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The road to regulation

The sheer size of the FSA&#39s CP98 draft mortgage sourcebook gives an early taste to brokers, lenders and borrowers alike as to how life is likely to be when the rule changes are brought in.

At over 400 pages, the document is as daunting to brokers as a panoply of five-page pre-application illustrations per mortgage under consideration is likely to be for borrowers.

Although the final document is yet to be drafted, brokers need to brace themselves for what the mortgage sourcebook is likely to mean for them. Its ramifications will be huge for the way intermediaries sell mortgages and it is likely to fundamentally change relationships between lenders and intermediaries.

The industry has been set a conundrum of how to achieve regulation of the advice given without actually regulating the intermediaries who are giving the advice.

This has been a two-stage consultation and there are still many questions awaiting clarification, which the FSA says will come in the form of a published mortgage sourcebook before the end of this year. But the one definite message from CP98 is that structural change is going to happen.

The requirement for lenders to take reasonable steps to ensure that intermediaries have provided pre-application illustrations in accordance with the regulations is one that needs to be clarified.

Lenders and the CML are seeking clarification of what will actually constitute “reasonable steps”. Until that has been cleared up, it will be difficult for brokers to know exactly how to prepare for that regulation.

Halifax mortgage regulation manager Celia Rowland says: “There are still a lot of ifs and buts in how the regulation will work. Intermediaries do not want 10 different lenders rooting through their files.

“But what is a reasonable step? Is it one visit to an intermediary every two years? Is it to be carried out by the lender or outsourced to a third party? We need more clarity.”

Those trading through networks and mortgage clubs will have some comfort in that their parent organisations will be addressing on their behalf the problem of how information will be gathered and processed and how compliant documentation will be generated and monitored.

It is the independent brokers, often running very small operations, who face the most radical change.

The new regime describes a situation where brokers send out PAI documents from each provider discussed, so that the consumer can make clear comparative assessments between the products on offer before making any commitment, that is, before making a formal offer.

It is likely to be acceptable under the new rules for a broker to hand over the PAI documents in person and then immediately proceed to making the mortgage application. But those giving telephone-based advice may have to wait until the letters have been received before proceeding to application.

Clearly, in such a circumstance, brokers will need an internet-enabled PC as an absolute minimum to be able to access compliant documentation from lenders. But with no clear strategy from lenders as to how brokers might be able to receive all the compliance data in a consistent form yet to be formulated, it would be premature for brokers to go away and spend thousands on a software system to pro-cess the information.

Lenders do not yet know what format of documentation will be acceptable.

As fundamental a change will be the requirement for lenders to authorise every piece of advertising that brokers put out – unless that broker is itself regulated by the FSA.

This could lead to lenders producing generic packs of advertising content that brokers can adapt to their own use, which could contribute to stagnation in the sector.

Probably half of all intermediaries are not regulated and the control over their advertising will make the relationship closer to the old-style agency relationship. It could lead to a push for even greater control by lenders.

Mortgageforce managing director Robert Clifford says: “The new rules change greatly the relationship between lender and broker. It looks more like a master/servant agency relationship.

“If lenders are morally responsible for brokers&#39 documents and advertisements, then why won&#39t the lenders want full control and go for some type of multi-tie relationship?”

When the final version of the new rulebook is published, it will confirm that standardisation is coming and the lenders&#39 hand will be strengthened. Independent brokers will have to scrutinise their business models as soon as it is available.

Independent Financial Services director Jim Gillespie says: “I am not frightened of change – we will have a rationalisation that will bring a cull in the same way that happened to direct salesforces. But those who survive will be more efficient mortgage broking businesses.”


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