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Regulation issue

The mortgage industry needs to focus on ensuring that the public are fully aware of the big changes brought by regulation.

Since everyone in the mortgage industry has lived, breathed and dreamt regulation for the past couple of years, it is hard to believe that out there in the big wide world of consumers, Mortgage Day came and went pretty much unnoticed.

The results of a YouGov survey commissioned by BM Solutions shows that 59 per cent of people did not know, or could even guess, what FSA regulation of mortgages meant.

Only 18 per cent knew that regulation would mean that key facts illustrations would make mortgages more transparent for customers. Eight per cent thought it involved the regulation of estate agents, 1 per cent thought it meant that all mortgages would run to a fixed term.

A small, but still shocking, 2 per cent thought mortgage regulation meant the FSA would be in control of the Bank of England and so there would be no further interest rate rises. An interesting thought.

As well as most consumers not knowing that regulation has come into effect or what it means, I think it could be that they do not really care.

However if we had asked customers if they believed they should have all the information necessary to make an informed decision about the biggest financial commitment of their lives and the seller be answerable to higher authority, I am sure the answer would be a resounding yes.

Many consumers would be surprised to find that was not the case already. I think, in general, if consumers knew more about the extra infor-mation and protection regulation gives them, they would be glad it has happened.

Whose fault is it that consumers know next to nothing about one of the biggest events in the history of the mortgage market?I think the answer lies at everyone’s door. There has been no strong communication from the FSA to the consumer explaining what is happening and how it affects them. The FSA implemented regulation for the consumer’s protection and spent three years working on it but it has not communicated this to the general public. The industry itself has hardly been shouting from the consumer rooftops either.

The result has been that the national press has written very little about regulation except for a couple of stories saying it will add 100 to the cost of every mortgage.

Have we really been gearing up to this moment for years to let it pass in such way? I think we will soon start seeing consumers asking questions about the extra documentation they are getting and what it all means.

The fact is that consumers are now much better informed and protected and lenders and brokers must make this known.

The KFI is such an important document to the process and consumers need to be aware of what it means to them.

As well as more transparency, they also need to be aware that they need to be careful when they read the information contained on the KFI. When they sign, they are signing to say they understand fully. If they later claim that they have been missold a product it will be a very difficult argument to prove.

The danger is that they will say they have read and understood information when they have not. Not only do lenders and brokers take responsibility for providing the KFI but they must also make it their duty to make sure the full implications are known to the consumer. Without this, there is an opportunity for confusion in the market.

It is the same in all areas of finance. As a country, we have 1trillion worth of debt but this is hardly surprising when you think about the lack of financial education in schools. Most teenagers leave school with very little knowledge about how finance is run and then they are targeted by credit card and loan offers while they are still little more than children.

People can make bad financial decisions when they are young that will affect them the rest of their lives and that is why we need to educate not just children but the general public about personal finance.

Regulation gives consumers more information but the downside is that reading and digesting the information requires a degree of financial understanding that many people simply do not have. The danger of the KFI is that, at five pages long, people will only look at how much they have to pay each month and will not check, for example, the effect that a 1 per cent rise in interest rates will have on their monthly payments.

I think that most people will notice the difference in the sales process next time they buy a mortgage. There is a lot of activity in the remortgage market, with people generally shopping around for the best deal every two or three years. The KFI is definitely the main difference that people will notice.

I think if you asked consumers whether regulation will mean an increase in the cost of the mortgage, they would say yes. But this is more because we are a cynical nation who does not believe we ever get something for nothing rather than an answer based on an insight into the mechanics of mortgage regulation.

I do not think there will be an extra cost to the consumer but if there is, it is worth it for the additional information and protection they now get.

What is next for mortgage regulation? Buy to let, hopefully. The FSA has acknowledged that three years ago, when it took the decision to regulate mortgages, buy to let was just a niche product. Now it is much more mainstream. Buy to let is a growing market and accounts for 7 per cent of residential lending. With a growing number of consumers relying on this product to provide them with financial well-being in the future it is only fair that these consumers have the same level of protection currently offered by the FSA.

But it is not just buy to let. The case recently in the media about the couple whose 5,750 home improvement loan escalated to a massive 384,000 adds weight to the argument for second-charge mortgages to be regulated.

Cases like this are rare but if the loan had come within the FSA’s remit then this situation may not have happened. To have any loan that puts someone’s home at risk, falling outside of a regulatory system is wrong and I think this is something that the FSA will address in the near future.

One thing is certain – regulation is excellent news for consumers. As an industry, we should not let it slip by unnoticed.


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