Concrete proposals for mortgage regulation have been a long time coming so the recent announcements from the Treasury and FSA should be welcomed by the new breed of consumer-friendly mortgage lenders.
The Government's commitment to protect consumers from abuse in the mortgage market seems genuine but there is no reason for complacency. Now is a good time to take a considered – even critical – look to see what these new measures will mean for the consumer and mortgage industry as a whole.
Developing a critical perspective
Let us start with the laudable objectives the Government set itself at the outset. The Treasury identified a clear problem to resolve – consumers are confused by the range of mortgage products and by hidden product features. Buying a home is one of the most important purchases a person will make so the Government is right in its determination to remove the dangers of an unregulated mortgage market. This is the benchmark against which the proposals for regulation need to be judged.
Product pitfalls for unwary consumers
The Government has not been alone in finding that various product features provide dubious value for consumers. New flexible mortgage lenders have been developing products that eliminate features offering poor value. The Government could have banned features offering no demonstrable value to the consumer. A very strong case, for example, could have been made for banning the annual calculation of interest and charging of separate fees for mortgage indemnity insurance, where the borrower pays the insurance on behalf of the lender but gets no benefit for it.
One area where action is to be taken is the banning of tied insurance but this is to be taken forward in a separate initiative. A consumer-oriented critic might well ask why the Government has not decided to ban all product features that cannot be justified. Instead, it has chosen to move forward by promoting a voluntary Cat standard.
Supporters of the approach on the table – with its focus on disclosure and transparency rather than product regulation – have argued that banning features would be wrong as it would inhibit innovation. This line is unconvincing. Banning anti-consumer features would force mortgage providers to compete on price and genuine quality.
Knowledge is power
The approach that has been adopted tries to give consumers the information they require so they can make their own choices. Information is, of course, vital to enable consumers to compare products and eliminate unsuitable options. For this to be effective, clear product features documents will be essential.
The industry and FSA have been working hard on this issue. We can only hope the final results will be a significant improvement on the current situation. However, the FSA's approach ignores a number of unfortunate but enduring facts about the mortgage market.
The public at large is mostly disinterested in financial services products. Most do not want, or have the time to develop, an active interest in this area. When choosing a product, they may not be aware of the significance of, say, annual calculation of interest. This will reduce the effectiveness of the proposed disclosure regime. There will naturally be some consumers who are better able to exercise effective choice as a result of proper disclosure. This will stop some of the worst practice in the sector but, unfortunately, it is unlikely to be universally effective, particularly as it is some of the strongest brand names in the industry that continue to persist with the worst practice.
Many consumers in this situation will look to intermediaries for advice. The lack of direct regulation of intermediaries is therefore a disappointment. Regulation should ensure that intermediaries' advice is impeccable.
The role of intermediaries in helping consumers get value for money is indisputable. The advisory community as a whole has been invaluable in helping new lenders with innovative consumer-friendly approaches enter the market. Many consumers have benefited from their expertise.
Unfortunately, although the vast majority of advisers are skilled and reputable, there are some who are less scrupulous. With an estimated 40,000 advisers (in addition to mortgage packagers) in the market, this is inevitable. Why the Government has decided not to introduce direct regulation of intermediaries is therefore baffling. Instead it has chosen indirect regulation, supervised by lenders. Moreover, regulation will only cover the information given to consumers, not how the sales process is carried out.
This is such an important issue because it is the small minority of rogue advisers who blight perceptions of the advisory sector as a whole. Without the confidence of full regulation, there is a risk that consumers will turn away from good intermediaries with valuable advice to impart.
Unless the compliance arrangements are carefully established, the new regime might well give significant cost advantages to the internal salesforces of big established providers – often the companies that have traditionally been the enemy of innovation and best value for consumers.
Even within the independent sector, the proposals risk undermining dedicated mortgage advisers with the most experience of the market. For example, it is proposed that where advisers are authorised for other aspects of investment advice, they will be able to self-approve some types of promotional material they want to distribute. Dedicated advisers, on the other hand, will need approval from providers. This will increase their costs and the administrative burden, making them less flexible and competitive.
Do consumers win?
The proposals will have some impact on consumer interests. There will be some pressure on providers to improve their products but this will not eliminate products with unfriendly consumer features.
Disclosure will help consumers but many will not have the knowledge or time to ensure they make the best choice available.
In the absence of product rules, a regulatory regime that supported the highest standards of independent advice would be the best route to protect consumers with problems in exercising effective choice. Unfortunately, the proposed regime will favour in-house advisers over independents and generalists over mortgage specialists. A critical analysis may regretfully conclude that the current proposals could have been stronger and hope that the ongoing consultation
will ultimately create a stronger result. Only if this is achieved will the Government meet the objectives it set for itself.