Do you think small mortgage IFAs/brokers will be forced out of the market because of increasing costs of professional indemnity cover?
Charlesworth: Yes, undoubtedly the cost of PI will have an effect on the smaller mortgage brokers who may decide that the increased cost and compliance burden makes the option of outsourcing the mortgage advice element of their business more economically viable. Increased cost of regulation will have the effect of polarising the market into referrers and larger, more professionally structured advisers.
Smith: There is a whole range of pressures building up on smaller companies in the mortgage market and the substantial increase in the cost of professional indemnity insurance is only one. The cost and practicalities of complying properly with the MCCB requirements and the ABI code of conduct on insurance sales are further examples. But there are many ways in which such businesses can respond to and meet these pressures, either alone or in partnership with larger firms and networks and good businesses will survive.
Hurst: No I don't although there will certainly be an increased burden on smaller firms. Over recent years the provision and cost of business-related insurances has risen steadily and many business plans have had to be recalculated. However, intermediaries have benefited from the fact that while margins for product providers have fallen, commissions and fees associated with the provision of advice have been sustained.
Additional costs are likely to be met through a greater focus on more profitable business, the growth of cross-sales and increasing the value of each individual client.
Was the CML right to call for the Bank of England to increase interest rates sooner rather than later to avoid a bigger correction in the long term, without consulting its members?
Charlesworth: No. The CML acts as a voice for members and, judging by the reaction from several high-profile members, the call was not representative of members' views. A marginal increase in interest rates is unlikely to act as the catalyst to slow down the housing market when lenders continue to offer very attractive new business discounts and increasingly generous income multiples.
Smith: The CML has a large membership which would make it pretty much impossible to consult and get agreement from every member for every policy statement ever made. I am sure that consultations would have taken place with the larger members and that the call was a sensible contribution to the ongoing debate about the stability of the current housing market.
Hurst: I am sure the CML thought that this was an appropriate measure to take. However, ancillary economic factors, low inflation and a fundamental supply-and-demand issue in housing stock diminish the instant calming effect that interest rate hikes provided just a few years ago.
The investment announced by the Government this week to deliver more housing stock is welcome but it is unlikely we will see any practical quelling of high demand for some time and I am not convinced that a small rate hike will have any discernable effect.
When do you think the Bank will increase rates, by how much and what effect will this have on the market?
Charlesworth: Difficult to predict when but there is an overall expectation that rates may be 0.5 per cent higher by the end of the year. But the surprises that seem to be coming out of the US on a regular basis and the effect this is having on the UK stockmarket, coupled with continued sluggish recovery of the manufacturing industries may delay any rise.
A small increase in interest rates is unlikely to have any measurable impact on the housing market. Property price growth does seem to be slowing down at the moment, particularly in the areas that were hot spots a year ago.
Smith: With the Bank of England holding off a rise at the last meeting of the MPC, it is difficult to forecast when a move upward will take place. It is also debatable whether a small rise would have any appreciable effect upon the rate of house price rises with such a high proportion of recent loans being on fixed rates.
Lack of affordability will be the main mechanism whereby house price inflation will start to slow and this, coupled with consumer concern about the economic outlook, may take the heat out of the market over the next few months.
Hurst: We are expecting a rise in the next few months and will not be surprised if 1 per cent is the unit of change. With falling interest rates over the past few years, we have bec-ome accustomed to a move of 0.25 per cent but I think that this is set to change as a more forceful strategy is adopted.
Do you think the definitions of correspondent and through lending agreed at a forum last month will end confusion in the market and help drive it forward?
Charlesworth: I am not sure that there was any confusion about the definition of correspondent lenders in the first place. The market has been a little confused recently pending a decision from the MCCB relating to transparency – if the ultimate lender is known at the outset should the customer be made aware or is it acceptable for the name of the ultimate lender to be concealed behind the correspondent vehicle?
My own view is that as loan books are bought and sold all the time and the terms and conditions for customers either via correspondent lending or loan sales are unaffected why differentiate? To support this, at the moment GMAC deliver to order for third parties but do hold on balance sheet for a period of time – if MCCB decide that disclosure is required for correspondent lenders should the same not also apply to the GMAC model?
Smith: The definitions will hopefully enable the position on both activities to be explained fully to regulators and consumers. The acceptability of the schemes to consumers will determine whether the market progresses.
Hurst: This is an interesting issue. Although clarification of the definitions is important, I think that correspondent lending faces more significant challenges. Our own recent survey of 500 brokers revealed that 50 per cent understand the concept behind correspondent lending, with 32 per cent saying no and 18 per cent unsure.
What is perhaps more likely in driving this market forward is whether or not margins continue to be squeezed in a low interest rate environment, making the numbers simply not add up to those promoting these loans. Another longer-term threat to this market comes with impending regulation and the placement of responsibility, whether it falls on the originator of the loan or the promoting lender.
Can FSA mortgage regulation still be introduced by the second quarter of 2004, as planned, despite the delay in the timetable by both the Treasury and FSA?
Charlesworth: The second quarter of 2004 is still two years away and, bearing in mind that initially regulation was due to be introduced in August 2002, I would think that the new date of implementation could still be met even with a little project plan slippage.
Smith: Many of the responses from the industry to both CP98 and the recent Treasury consultancy document will have said that a minimum of a year will be needed between the full rules being published and implementation deadline. This really is the minimum, particularly given the likely scale of the changes required, from computer systems to company structures.
However, the end date is really driven by the maximum period after the adoption of the EU intermediation directive that is permitted – just over two years. This is the factor that is driving the whole timetable for general insurance, protection and mortgage regulation.
Hurst: Yes. I think that the timescale is still well within the capability of the industry. Factors that may push this out will be complications associated with the introduction of general insurance as part of the 2004 launch, the impact of European regulation (and their acceptance of our alternatives), and finally IT solutions to support additional processes and information provision.
Is there a need for a new lobbying group for packagers which Olympian Financial is currently trying to set up in light of the lack of success achieved by the UK Association of Mortgage Packagers?
Charlesworth: No. The activities of packagers are evolving and the interface between them and the broker are becoming blurred. The boundaries will be even more blurred next year after the requirement for Cemap/MAQ qualification to give mortgage advice is introduced.
This further strengthens the argument for a single intermediary trade body covering brokers and packagers.
Smith: Representative bodies that can add value to their members and make a credible contribution to the debate on mortgage regulation are always to be welcomed in the mortgage arena.
Hurst: I think it is more appropriate to look at the potential added value a lobbying group could provide rather than satisfying a suggested generic need. The conclusion of the debate over regulation of packagers will almost certainly provide a catalyst for change in this market. Lobbying groups have the opportunity to not only represent the views of their members but also create a unity and bond that can help in developing and driving a sector forward.
The significant advantage that packagers have in creating such a trade body is the number of companies involved. It is simply easier to court the opinion and agree common ground with 100 firms rather than 20,000 individuals.
Will other life offices follow the lead of Legal & General and sell off their banks and mortgage books to focus on their core business of life and pensions?
Charlesworth: I do not think that the sale was prompted by any particular change in the market that would suggest that other insurance companies will follow suit. The sale suited L&G because of their strategic objectives. With the current issues facing many insurance companies, increased activity in the banking and mortgage sectors may be more likely, as evidenced by the recent development at Zurich.
Smith: Other life companies with banking subsidiaries will have their own priorities. This represented an excellent deal for L&G and for Northern Rock but it is not necessarily the beginning of a trend.
Hurst: I do not believe so. Most people in the market expect there to be an element of consolidation but I doubt that this will be led by anything more that individual corporate strategic goals. It was per haps 10 years ago that a significant number of firms in various industries returned to core product lines and business units. Although the emergence of the global village induced conglomerate strategies, when margins are tight, most firms return to what they know best.
Mark Charlesworth, The Mortgage Operation
Stephen Smith, Director, housing marketing,Legal & General
Richard Hurst,Communications manager, Future Mortgages