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Proc and a hard place

Do you think Cheltenham & Gloucester&#39s move to increase its IFA procuration fees will help increase its intermediary business?

Court: Increasing procuration fees will inevitably have an impact although one would hope the products and service on offer compared with the rest of the market would remain the primary defining factors.

Aitken: It is clear that intermediaries must place cases where the product offers the best terms and conditions. As with any specialist lending market, it is widely recognised that the inherent complexity and placement difficulties will sometimes mean that the introducer does carry out more work on certain types of specialist business and the fee paid will often reflect this fact. All lenders seek higher-value loans as there is more profit per transaction and they will look at ways of attracting such business. Many lenders also pay a percentage-based procuration fee, so that higher-value loans will result in higher fees.

Townsend: We do not know what C&G&#39s procurement fees are, so would not wish to comment about them specifically. In general, we would not expect to see IFAs particularly swayed purely on the basis of fees. We would be confident that IFAs would look at the whole package in terms of the deal available to clients and service provided by the lender.

Were you surprised by the statement in the FSA&#39s guide for firms on mortgage regulation that there will be no automatic transfer or “grandfathering” from voluntary organisations such as the MCCB to the FSA? Do you think this will make it difficult for mortgage lenders and brokers in terms of the time and cost in becoming FSA-authorised?

Court: The lack of a grandfathering provision will clearly make the process of becoming FSA-regulated more of a burden for advisers but it is probably not that surprising that the FSA wants to make a fresh start in defining its own criteria for authorisation.

Aitken: The new regulatory regime is going to cause upheaval and this will include the registration of firms which wish to continue to work in this field. The FSA seems to indicate that current membership of bodies such as the MCCB will help or be seen as an advantage. Nonetheless, it is clear that all firms will need to reprove themselves to the FSA as fit and competent. In addition, it is obviously not yet known to what extent the FSA will mirror the MCCB&#39s rules and practice. The MCCB is more limited in its scope than the FSA and there are bound to be additional requirements once the FSA becomes the regulatory authority.

There will be work and effort involved in this process. However, the stakes are now higher. This is the first time we will have statutory regulation and my opinion is we cannot expect the FSA to register firms without embarking on a due process of screening in only those firms it believes can work effectively within the legislation.

Townsend: No, I was not surprised. There is a difference between registration with a voluntary body and authorisation with the FSA. The FSA needs to create its own regime and, while it has said that existing firms that are registered with the MCCB will be given “due credit”, it is not clear how this will work in practice. It will no doubt need to review the MCCB&#39s fitness and propriety requirements, monitoring approach and disciplinary process before it can decide what further information is needed from intermediaries applying for authorisation. Firms that are already FSA-authorised will need to apply to vary their permission and presumably the FSA will provide sufficient time before the new regime becomes effective to make sure it can deal with all applications.

How do you think mortgage intermediaries will cope with the FSA&#39s suggestion in its guide that they may have to pay a levy to join the Financial Services Compensation Scheme?

Court: This will further add to the cost burden on mortgage intermediaries, all of which will combine to lead some to question their future involvement in the sector.

Aitken: Mortgage applicants could lose financially if, as happens on rare occasions, they have paid a fee to a mortgage adviser who subsequently ceases trading. They obviously need protection in such cases. They also need a backstop in the event of poor advice resulting in financial loss. In the event of advice being wrong, a firm could potentially face a number of claims from consumers saying the advice given was to their detriment and in this instance it is vital that a scheme exists to protect the consumer where the introducer&#39s firm ceases to trade. Until we know the actual details of the levy, it is difficult to comment further other than to agree with the underlying principle of protection for the consumer.

Townsend: The FSA&#39s guide for firms states that intermediaries may have to join and that there will be an opportunity for intermediaries to provide comments on this proposal when the FSA consults on this issue in the future. In terms of coping, I suppose this really depends on the amount of the levy.

Will consumer confusion arise if advisers have to label themselves “authorised” for life and pension business because of CP121 while remaining “independent” for mortgage business?

Court: It is certainly desirable that the two regulatory regimes sit together as closely as possible to maximise simplicity and transparency for the consumer. Any perceived contradictions in status for different product sectors will be potentially misleading.

Aitken: A large proportion of IFAs will give advice on mortgages as well as other financial products that are already FSA-regulated. There is potential for consumer confusion in circumstances where an IFA is tied or multi-tied for currently regulated investment and life products but is independent for mortgage business. You could see a situation where an IFA provides information and advice on mortgages from a wide range of suppliers and in the next breath is only able to refer to investment products from a single supplier.

Townsend: Any potential for confusion can be addressed with full status disclosure for each product area. This could just be a timing issue, given the different timetables for the polarisation review and mortgages becoming regulated, as it seems that intermediaries will ultimately need to choose one status for all regulated products.

Do you agree with the finding from the Housetrack survey for March that house prices are rising at an unsustainable annual rate?

Court: Sooner or later, there will have to be a slowdown in the rate of increase. First-time buyers will be unable to enter the market, halting movements up the chain, and peoples&#39 incomes are not moving upwards at the rate of increase in house prices.

Aitken: Like the Housetrack survey which states that house prices are rising at an annual rate of 15 per cent, a recent Nationwide report also shows annual price rises ranging from 8 per cent in the North to 18 per cent in East Anglia. This question depends on what you mean by “unsustainable” – for example, prices becoming so high that the market collapses. The key factors are really interest rate stability, which we currently have, and affordability.

Clearly, in London, with an average house price of somewhere between £150,000 and £175,000, house prices are out of the reach of lower earners. However, if there are people who can afford these prices – and house purchase figures prove there are – then it is a sustainable market. The real indicator will be if house purchase activity at the top end declines. Underlying all this is the real issue, which is not to do with the sustainability of the property market but to do with a social issue. It is encapsulated in the fact that many key workers such as nurses and teachers cannot afford to buy in the most expensive areas.

Townsend: Our own statistics (Housetrack does not use any statistics) and research have shown rapid growth in the housing market for the last year. As we go forward, pressures from the economy and interest rates will work to ease this level of growth. We do expect to see continued growth throughout the year, albeit at a more modest pace than the last 12 months.

Do you other think other building societies will develop specific intermediary brands/businesses as West Brom is aiming to do with its purchase of New World from Commonwealth Bank of Australia?

Court: Because of competition in the domestic mortgage market and the impact this has on margins, many lenders are looking at alternative markets and methods of distribution to improve returns. We have already seen a number of such ventures and more are likely to follow.

Aitken: I cannot speak for West Brom&#39s business strategy. However, by its own admission, West Brom is out to grow by acquisition and the New World opportunity is a brand and a business that looks to be in the complementary and growing niche sector of lending and this would appear to be a sound business move.

For mainstream lenders looking to expand into niche sectors, acquiring an existing brand and business is a quicker and easier method than developing the specialist skills in house. The obvious alternative strategy to the business acquisition approach is to purchase the assets in the form of niche loanbooks rather than build or buy expertise. There has been plenty of evidence that the market has a growing appetite to take this course of action and it is something I expect to see more of in future.

Townsend: It is unlikely that many lenders would follow this lead. Where it might be seen is with smaller lenders which do not have a great brand identity within the intermediary market. The purchase of a company with a stronger brand might, in this instance, provide greater opportunities through this channel.

Rachel Court, , national intermediary manager, Yorkshire Building Society

Martin Townsend, manager, mortgage regulation, Halifax

Stuart Aitken,director of credit, SPML


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