The DeAnne Julius report into banking recommended that mortgage brokers claim co-ownership of the mortgage code through the creation of a trade association. With two prospective trade bodies struggling to get off the ground, do you think brokers feel there is a need for one?
Anthony Richardson: I think most mortgage brokers would like to see co-ownership of the code through a trade body. It would be particularly advantageous for smaller firms which do not usually have dedicated compliance officers who can guide them through the minefield of a changing compliance environment.
Mortgage lenders have the Council of Mortgage Lenders in their corner, so I think a credible trade body to represent mortgage brokers' interests is something that would be welcomed by them.
Bill Dudgeon: I think the time is right for a truly independent trade body. There is a great deal of uncertainty among brokers at the moment, especially surrounding regulation and CP98. A body that would give them recognition and influence with the authorities would be welcome. Unfortunately, to have two or more bodies purporting to be the voice of the broker is just diluting the message. A body representing the membership and paid for by the membership, with no commercial interest, will get closer to the issues and should be welcomed by brokers.
Stephen Smith: Forming a trade association is not an exercise to be undertaken lightly and the industry would be poorly served by a body that lacked credibility in its management and representatives or was insufficiently funded to make a real contribution to improving standards in the market. There is some representation of brokers in the work of the Mortgage Code Compliance Board through its advisory group and, doubtless, if brokers feel the need for a more formal structure, one will develop.
There is also no lack of opportunity for brokers to respond to consultations on matters that affect the industry but the numbers replying to recent FSA and MCCB consultations has been low.
The CML believes implementation of FSA regulation should be postponed to give lenders more time to gear up for the change. Is this necessary?
Anthony Richardson: Given that the FSA rules will not be known until the end of the year, it might be practical to delay N3 to allow lenders to fully meet the requirements of regulation, with all the work that this will involve. In effect, lenders will only have eight months to develop IT systems that are robust enough for the new regime. While this is not impossible, it could prove prudent to push it back to the end of the year. With 275 days to go and counting, the decision should be made sooner rather than later to allow for a smooth transition into the new regulatory world.
Bill Dudgeon: The last thing that the industry needs now is ill thought-out rules imposed before the necessary time is allowed for all parties to have the necessary infrastructure and systems in place to comply. The FSA rules will be finalised in January and then everyone has eight months to design, test and implement major IT developments in order to comply. I feel that this window is too short and I am sure that the FSA will not want to introduce rules that nobody can comply with.
Another reason for postponement is that the application that lenders need to complete to become regulated includes full details of the proposed compliant IT platforms that will be used post-N3. The FSA has stated that it will take six months to turn round an application, meaning that the IT solutions will need to be finalised by the end of February, which again is unworkable.
Stephen Smith: Yes, this is necessary and it will not be in consumers' interests for changes of the scale intended to be rushed through.
The FSA plans to make one of the most complex parts of the regime – that of getting more than 100 lenders to be able to provide standard format illustrations for over 40,000 mortgage advisers – mandatory in only eight months after the detailed rules are published. We think this is unrealistic.
Building Societies Association chairman Martin Ritchley recently said the Financial Ombudsman Service should be forced to consult with the industry and offer a cost/benefit analysis of its decisions. Do you agree?
Anthony Richardson: The FOS is in place to resolve individual disputes between consumers and financial firms. The decisions it makes can have costly implications for the firms concerned.
I think it would be beneficial if the relationship between the ombudsman and financial providers was more open and the lines of communication between the two could and should be improved.
It is important that we see increasing transparency in the decisions that are made and for both sides of a dispute to understand the consequences and implications of any decision made by the ombudsman. Financial services providers are required to be accountable the same should apply to the FOS.
Bill Dudgeon: Everyone will agree that there needs to be a fast, cost-effective method of resolving complaints in the interests of consumer confidence in the industry. It currently costs companies £500 to refer unresolved complaints to the ombudsman and because of this I am sure that certain complaints are conceded on an individual basis rather than being referred for an independent adjudication. This can also lead to lenders' outdated and inefficient systems not being updated to the detriment of customers who may have similar complaints in future.
The anticipation is that complaints will increase following N2 and then drop back to lower levels. A cost/benefit analysis or a method of allocating costs to a particular case after consultation with the industry would be fairer all round.
Stephen Smith: The FOS looks like a good solution to the problem of fragmented complaints' procedures and the gradual taking over of the current arbitration service provided under the Mortgage Code seems a sensible move. There seems little cause for complaint at the moment..
Interest rates are at their lowest level for half a century. Can lenders afford to continue passing on rate cuts or will we see more of them taking the Abbey National route?
Anthony Richardson: This really depends on the mix between borrowers and savers and how lenders fund their ability to lend. The oft-quoted ratio of seven savers for every one borrower is always wheeled out as the reason behind no cut or a reduction less than that announced by the monetary policy committee and it is an important factor for lenders when considering how and when they cut their rates. Interest rates have probably not got much further to go down but, if they do, I think it is a certainty that many lenders will reduce their mortgage rates by less than the full amount. Interestingly, it is not just in low interest rate environments that lenders choose not to cut rates in full.
Bill Dudgeon: I think we will see more lenders follow the Abbey and fail to pass on future rate cuts in full to their existing customers on standard variable rates in order to balance the needs of their savers and borrowers. The returns on investments, particularly after inflation, are low and savers will not take yet further reductions in their returns.
Therefore, in order to retain customers, lenders will have to refrain from passing on any rate reductions in full. Lenders will also have to rely more on the money markets for funding if rates continue to fall and this could have a knock-on effect on mortgage pricing and perhaps in the short term lead to a reduction in the number of attractively priced offerings available. Customers who want to ensure that their mortgage rate moves with base rates should consider a tracker rate and ensure that there are no collars attached to the product base rate. Lenders are balancing the needs of their savers and borrowers and, at the same time, certain lenders are sneaking collars back into their products.
Stephen Smith: Mortgage rate falls are not good news for everyone and lenders who fund a proportion of their lending from retail investments must keep an eye on savings rates. If these drop too low, there will be no incentive at all to save and, thus, provide funds for lending. Given the need to keep this in a fair balance, it is probable that any future rate cuts will not be passed on in full by all lenders.
With margins virtually non-existent in the mainstream market, can you see many mortgage firms considering correspondent lending?
Anthony Richardson: It is quite possible that lenders will look towards new markets in order to drive profitability but I do not think we will see wholesale changes in strategic direction for lenders.
Bill Dudgeon: A number of lenders have been looking at correspondent lending but it has tended to be in the specialist areas such as the sub-prime market rather than the high street.
Lenders are continually looking to improve their bottom line by outsourcing mortgage origination and processing activities. However, I think that the growth of correspondent lending will be mainly in the specialist areas of the market.
Stephen Smith: Even with thin margins on mainstream mortgage lending, lenders can make money out of mortgages by the development of a more full customer relationship based on the initial mortgage transaction. This is likely to be more of a focus for lenders than the funding opportunity that is represented by correspondent lending.