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U-turn in the right direction?

Industry welcomes Treasury decision.” “Common sense prevails.” “The

right decision at last.” These are all views we have read since the

infamous Treasury U-turn on the regulation of mortgage advice last


But what else could the industry have said? From CP70 through to

CP98, lenders have argued that the proposals for statutory mortgage

regulation are unworkable unless mortgage advice is included – and

have lobbied hard to get there.

Finally, our wish was granted. But, as the old saying goes, be

careful what you wish for.

Since the mid-1990s, pressure has been applied to the financial

services industry to clean up its act. Self-regulation resulted in

the launch of the mortgage code in 1997 and, through the work of the

Council of Mortgage Lenders and, latterly, the Mortgage Code

Compliance Board, it has been a great success.

However, we all knew that, no matter how successful, it was merely a

forerunner to statutory regulation because, after all, that is what

the politicians demanded. Let us be honest here, regulation is

probably the last thing the industry actually needs but it is a fact

of life and we must adhere to it, whether or not we like it.

Many embraced the initial proposals for regulation by the FSA,

perhaps forgetting the increased cost it will land on the industry.

Indeed, lenders and brokers alike will have to consider how they will

afford it.

To give an example, in 2001, with the enduring aggressive market

conditions, margins fell by over 0.5 per cent and are now heading

towards 1 per cent. Add to this increased funding, acquisition and

servicing costs and there leaves very little for the lender – and

that is before you add up-front discounts and incentives. So, what

margin is left to pay for increased regulation costs?

We would not want to make predictions about there being fewer lenders

or brokers, or even higher mortgage pricing but I am sure you get the

picture. It is no surprise that the prospect of delaying the

inevitable for a further two years provides a welcome reprieve.

Will it be a “big bang” approach to regulation, lenders and brokers

together, in spring 2004? I am not so sure. The FSA has not intimated

how it would like to implement it but I think the lending industry

should consider a two-stage approach.

Many elements of CP98, such as the financial promotion rules, are a

positive step for the mortgage industry as the current advertising

regime under the Consumer Credit Act is outdated and even


The rules on lifetime mortgages – equity release to most of us – were

also welcomed as the CCA only hindered innovation in this area. Many

lenders want to enter this market and I am sure many were planning

launches post-N3 under the new regime but they will have to think

again and this could hold up the development of this market.

Finally, even the FSA would be prepared to admit that regulation will

take time to bed in. We may not get it right straight away so why not

introduce some elements now and give them a chance to work?

If a two-stage approach was implemented, what date could be the

earliest for N3? Originally, final rules for N3 were due in early

January, with implementation by August 30, 2002.

However, there may be no decision until the scope of the new

Regulated Activities Order is known and this will not realistically

be until June as it requires a three-month consultation through

Parliament. This would give us a revised N3 date of the end of

February 2003 for the first raft of changes.

So, what could be implemented in the first phase of a two-stage

implementation process? First, and most obvious, lender authorisation

as this was proposed and accepted under CP98. This states that

mortgage advisers do not need to be authorised as well, as it was

lender/broker responsibility that was the issue.

As mentioned, the financial promotion rules proposed in CP98 were a

huge step forward on the whole. These apply only to authorised firms,

with non-authorised brokers sticking with the existing CCA

regulations or requiring a third party to authorise on their behalf.

There is no reason why this could not operate for 12 to 18 months

between the two stages.

The most controversial element of CP98 was the pre-application

illustration. There was no problem with the proposals for direct

sales but Mort 4.7 as drafted was unacceptable in terms of the lender

being responsible for delivery of the documentation by

intermediaries. We believe that a workable solution could be for the

lender to provide the disclosure on receipt of the application from

the intermediary while the MCCB could strengthen the mortgage code to

provide a requirement for intermediaries to enhance their disclosures.

Disclosures at the offer stage and at the start of the contract are

a lender responsibility and, provided the pre-application disclosure

has been made, there would seem no reason why the proposals for these

disclosures as drafted could not work.

The remainder of the draft sourcebook in CP98, such as responsible

lending, charges and record-keeping, only really has relevance for

the lender and there seems little reason why this could not be

implemented before the regulation of mortgage advisers.

Mortgage regulation continues to evolve and we seem no nearer the

solution but what would life be like in the mortgage industry without

regulation hovering on the horizon?


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