The FSA says it has already seen evidence of poor financial promotions in the equity-release sector and is warning that it will take swift regulatory action against firms which missell the products. Do you agree with this stance?
Batchelor: The prime reason why the FSA is regulating mortgages is to protect the consumer and in its rules it makes it clear that equity release is a higher-risk product with an increased possibility for misselling.
With that in mind, it is appropriate that the FSA should take regulatory action against those firms and individuals who do not treat customers fairly.
Clifford: The FSA is quite right to take a hard line. It is essential that clients are not inappropriately lured into this type of product by clever marketing. First, there is the argument that typical equity-release clients are elderly and a vulnerable sector and second, it is crucial that the industry does not repeat its mistakes of the past, which resulted in equity release having an exceedingly negative reputation.
Given house price inflation and the tendency for elder people to minimise debt during their lives, it is clear that there are now huge opportunities for equity release. Therefore, marketing campaigns are likely to increase significantly and sharp practice is always a risk.
Smith: It is good to know that the FSA is already alert to the market and intends to ensure that swift action will be taken in the event of proven misselling. It is in all our interests that this market develops through maintaining the highest possible standards. It is such an important market that we must not allow the sort of setbacks we have had in the past.
What is your view of Professor David Miles' interim report, published in December, into the lack of take-up of long-term fixed-rate mortgages in the UK?
Batchelor: Within the Britannia group, we are reviewing the report and will be giving feedback to the CML soon. My personal view is that it will be difficult to change consumer behaviour and it would be a shame if the UK mortgage market, which is arguably the most dynamic in the world, were forced to limit the choices available to consumers.
Clifford: The reality is that, due to the plethora of excellent shorter-term products in the UK market, consumers simply do not want the perceived commitment of a long-term fixed rate. We have a highly competitive and well supplied market and unless the Government regulates on this issue or somehow forces consumers to take a longer-term view or bans short-term deals, then we will continue to see very few consumers taking up long-term rates. APR and Total Amount Payable are always made plain to borrowers and I just do not believe that borrowers fail to understand the benefits of a fixed rate. They do understand the benefits but ultimately choose the cheapest option.
Smith: This interim report was a good, detailed and very academic analysis of the operation of the UK mortgage market. Its findings will have come as little surprise to most practitioners in the market.
Having identified the problems, it will be interesting to see how bold Professor Miles will be when the full report is published in the spring. If nothing else, the development of a properly funded long-term fixed-rate market can only increase consumer choice nd it is to be hoped that consumers will be able to select these products alongside those of a shorter-term nature that are currently so popular.
Building Societies' Association chairman John Goodfellow believes that mortgage regulation is unnecessary and will be regretted by the industry. Do you agree?
Batchelor: If regulation provides the consumer protection benefits and improves consumers understanding, as suggested, then this can benefit the financial services industry as a whole. The compliance costs of regulation should not have an adverse impact on the number of mortgages sold. It is possible that because the consumer is receiving extra protection, the market may see a small increase in rates although, due to the intense competition within the marketplace, any increase will be minimal.
Clifford: There is no question that voluntary regulation was working. The MCCB and the mortgage code have brought about staggering changes to this market, such as compulsory PI insurance, mandatory professional qualifications and a robust fitness and proprietary regime.
Statutory regulation has largely been welcomed by the industry as it serves to strengthen the position and reputation of a sector, which has come under fire far too often in recent years. There is always a danger, however, that the increased processes and costs could pull the focus away from the key business of giving cost-effective mortgage advice. Consumers pay for every penny of cost.
Smith: Many observers have commented in the past about the scale of change and the cost of regulation of the mortgage market, given the tiny number of complaints that are referred to the mortgage code arbitration scheme and the even smaller number of these which are found in favour of the complainant.
However, there is little mileage now in considering what might have been, such as a more empowered but highly cost-effective MCCB for example. It is time to get on with implementing what must happen. Mortgage regulation represents a step forward for consumers who will be given clear and comparative information on mortgages and we believe this will also be useful to mortgage advisers in their selling activities.
What do you think of Government plans to stop homeloan schemes, a loophole that currently enables homeowners to avoid inheritance tax on their homes?
Batchelor: Harsh. With soaring house prices over the last decade, many ordinary people have found that their properties are now worth over £255,000 and so inheritance tax would apply to their estate. As the threshold only increases in line with inflation each year, it has not accurately reflected what has happened to prices in reality and if, as some industry analysts calculate, the threshold had increased in line with house prices, it would now be around £400,000.
Clifford: A significant number of people are using equity in their property to supplement their pension arrangements and, in an uncertain stockmarket, to penalise customers who plan for the future in this way, seems a little harsh. Tax avoidance is, of course, big business, which generates significant fees for accountancy firms so I suspect that other tactics will be used to mitigate tax exposure even when this loophole is closed. It is essential that consumers try to mitigate the effects of the recent terrible equity market and house price inflation has clearly given many people capital they wish to put to good use.
Smith: Nobody should be surprised that the Government acts to close tax loopholes that mainly benefit those who can afford to get smart advice. As with most things in the mortgage market, if something seems too good to be true, either it is or it will not last for long. We do not anticipate this move having any effect on the mainstream market.
Do you think that the FSA's description of what will constitute a whole-of-market offering under mortgage regulation is clear? Some have said that it is still woolly.
Batchelor: The important issue here is what the consumer understands as “whole of market” and what it constitutes, especially as “panels” of lenders can be used to satisfy the requirement. Also, the rule allowing a firm to satisfy the whole-of-market rule by considering “a sufficiently large number of regulated mortgage contracts which are generally available to the market” seems ambiguous and may need further clarification.
Clifford: There is bound to be confusion, when you start out with a principle which is fundamentally flawed. Whole of market is not the way in which intermediaries have naturally operated and to give access to literally the whole of the market is virtually impossible, given that some products will be unavailable to some brokers.
The FSA's description of whole-of-market offering is unclear at present and I suspect that clarification has to follow. Clarity should be provided as soon as possible in order that brokers can alter their modus operandi. I accept that operating a broad panel of lenders should be able to constitute whole of market in certain circumstances and this is a good, pragmatic approach.
Smith: No. There still appears to be widespread misunderstanding of how panels can operate. Simply listing well-known lenders will not do. As the MCOB rules state, consideration must also be demonstrated of the underlying mortgage products – regulated mortgage contracts – in determining the lenders for inclusion in the panel. This will be good for competition, as lenders will not be able to rely simply on strength of brand but will have to provide good competitive products. This will be good for customers and good for intermediaries too.