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Sub standards

The FSA found a mixed picture on sub-prime mortgage compliance. What more needs to be done by providers, advisers and the regulator to ensure a fair and safe playing field?

Knight: This should be a bit of a wake-up call to some. Record-keeping is very important and investing in technology can help. Len- ders’ online systems can be a good starting place and using such systems can remove the complexities of the sub-prime market. It also frees brokers’ time to deal with compliance issues and generate more business.

Hague: Providers must ensure products are clear and well communicated. Ideally, they should be offering a range of sub-prime products tailored to the scope of clients in the sector, enabling brokers to find a suitable product for clients’ specific needs and circumstances. Standardisation of terminology and product comparators would be helpful. Sourcing systems are still not great at helping advisers find the right sub-prime products, typically because they are classified incorrectly. Different lender terminology does not help.

Advisers must take the report’s findings on board, specifically regarding record-keeping. It appears that advisers know their clients well and can verbally provide back- ground to verify products were suitable but in a regulated world this is not enough. Record-keeping is the only way to comply. The regulator also has a role to play in providing continued advice and support to those operating in the sector, working closely with organisations and making all requirements clear.

Burnard: Often the consumer has not understood the principle behind the sub-prime product. It may have been poorly explained or they may have rushed into it as something too good to be true. Often it is a product with long tie-ins and hefty penalties. Asking consumers to sign a document to say it has been fully explained and understood may help but clients have selective memories.

Are naming and shaming surveys of lenders helpful, such as the proposed survey by Zurich’s Openwork? Should this job be left to the FSA?

Knight: It depends what the surveys are showing. Networks and mortgage clubs often undertake surveys among members, looking at lenders’ service levels, online systems and products. It is good for lenders, members and the network/club as good, constructive feedback is obtained to identify gaps and ways to enhance service. This is some- thing the FSA is unlikely to do. So surveys are a good thing, depending on what they are trying to find out, but perhaps naming and shaming is not the best terminology.

Hague: Anything which helps intermediaries see how lenders are performing should be welcomed. The success of such a league should be based on how the tables are put together and criteria used. If the league is too simplistic or overly complicated, it could lose credibility. It must create a true and fair reflection of what is happening, being careful not to misrepresent through inaccuracy or inappropriate comparison. This seems different from the role of the FSA, which I am sure will continue to regulate and monitor the industry as now.

Burnard: There is a problem here. Lenders produce products which look good and brokers recommend them. Business comes in at such a rate that processing centres are overwhelmed and unable to cope. This gives a bad impression. Call centres putting brokers on hold is a real pain. An alternative is to ask them to leave their name, number and time they want a response. This has worked satisfactorily for some lenders.

Are old-fashioned income multiples and 25-year terms inhibiting the first-time buyer market or are seven times income multiples and 100 per cent LTVs still too dangerous?

Knight: GMAC-RFC commissioned research into the FTB market which showed that, while affordability is a key issue, of equal importance is that a vast majority of FTBs are choosing not to buy. They have more choice when it comes to renting and see purchase as a sign of settling down and are choosing to spend their money on other things. The research showed there is nothing lenders or the Government can do to entice them to the market. The industry needs to understand this and have appropriate products for FTBs when they choose to buy. I believe there are a wide number of such products on the market.

Hague: Offering large sums of money just to secure a first property is not the right answer. Clients must be able to afford the funding they secure to ensure they make repayments and maintain a healthy credit rating. Raising the amounts that FTBs can borrow or the levels of LTVs they can secure is not necessarily the right answer in the long term. Raising indebtedness should not be allowed simply to get clients in their first house. Affordability calculators help FTBs who have lower total commitments. Responsible lending is the key to responsible borrowing.

Burnard: FTBs are usually young people wanting to step on to the housing ladder. They need assurance that this is worthwhile and they will have something beneficial in future years. Why should mortgages be restricted to 25 or 30 years? A 20-year-old has 45 years to retirement. Why not spread repayment over this period? Young people need to show they have commitment by saving 10 to 15 per cent of their income in one year. This generates a useful deposit and shows their future commitment.

Should sourcing systems be responsible for the accuracy of key facts illustrations?

Knight: It would be better if everyone who produced a KFI was responsible for their accuracy. That would give greater consistency and make things easier for intermediaries. We stand by the accuracy of our KFIs, so we believe everyone else should too. Ultimately, technological advances will assist as lenders develop links from the sourcing system into their online system.

Hague: The accuracy of sourcing systems is a much debated topic. The situation is not ideal and brokers should use lenders’ websites if they want to guarantee the accuracy of the information. From a broker’s perspective, the fact that sourcing systems are not regulated means the usefulness of the service they provide is limited, as the regulated brokers will be held responsible for the information used. Sourcing systems should be regulated if the FSA expects brokers to search the whole of market and give accurate information. As to whether sourcing systems should be made to take responsibility for accurate KFIs, very much depends on how this section of the market develops. It is key that the industry makes sure it can offer brokers the best solution, making it as simple as possible to get the accurate information they need.

Burnard: These are what they say – sourcing systems. If you went to an independent garage and asked for a car, you could be offered a Mini or a Jaguar. Product particulars of each vehicle are vastly different. A KFI from a sourcing system for a standard variable rate mortgage and a stepped capped discount rate mortgage would be vastly different. Car manufacturers must have their specifications correct so why should a sourcing system be blamed for the inadequacies of suppliers of the information?

Does Safe Home Income Plans still have a useful role to play in an FSA-regulated mortgagemarket? In what way can it still play a relevant role in lifetime mortgages?

Knight: Even in an FSA-regulated environment, Ship will have a valuable role to play. This is because such a potentially vulnerable group of customers need to be aware of the advantages and disadvantages of the products and the transactions from as many different sources as possible. The activities of the likes of Ship are a good thing.

Hague: Ship has contributed huge amounts of guidance and best practice in the equity release and lifetime sector, helping to shape its reputation. There is no reason why Ship should not continue with its endeavours in the regulated market, continuing in its aims to help consumers distinguish between plans and make informed and sensible choices. Its code of practice remains valid. Equity release is a unique offering, being underwritten based on mortality rates rather than ability, stability and willingness to pay, and this alone verifies the value in an independent body such as Ship. It will no doubt develop its positioning and offerings to its audience in the lifetime sector, moulding itself to still play a relevant role. As with any establishment, it must always evolve along with the market in which it serves.

Burnard: Ship has a useful role to play in assuring people that some home income plans are what they say – safe. This is what senior people crave. Quite a number have anxious memories of the 1980s when a number of home income plans were far from safe. Not only does safety apply to the older occupants but needs to apply to children or beneficiaries. They need to know that parents or relatives have not suffered at the hands of an unsafe product leading to repossession of the home.

A mystery shop found 50 per cent of firms do not provide correct documentation to borrowers at the appropriate time. Why are mistakes being made a year on from M-Day?

Knight: When other areas of financial services became regulated, it took those involved time to adapt. This was not a deliberate attempt to ignore new rules but it simply took businesses a while to adapt culturally. The same is happening now. Regulation is all about protecting the consumer and giving the best advice, which is why the intermediary market is so important.

Hague: Regulation of the industry was always going to take time to settle, allowing those affected time to truly understand their new requirements. As such, some allowance should be made for a learning curve. However, almost a year from M-Day, the excuses for such mistakes are less easy to swallow. The reasons behind continued mistakes will no doubt vary and the FSA must, of course, acknowledge and respond to any valid reasons. As an industry, we must all take responsibility for our roles where documentation is concerned to help the num- ber of mistakes to decrease.

Burnard: Firms should by now have got to grips with the requirements for the regulations and documents needed. A specified track or script should be in place in firms which follows the FSA recommendations. The forms are too alike. They all have the key features logo predominant so they look the same. The wording of “About our services” and “About the cost of our services” are similar and confusing. It takes time to explain these documents. We all know time is money.

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