, necessitating changes. Where necessary, we will make these changes to our back-office systems to meet the needs of our network partners.
Grayson: Most lenders should now be in a position to do this or, if not, be very close to offering this service. However, it is true that there are many len-ders who are not investing enough money in IT and e-commerce systems. IT will be at the heart of operating in a regulated mortgage environment. We have already seen IFAs turn to online services in their droves. This trend will continue but more lenders need to get their systems to a more acceptable standard. Time will be at a premium and lenders need to do their bit to drive efficiency in the mortgage supply chain.
Smith: We have checked with all our panel lenders and we are confident that they will be able to continue to pay us proc fees after the new regulations start. Paying for the business you get is good business and should result in repeat behaviour. Ensuring arrangements are in place for proc fees will have been a priority for all lenders with a focus on the intermediary market.
Stephen Smith, director of housing, Legal & General
Matt Grayson, public relations manager, BM Solutions
Sean Webb,chief commercial officer, Igroup and First National