Do you support the FSA's decision to abolish the least-worst rule for mortgage regulation, meaning that lenders and intermediaries will no longer be able to recommend a product that does not exactly match a customer's needs?
Mountney: Yes, because this works in conjunction with the mortgage code on responsible lending. This applies just as much to the adviser as it does to the lender. In other words, while the interpretation of what product is right for the client's requirements is now open to discussion, it still has to be proven, if tested, by the adviser.
Remember, there are hundreds of lenders and thousands of mortgage products.
Sandiford: Intermediaries have a responsibility to give best advice and few would ever recommend a product that was not appropriate for the customer's needs.
The vast majority of professional intermediaries have nothing to fear from the least-worst rule.
Cherry: The FSA rules build to some extent on the mortgage code's suitability rule. Under the published mortgage code rules, mortgage intermediaries and lenders will have to send applicants to a whole-of-market adviser if there is nothing in their own range that is suitable rather than offering a least-worst option. Similarly, mortgage advisers who become appointed representatives to a principal that only deals with a very limited panel of lenders may also have to refer some customers to another source of advice.
We welcome this provision as beneficial to consumers and a further recognition of the important role that independent financial advice plays in the market.
Is offset becoming a mainstream product?
Mountney: Yes, it is but worryingly so. The percentage of clients for which this very sophisticated product is right is limited to say the least. The total solution of the offset includes many bells and whistles which, frankly, I suspect a lot of clients will rarely use. The primary driver for most solutions remains the lowest rate or the lowest payment or protection via a fixed rate.
I say worrying because the misuse of the product could open up the door for a complaint in the future. We know how quick clients can be in remembering the thought processes used in selecting a solution. Endowments?
Sandiford: First, there are very few players which offer a true offset product, that is, the ability to combine a mortgage, current account, savings and so on. Intelligent Finance is one of the few that offers a comprehensive product – unsurprisingly as it kicked off the offset market in the UK.
In terms of watered-down offset solutions, yes, there is now product innovation in the market which has offset elements and it is certainly becoming more mainstream. However, if you want a specialist in the area, then consumers need to turn to a player that has offset at the heart of its business.
Cherry: The classic answer to this is that it all depends what you mean by mainstream. Offset products can only be offered by organisations that have both mortgage lending and savings capability as these are the two balances that are offset against each other, so this would naturally limit the size of this particular market.
Recent Datamonitor figures show that offset mortgages currently account for only around 15 per cent of UK net lending, so I think that can be regarded as niche. The financial benefits of offsetting savings against the mortgage loan can be considerable, so in a totally logical world we could expect this product to quickly become mainstream. However, where mere mortals are concerned, I expect there will be a lingering reluctance to put savings into the same product as the mortgage loan, as people tend to like keeping money separate for each purpose.
Do you think that lenders will want to work with tried-and-tested mortgage clubs come mortgage regulation, making life difficult for the newly set-up clubs and mortgage networks?
Mountney: No. Distribution will be king in the new world and, while lenders will favour certain parties, they will not be able to afford to shut out others. Lenders will keep all options open because they do not know the eventual winners and there will be many casualties along the way. Backing only a few horses could be an expensive mistake to make.
Sandiford: Distribution will be key after N4 and it is clear that there will be a flight to quality across the whole market. It will be those players with a strong and established brand and the best online services that win out. There will undoubtedly be mergers and acquisitions across the market as firms look to manage their cost base and the impact of compliance. Other organisations will simply look to share back-office processes and systems to cut costs. This does not make it impossible for start-up clubs and networks to be a success but it will certainly make life difficult for them.
Cherry: Certainly, the topic of distribution is exercising the hearts and minds of most lenders and packagers at the moment. This question is really about how many advisers will be directly authorised and how many will be tied into a principal. The directly-authorised ones will still be free to join any number of mortgage clubs while the appointed representatives will only be able to deal with the lender panel of their principal/ network.
From the point of view of lenders, I do not think they have to make a choice between mortgage clubs or networks and will be happy to be included in all lender panels, so long as the standard of applications and packaging is good.
Do you think a home-reversion plan has benefits that cannot be matched by an equity-release mortgage?
Mountney: Actually, no. The reversion market has been around for a long time and was an effective monopoly, with little in the way of alternatives. Assuming that interest rates remain low or can be fixed and that house prices continue to rise, even nominally, to hold on to an appreciating asset has to be the winner in the long run.
Some of the equity-release products are superb. Also, reversions are very complex products and difficult to explain and put in place. Loans are not. Frankly, the decision to forfeit ownership of one's home does not sit easily with most clients, let alone their children.
Sandiford: There are two types of equity-release mortgage – lifetime mortgages and home reversion. Home reversion will not be regulated by the FSA post-N4. There is the obvious danger that the minority of unscrupulous brokers will turn to home reversion. It is especially worrying considering that the FSA has deemed these mortgages as high-risk products.
Cherry: The home-reversion and equity-release market is certainly likely to grow, given ever increasing life expectancy, ever decreasing annuity rates and general under-provision for retirement income. Home reversion is not actually a loan but a sale of part of the property and, as such, does not currently fall under FSA regulation although this is under review. This means that the owner retains part of the property that can be bequeathed to children or other beneficiaries. With equity release, no repayments are made, so if the loan goes on for a long time, the debt increases more sharply as time goes on and could end up taking up all the equity in the property.
This inheritance aspect is seen as one of the major benefits of home reversion over equity release and is being cited as such by Norwich Union, the latest entrant into this market.
Equity-release and home-reversion plans are complicated, with more extreme financial results than a normal mortgage. They must be thought through carefully and sold correctly. Borrowers must think through the implications for their family and heirs.
Do you think lenders are taking reasonable steps to detect fraud which arises through fast-tracking the underwriting process?
Mountney: I am not a lender so I do not know what special steps they take, if any. What is clear is that some mortgages have progressed which should not have if the appropriate restrictions were adhered to. But to blame just the lender is putting the cart before the horse. The primary responsibility in my eyes lies with the adviser. He or she should know their client and take the necessary steps to understand the truth. That is where the initial errors, deliberately or otherwise, are being made. The lender then can act as a second safety net.
Sandiford: The Money Programme, which aired a couple of weeks ago, repeated some serious allegations against the self-certification market and then subsequently fast-track underwriting. However, the anecdotal evidence featured in The Money Programme is in stark contrast to the FSA's rigorous review across 15 lenders and its subsequent independent conclusions, that is, that lenders in general have adequate controls in place to mitigate the risks.
I think it is important to differentiate between the self-certification market and fasttrack underwriting. Self-certification has grown because of changing lifestyles and working patterns. It fulfils a very genuine need for those consumers who cannot prove their income in the standard way. Fast-track underwriting applies to seasoned homeowners who have a strong track record and a big deposit to put down. Most good lenders ask for a minimum 25 per cent deposit. The fundamental point is that lenders do not want to lend to consumers who cannot pay them back and have an array of responsible and prudent checking processes in place.
Cherry: SPML certainly is. Every case is individually underwritten by experienced underwriters and there is no question of starting to cut corners on this process. We understand that employed people also want to self-certify, especially if income is from several sources, or they want the loan to go through very quickly. We have always operated a self-cert policy that is subject to checks. We will check application details with a phone call to the borrower's accountant or employer and we may ask to see bank statements.
Above all, we want to keep having highly-rated and strongly-performing securitisation bond issues, so keeping collectability good is a top priority. This means satisfying ourselves about affordability at the borrower's point of entry.
Mark Mountney,managing director, Premier Mortgage Management
Steve Sandiford,head of products,BM Solutions
Bill Cherry,managing director, Southern Pacific Mortgage