M-Day will be upon us in under a week and the biggest upheaval seems to have been with the lenders where the changes could mean higher costs and changes in service levels.
Figures on just how costly regulation will be after M-Day are providing an insight into just how much of an upheaval regulation has been for lenders.
A survey from financial services compliance outsourcing company Huntswood has shown that 66 per cent of lenders have reported an increase in compliance costs averaging 59 per cent, with 83 per cent of them expecting that ongoing costs will rise by an average of 25 per cent.
Savills Private Finance managing director Mark Harris hopes the banks will do the right thing by consumers and bear the increases. He says: “I would like to think that since they are making so much money that consumers will not bear the brunt although possibly some of the cost of regulation will fall on the consumer.”
Harris suspects that increased costs will bring some high-profile casualties very quickly. He says: “Banks cannot be priced out of the market but there will undoubtedly be some smaller lenders and niche organisation that will not be able to keep pace or offer competitive products.”
But Charcol technical director Ray Boulger says the real issue is the huge one-off cost for the transition to regulation rather than continuing increasing costs. He says lenders he has spoken to have spent hundreds of millions of pounds on getting ready. “This has been significantly higher than any estimates that the FSA tried to give the industry,” says Boulger. He does not believe the huge one-off cost should affect proc fees or be passed on to the consumer.
The Huntswood survey showed that 69 per cent of lenders believe the industry will benefit from mortgage regulation and although around one-third would have liked to have seen regulation sooner, most are satisfied with the FSA's timescale but believe that an 18-month period of adjustment could have helped.
Sixty-eight per cent of lenders have seen compliance teams grow over the past year, with nine out of 10 compliance teams admitting to having to use staff from other departments within the lender to handle the workload or bring in expertise. Lenders say senior management have had to be involved directly in preparations for mortgage regulation. The survey found that more than half in the senior management team of each organisation was directly involved in M-Day preparation projects. On average, it seems that one in 10 of lenders' non-compliance staff has been directly involved in preparation for M-Day but the proportion is much higher within smaller building societies.
Purely Mortgages chief executive Mark Chilton says every lender has had their eye on M-Day for the past year so it is natural that a lot of senior management has been focused on regulation this year but he says: “I am still not convinced that intermediaries still realise the significance of regulation.”
Harris points out that some lenders have been FSA-regulated for some time now and should not need a massive increase in resources. He says for the likes of Abbey and HBOS, the onset of mortgage regulation should cause fewer problems. “But there are probably some smaller lenders and building societies that will definitely be feeling the pinch and it will be hard for quality IFAs to take them seriously if they cannot get their act together,” adds Harris.
Huntswood senior consultant Andrew Wheeler says: “Most lenders are warm towards the benefits of regulation but many will be regretting the level of resources re-directed from bottom-line business during a boom time for homebuying. The chance for lenders to manage M-Day compliance differently may have come and gone but lenders can still remain within the rules most cost-effectively by bringing in expert external help.”
Boulger believes outsourcing will become increasingly prevalent but does not believe IFAs should be worried about this affecting costs. He says: “There are a lot of other things that will affect proc fees besides outsourcing.” He also says IFAs should not be worried about costs affecting service. “If there are issues, the IFA should talk to the provider. A broker should expect service and compliance levels to increase if a lender is outsourcing. If it is not, then the lender has not got the arrangement right,” he says.
Chilton believes there is a place for outsourcing of compliance but does not think it is something that lenders will use all the time.
He says big lenders and intermediaries can always buy some level of expertise but believes it is usually out of the price reach for the smaller intermediary who could stand to benefit.
Chilton says: “Where an outsourcer can exhibit a particular skill, both lenders and intermediaries will use them when they have a specific need or a glut of work but use of outsourcers can only ever be tactical because the buck stops with the directors of the business. The FSA will chase them – not the outsourcer – when something goes wrong.