Should there be a code of practice for buy-to-let mortgages and, if so, who should oversee it?
Barrett: Let us be clear about this. Buy to let should be regulated by the FSA. It is a growing part of the mortgage market and consumers in this area deserve the same protection as those in the mainstream and equity-release sectors.
More ordinary consumers, who have one or maybe two properties, have moved into this sector so the argument that this is an investment purchase that does not require regulation does not stand up. We have to be careful that buy to let, along with sectors such as second-charge, do not turn into the Wild West of the mortgage market, with unscrupulous players moving into the sector from regulated markets.
Jannels: A buy-to-let mortgage is essentially a commercial proposition. This in itself should not automatically disbar consumer protection but caveat emptor needs to apply. Any consumer protection should be proportionally weighted with a level of responsibility accepted by the borrower. However, achieving the correct balance would be the acid test.
Webb: The industry appears to be split evenly as to whether buy-to-let mortgages should be regulated by the FSA. One view is that this form of borrowing represents a purely commercial proposition while another holds that all forms of mortgage lending should be regulated to achieve consistency. We incline to the former, believing regulation should only be applied where it serves a clearly defined purpose and is objective, as in the case of residential mortgage lending.
For buy to let, we do not think the case is made yet. However, it is important that high professional standards are set and maintained in the marketing, selling and processing of buy-to-let mortgages. This will help make the product transparent and understandable to would-be borrowers and investors.A voluntary code of practice is a good way to ensure this happens. To be effective, however, it needs to be supervised. As a non-regulated product, this would best be achieved through a recognised and respected trade body such as the Council of Mortgage Lenders or the Association of Residential Letting Agents.
What do you think about Chase de Vere Mortgage Management setting up a mass-market fee-free mortgage intermediary firm?
Barrett: Advice is essential in the mortgage market. Consumers will use tools such as the internet to price-search but time and time again they turn to their mortgage intermediary for advice. The point is there is room for all types of advice in the market, both with and without a fee.
From a strategic point of view, maybe Chase de Vere believes that key facts illustrations, due to launch with statutory regulation after October 31, 2004, will have an impact on the amount of the fee it will be able to charge.
Jannels: In essence, jolly good luck. It has presumably done its homework and business plan. However, one assumes its rationale is based on good acumen and opportunistic marketing. It is no doubt already registered with the FSA and, assuming it receives or expects to receive its variation order shortly for direct authorisation, its offering may strike a chord with those who are undecided. This would let it steal a march on the rest of the industry.
Webb: With its established business credentials, we feel sure that Chase will have researched and tested the market to gauge the appeal of its proposition. As mortgage choice proliferates, we agree with Chase that borrowers will seek out and continue to value the services of intermediaries. It is also reasonable to point out that some of these borrowers, especially from the mid-market, are less willing to pay fees. There is therefore no reason to suppose that the new firm will not be able to establish a successful niche position quite quickly. Key to this will be securing sufficient distribution through effective marketing and positioning. Whether others follow remains to be seen.
Fee-charging business models will continue to have wide appeal and be successful so long as they are compliant and transparent as now required by the industry as a whole.
What do you think about Bradford & Bingley ending its IFA status and moving towards multi-ties in a strategy review?
Barrett: Bradford & Bingley has recently made a series of announcements following its strategic review. It appears that B&B is moving away from traditional advice to concentrate on its core competency of product manufacturing. This is all about where B&B wants to be as a business. There will be lots more of this kind of activity post-mortgage day.
Jannels: It is a bold business decision, obviously in anticipation of the changes that regulation will bring about in personal financial markets after October 31, 2004. It will increase competition in this sector while enabling B&B to strengthen its distribution channels and profitability. However, it will require a wider compliance function and the inherent risks of a fall in service standards as existing personnel are retrained and/or new staff taken on.
Webb: At first glance, B&B's decision appears to be at odds with the IFA market as a whole. A recent edition of MM reported that 81 per cent of IFAs will not multi-tie after depolarisation, preferring to retain their independent status. Others commentators have expressed surprise at the decision given B&B acquired some of its IFA businesses only 12 months ago.
But does this make B&B's decision the wrong one? Probably not. After all, the IFA businesses were relatively modest contributors to revenues and are likely to fare well under new empathetic ownership. It also allows B&B to focus on its core offerings while retaining access to major providers and products. The refocus should also produce significant cost savings. Overall, therefore, it would appear to be a sensible move although B&B will need to be careful about defining its product offerings at the point of sale.
Will the media frenzy surrounding the CML predictions which it claims were misreported in the national press have had any effect on borrowing?
Barrett: No doubt, there will have been an impact, especially from subsequent broadcast coverage on the issue. However, relative to the recent base rate increase, it will have been minimal. Now that consumers are being hit in the pocket, they will undoubtedly begin to address how much money they are spending as opposed to saving. There is a £27bn savings gap in the UK and, hopefully, base rate increases will see this gap start to close.
Mervyn King's speech to the CBI in Glasgow warning of a house price meltdown will also serve to drive this message home. Clearly, his aim is to engineer a gradual slowdown in house price inflation.
Jannels: The borrowing public can be fickle but I believe they recognised this as a storm in a tea cup. Regrettably, the standard of accurate and informed reporting over recent years seems to have fallen. This, together with the now expected spin that political observers drive, results in a healthy sceptical view of what we read or hear in the news.
Webb: The CML report was a revision of its market briefing in which various possible scenarios were considered. One part of the report looked at what the Government could do if it wanted to reduce house price inflation to single figures immediately. This was a hypothetical situation.
Taking the report as a whole and in context, it is clear that it was not a call to action but a situation analysis. The CML is well aware of the intense media speculation concerning consumer borrowing levels, interest rates and house prices. In our view, it has made every effort to provide people with a balanced view of the housing market and what might happen in certain circumstances.
The misreporting was unfortunate in so far as only one element of the report was highlighted and the CML acted swiftly to put it right. We do not expect any direct effect on consumer attitudes. The same cannot be said of the recent rise in interest rates or Mervyn King's comments about house prices.
Do you agree with Bankhall's Shaun Godfrey that regulation will see the return of the composite intermediary?
Barrett: Regulation may see a drop in the number of brokers wanting to continue to do business but intermediaries who are already used to working in a regulated environment will no doubt find it easy to extend their reach into other areas.
Similarly, those entering a regulated market for the first time will, once established, probably feel comfortable in expanding into other regulated markets. For example, the general insurance market will fall within the statutory framework from January 2005.
This will provide opportunities for the reputable intermediary and could in turn see the rise of the super-intermediary offering a one-stop financial shop to time-starved consumers.
Jannels: What goes around comes around. There is no great surprise in Shaun's observation. Any casual observer in the financial market will know that it continues to undergo change as a result of Government policy.
For years prior to the 1980s, there were a number of specialists who dealt direct with the public. The first Financial Services Act changed that by creating polarisation. The market took the opportunity to resell itself, with many entering niche market areas as their speciality channel of business.
What we will probably see is a full revolution of that circle as we all need to become regulated – eventually for all areas of our business – returning to, in many cases, the composite intermediary. It might be prudent to assume the jury will remain out on this for a while.
Webb: The one-stop shop that is envisaged by Shaun is in some ways a very real and tantalising prospect. As the effect of regulation makes itself felt, it is not unreasonable to suggest that many in the intermediary community will seek to offer a full range of mortgage and general insurance products under one roof, as some already do.
Whether this will be extended to include pensions is more questionable, given the distinct and specialist nature of the product – not to mention its diminished reputation in recent times. However, this will not lead to the demise of the traditional intermediary who chooses to focus on mortgage and mortgage-related insurance products. As choice in this area expands, so will the demand from borrowers seeking specialist advice and guidance.
What do you think will be the split between directly-authorised and appointed representatives after October 31, 2004?
Barrett: Depending on whose research you read, estimated splits vary enormously. A sensible split seems to be 60:40 towards the networks. Clearly, market forces are at work and this may change as we work our way towards mortgage day.
Jannels: This seems to be a moveable feast at the moment. In essence, given the numbers currently disclosed by the FSA and the somewhat laboured delivery of minded to authorise letters to date, it is likely that the appointed-representative sector will win by a mile.
However, when it comes to the crunch, and given that networks are likely to receive their minded to authorise letters later rather than sooner, many plans may already be in disarray. This potentially leaves the public devoid of proper options and appropriately functioning personal insurance and financial services markets.
Webb: Many column inches have been devoted to this question over the past few months. Answers – or speculation – have varied widely as more facts become available. A year or so ago, commentators were taking the view that up to 70 per cent of mortgage intermediaries would opt for direct authorisation, with the majority of the rest choosing the appointed-representative route and a small minority opting to leave the industry.
These predictions now appear to be seriously inaccurate although it is to be hoped the latter group will not grow significantly in size. What is clear is that many firms have still not made a decision regarding the route to take – or, if they have, have not yet chosen to share it with the FSA. These are likely to be the smaller operators and they need to be careful not to leave it too late if they wish to remain active players.
Current indicators suggest that somewhere in the region of three-quarters of mortgage intermediaries will now opt for the appointed representative route. However, this is merely the global view and the precise split will vary according to a particular lender's distribution strategy.
In the case of igroup and First National, for instance, the vast majority of our supporting intermediaries have, with our support, opted for directly authorised status.
Colin Barrett,senior products manager, BM Solutions
Vic Jannels,group managing director, All Types of Mortgage
Sean Webb, chief commercial officer, GE Consumer Finance Home Lending