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Wake-up call

Our panel of experts give their views on why lenders were not ready for M-Day and if there should have been a transitional period.

Why were so many lenders underprepared for Mortgage Day on October 31?Clifford: Lenders tell us that this would not have been due to any lack of planning, effort and determination on their part but you cannot help wondering. The likes of Halifax and RBS have been very helpful whereas other lenders have shut down their systems or not accepted even those applications written before M-Day.

One lender argument is that the FSA was still publishing guidance and rules right up until the last minute and lenders were reluctant to plough money into system changes and training until the complete picture was clear. Lenders ended up spending a huge amount of time and money debating points that could perhaps have been clarified by the FSA sooner, for instance, proc-uration fee disclosure.

Malle: It is time to learn from mistakes rather than apportion blame. Lenders took the opportunity to use the regulation project to manage massive change in their organisations, not least updating and replacing many of the technology systems they had in place. This, coupled with a busy market and lack of clar-ity (therefore varying interpretations) of the MCOB meant that they had created tight and often unachievable deadlines for themselves.

Additional work was made by taking an over-cautious approach in the interpretation of the MCOB. Finally, a number of lenders were relying on third-party technology development, which made it even harder to manage.

Dring: The feeling is that some lenders have left preparations to the last minute so any teething problems (which were bound to happen) have only arisen after M-Day. From a lender’s perspective, you can only test systems and processes so far before going live so many problems will only arise when the system has been stress-tested and used in its full capacity.

To date, our testing has been proven to be robust but it is still early days. We undertook extensive research with introducers to try to ensure we were prepared and that our proposition reflected the reality of what the market did. Other lenders may have not invested in this research, which we feel was invaluable in ensuring we were ready.

Should there have been a two-week transitional per-iod for intermediaries and lenders to adjust to regulation from October 31?Clifford: Yes, as such a dramatic change affecting the entire sector could not reasonably have been expected to work perfectly from day one. Major brokers and lenders have had the sense and foresight to work together with as much patience as possible to solve the problems. A trans-itional period would have been wonderful but my rather cynical view is that many lenders and brokers would still have perhaps left it to the last minute.

Malle: This could have made the transitional period even more dangerous and confusing. What was required here was some guidance and clar-ity from organisations such as the CML or Imla, which just did not get lenders to adopt a consistent set of rules for transitional business. Ultimately, this made life for intermediaries very difficult.

Dring: From our own research, conducted among more than 150 key relationships, intermediaries are still having problems with some lender KFIs. The biggest issues are lender systems crashing, online KFIs, unanswered calls, understanding new KFIs and sourcing system problems.

My belief is that a two-week transitional period would only have delayed the bedding-in period. Although a difficult period for all concerned, by drawing a line in the sand on October 31, it should actually speed the integration process up by forcing lenders and sourcing systems to sort out issues as soon as possible or suffer the financial impact.

Mortgage intermediaries using sourcing systems are liable if the sourcing syst-ems give incorrect inform-ation. Is this fair? Can sourcing systems guarantee to give accurate information?Clifford: Intermediaries are liable in the regulatory sense but should be able to rely on a competent third party such as a major sourcing system. By doing this, intermediaries might well be able to claim that they have fulfilled their responsibility under FSA rules. Intermediaries still have exposure to negligence claims from customers but this is probably very similar to an adviser’s position prior to statutory regulation under the MCCB rules.

Sourcing systems should guarantee accuracy through the processes that they have put in place to ensure that accuracy is built into the system but let’s face it, the only guarantee worth having would be one under which a sourcing system indemnifies the broker against actual losses resulting from inaccurate data such as negligence claims or FSA fines.

Even some lenders strongly doubt that any offline sourcing engine can ever be completely up to date and have the capability to reflect the calculations and algorithms of every lender. For example, a base rate change can trigger a universal relaunch of lender product ranges. Most lenders will, regrettably, favour the process whereby KFIs are issued to intermediaries via their own websites and therefore guaranteed to be accurate.

Malle: For some time, the market expected sourcing systems to provide safe and compliant solutions for intermediaries. It is clear that they have only provided a sourcing system with compliant admin tools, which does not give the intermediary any reassurance on KFI accuracy. If sourcing systems were able to use some of the monthly subscriptions to provide resource to check KFI accuracy, then I cannot see why they could not guarantee the information.

Dring: Again, our own res-earch suggests that more than 90 per cent of the intermediaries currently using Standard Life Bank will source initial illustrations from sourcing systems and then contact the lender of choice for a penny accurate quote. In the current climate, this appears like a sensible approach and one that will continue for some time. It is very difficult for a sourcing system to guarantee accurate information as lenders’ products can change regularly.

However, if the sourcing system is verifying the products with the lenders, then they are doing everything they can to ensure accuracy. It is important that brokers can trust the sourcing system but the general opinion is that many of them are checking with the lender as well as the sourcing system to ensure accuracy, which is doubling their efforts.

Are KFIs too long and inc-onsistent from one lender to another? Should the FSA reassess them in the near future?Clifford: Almost certainly, as KFIs can be too long, too complicated and too inconsistent. I think that the majority of borrowers could not easily understand KFI content and a KFI should aim to run to no more than three pages. We need a few months to judge whether they are inconsistent or not butI would suggest a reassessment in, say, three to six months to check whether the KFI template needs revising. We are currently finding that the KFIs on sourcing systems are inaccurate and having ntly to get them from lenders websites is hugely inefficient and frustrating.

Malle: Again, I think the inconsistency has come from len-ders adopting a belt and braces’ approach in interpreting what needs to be covered on the KFI. This has often led to a 13-page KFI that I am sure the FSA did not intend. Sometimes, it has even meant that lenders have not been able to deliver KFIs from their own website in time. Some believe it could confuse rather than help consumers in their decision-making process. If the FSA provided a definitive template, which we would welcome, I am sure this will help not just the adviser but also ultimately the consumer.

Dring: There is an element of discretion on what additional information lenders include in the KFI beyond the FSA set text and this may initially result in extended KFIs. Ultimately, the content will be driven by a combination of FSA requirements and intermediary and consumer feedback. Broker feedback has told us that some do feel that KFIs are too long and that there are inconsistencies. Feedback has also told us that some clients believe they are too long. Our KFIs will be constantly reviewed.

Should procuration fees be paid in relation to the type of mortgage product that the intermediary has sold?Clifford: Lenders need to pay a more appropriate fee to brokers for the work done and in the context of how cheap bus-iness acquisition via intermediaries really is for lenders. The complexity of a case and labour involved cannot be determined by product type alone as it also depends on the lender’s criteria and service levels and depends on the clients’ co-operation and demands.

>From a lender’s perspective, this might be logical as different product types usually carry varying degrees of risk to the lender such that some products generate a greater/slimmer margin which facilitates variations in fees. The underlying issue is that lenders pay far too little for prime business and fail to recognise adequately the labour-intensive nature of mortgage broking. Learn from the Australian market, where 0.7 per cent is a typical fee for prime business compared with 0.35 per cent in the UK.

Malle: It is clear that certain products require more work, research, marketing, lender negotiation and case presentation. As long as the intermediary is working under MCOB rules, then yes.

Dring: Paying excessive procuration rates for business that does not stay on the book for more than 12 months is commercial suicide and will ultimately end up being paid for by the consumer. We have seen commission levels in the life and pension arena altered to reflect profitability and I believe this will be replicated in the mortgage environment in the future.

Certain products such as flexible mortgages and lifetime mortgages generally involve introducers investing more time with their client. For too long, lenders have engaged in the battle to pay the highest procuration fees to attract business. The industry must change this mentality and try to reward brokers not for churn but for working to create a personalised financial planning platform that will have long-term income potential and reflect the introducer value to the provider.

Dev Malle, associate director, PinkRob Clifford, chief executive, Mortgageforce

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