The FSA's new mortgage rules should be underpinned by the principle that regulation is appropriate only if it provides benefits to the consumer and does not place an unacceptable burden on the industry.
It should seek to provide “baseline” protection for consumers while still allowing providers and brokers the freedom to compete in the services and products they offer.
The FSA must not forget that continuing competition will be crucial in delivering ongoing improvements for consumers.
Stepping back and looking at the regulations, I would argue that most of the rules more or less meet this principle. They apply evenly across the industry and, although they will involve some extra costs, they should allow brokers and providers to retain a competitive niche in the market.
Unfortunately one of the proposed rules (Rule 4.7 for those with a copy of the mortgage sourcebook handy) fails this key test. It could put the intermediary sector at a severe disadvantage to the rest of the market and must be changed before the FSA publishes its final version of the rules.
The significance of this should not be underestimated – it is intermediary-based lenders that have done the most to drive up standards across the sector in recent years and. They will be penalised most by the imposition of this rule.
Higher hurdle for indirect sales
As currently proposed, Rule 4.7 requires lenders to take responsibility for ensuring intermediary compliance with the provision of the pre-application illustration. They will also have to ensure that information on other products is accurate.
Similar burdens are not to be placed on directly sold products – providers will simply have to ensure that their own information is compliant.
The additional burden on providers who sell through intermediaries is a huge headache. It will increase costs and may force lenders to restrict their distribution networks so they can deal with the admin challenges. This would have a real impact on effective competition in the market.
From a broker's point of view, the impacts are a little less clear but could still be significant. Lenders struggling to comply with the new rules may place obligations on intermediaries that mean smaller brokers will struggle to survive.
They may be forced to join a network or go out of business. Larger intermediaries may have to make significant investments in technology, with serious impacts for their costs. They will certainly have to consider how they work with lenders to ensure their relationship is secure.
A key problem with this proposal is that it puts a significant regulatory burden on intermediary providers not shared by the direct-sales sector – despite the fact that there seems to be little reason for the change.
The punter's perspective
The view that the rules of the race should be handicap competition is shared by the Consumers' Association.
It has said that the FSA proposals create a “very real risk that this form of regulation (based on information disclosure) could simply introduce additional costs, resulting in a serious reduction in the effective competition in the mortgage market”.
It suggests that the competitors most at risk are those medium-sized lenders that do a large proportion of their business through brokers – the costs of intermediary disclosure requirements are felt disproportionately by those companies.
The Consumers' Association has also recognised the value of brokers. It argued that “in a complex market, consumers tend either to seek out advice or fall back on the trust engendered by the big brands”.
The FSA should realise rules that compromise the position of these two key groups must not be introduced.
Overcoming the handicap
It seems clear that if the FSA really wants to help the consumer by promoting choice and shopping around, it must rethink its position. It must revise Rule 4.7 and recognise the risks of stacking the odds against intermediary-based providers and brokers.
However, there is no certainty that sense will prevail. We should therefore start thinking about what we can do to mitigate the impact of this handicap. There are a number of general issues connected with disclosure requirements that may be of some help.
Technology certainly has a part to play in assisting compliance for both lenders and brokers. The FSA proposals revolve around the disclosure regime and the pre-application illustration. No doubt the likes of Mortgage Brain, Mortgage 2000 and Mortgage Link are already working on this.
Most brokers already use this software or something similar. Usage will have to increase as these illustrations cannot be produced manually. Even if they could be, no lender would accept them.
Lenders will need to play an active role with the software providers to ensure that their existing products, as well as every new product launched, can be represented 100 per cent accurately.
It sounds simple enough but if the lender cannot guarantee that the illustration produced from one of these systems is 100 per cent reliable, the whole process will collapse.
Then there is the question of how a lender takes “reasonable steps” to ensure that the intermediary has provided the illustration to the customer.
A third-party monitoring organisation is likely to be hugely expensive. To provide full regulatory certainty, it would have to be equivalent to direct regulation of brokers. It seems unlikely that a third party could provide this.
If the FSA persists with its demands in this area, it must give proper guidance as soon as possible regarding how its regulatory demands can be achieved – otherwise this demand now looks unfeasible.
Certainly the industry will have to give some thought to how far using materials disclosed through reputable software and the internet can give some regulatory reassurance. How watertight this will be, and what regulatory risk it could expose providers to, is still unclear.
It seems that although the technology can help meet the FSA's proposed regulatory demands, it will not provide a full solution. It is likely that intermediary-based lenders may be disadvantaged as they will have to engage in an unhelpful administrative obstacle course that increases their costs out of proportion to the benefits.
Certainly, as it stands, Rule 4.7 will put greater administrative burdens on both lenders and brokers for no significant consumer benefit. No one – except perhaps traditional providers with direct salesforces – will benefit.
Hopefully, the FSA will recognise this and make sure the rules are appropriately altered before they are finally introduced.