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Two years of regulation

The mortgage business has come a long way since M-Day in October 2004, with an influx of new lenders moving into the market and borrowers gaining confidence in the sector. Helen Pow reports

It is two years since the FSA started regulating the mortgage market in October 2004 and many lenders and brokers say the transition has been smooth and successful, albeit expensive, and consumers have fared well from the change.

Regulation aimed to encourage borrowers to shop around for mortgages, help them understand the risks and features of mortgages and make sure companies are treating customers fairly.

Alliance & Leicester head of intermediary mortgages Mehrdad Yousefi believes that after a few initial hiccups, brokers and lenders have coped well. He says business volumes fell in late 2004 and early 2005 but the last 18 months have been positive.

London & Country mortgage specialist James Cotton says the run-up to regulation was the hardest part of the process because everyone had to upgrade to meet compliance levels.

The main changes, according to Cotton, are the documents that lenders now have to provide. The initial disclosure document outlines the type of advice the customer will get from the company and states whether or not there is a fee or commission paid and the key facts illustration document gives details of a specific mortgage deal in a prescribed, uniform format to allow people to compare mortgage deals.

Before regulation, lenders did not have to provide customers with such information and although there is a lot more paperwork now, the FSA claims these documents are effective.

The cost of changing business procedures and upgrading software was immense.

Scottish Widows Bank managing director Graeme Hartop says: “For older, mainframe companies, technology costs were greater than for companies with newer technology.”

Council of Mortgage Lenders spokesman Christopher Dean says regulation was much more expensive than the industry expected but believes those costs are now dying down.

Regulation has made the mortgage market more standardised, with clear uniform rules for all companies.

Cotton says: “Before October 2004, there was a voluntary mortgage code from the Mortgage Code Compliance Board. It was not compulsory to sign up to the code and not everything was covered. The system did not have any power to enforce rules so anyone could continue doing mortgage business.

“Regulation sets out what type of advice or service you will get from the company. It will also say whether or not there is a fee or if there is commission. The FSA has a bit more bite to it now. If people break the rules, it can hand out heavy fines or remove licences.”

Dean says regulation has built up consumer confidence and provided people with better services and improved products.

But Hartop wonders if borrowers are making use of all the additional information. He says: “Consumers have been given more information to shop around but I do not think it is being used by the majority of people.”

The FSA recently completed stage one of a regulation effectiveness review which focused on pre-sale disclosure and advice and selling standards.

FSA press officer Robin Gordon-Walker says: “The review shows that consumers are actively shopping around for mortgages, with 77 per cent getting product information from more than one company. Consumers find the initial disclosure document useful and accessible and they can use the key facts illustration to identify the key risks and features of a mortgage.”

Industry figures suggest that some brokers have left the market since the FSA clamped down.

Dean says: “Regulation deterred a lot of poor and small firms with bad levels of practice, who are not going to set up in a market regulated by the FSA.”

Hartop says: “Regulation brought about better consistency. It has made the industry think carefully about how they go about their business.”

In the past two years, new lenders have been moving into the market and some say that regulation is making the market more appealing.

Cotton says: “This year has been a strong year. Regulation is probably why we have seen new lenders. The UK is a prosperous market and is fully regulated, safe and well respected. If you are a foreign lender, the set framework and the fact that the market is policed would probably make you a bit more confident about going into it.”

Yousefi says: “A strongly regulated market is a positive market to enter but perhaps foreign lenders also like the fact that the market is resilient.”

Cotton suggests the FSA should look at regulating buy to let because it is becoming less commercial.

He says: “The buy-to-let sector is still not regulated. Unless 40 per cent of the property is used by yourself or your family, it is essentially like a commercial loan or investment but the whole market is changing.

“It used to be a purely commercial one but now lots of people who are taking out buy-to-let mortgages are not necessarily experts and probably need protection and information as much as anyone buying their own home.”

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