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What went wrong?

Helen Monks investigates the problems that beset the mortgage industry on M-Day.

Mortgage Day revealed lenders and brokers not entirely ready for the rigours of full regulation. Some brokers were forced to accept interim authorisation from the FSA while some lenders dropped products and failed to be clear on the position on guaranteeing the accuracy of key facts illustrations.

There was a range of factors which might account for the lack of preparation. The sheer scale of the operation meant that even the best planning could be undermined.

London & Country mortgage specialist James Cotton says: “Most lenders experienced glitches but that was not necessarily about lack of preparation but the reality of putting the systems into action. There were always going to be problems. This was an entire industry switching systems and launching on the same day.”

Abbey withdrew some of its products in the run-up to M-Day. The company admits that maintaining its old portfolio would have been enormously complicated but says it was always its plan to consolidate the product range regardless of IT issues.

Abbey for Intermediaries head of intermediary mortgages Jeff Scott says: “We had a huge range but brokers told us that some products were far more popular than others.”

The KFI issue provided one of the biggest barriers, with a major debate over guaranteeing accuracy.

Accord Mortgages managing director Linda Will says: “We have all had lots of problems and, in common with other lenders, we are still having problems with portability KFIs.”

She adds that lenders put in the work but met unexpected problems in some marginal areas lenders.

Will says: “Three years ago, they said ‘let’s regulate mortgages’ but it was not until six months ago that we had the full picture.” She argues there was not enough time to get everything right and makes the point that while consultation papers and responses were going back and forth, many lenders were reticent about putting final strategies in place.

Mortgageforce managing director Rob Clifford says he understands that the FSA was issuing final clarification and guidance right up until the last minute. “Lenders’ rationale for being unprepared is that there were lots of technical questions still outstanding. They were prepared to spend hundreds of thousands on their IT systems and some would not fully implement these changes until they had the final interpretation of the rules,” he says.

Interpretation is a key reason why there appeared to be a last-minute scramble to resolve some issues. The nuts and bolts’ reality of embodying the regulations in practice threw up ambiguities. Scott says: “We knew the basic principles for a while but there were changes as late as the summer and issues which started to emerge once we started to reflect these rules in our systems. It was optimistic to expect everything to go perfectly.

“When you get down to the wire and you know that everything has to be penny-perfect, whether you are doing it correctly or not is a very big ‘yes’ or ‘no’. Some of the contact that lenders had with the FSA at the latter stages was more to do with comfort than anything else.”

Birmingham Midshires external relations manager Matthew Grayson says: “For those lenders which seemed least prepared – and you might argue that these were the ones not coming out witstrong positions ahead of M-Day – they may not have had strong in-house project teams and could have been relying too heavily on external consultants who might not have totally understood the mortgage business.”

Clifford applauds lenders for investing in systems but he is less impressed by some brokers’ preparation. He says many brokers showed the same levels of tardiness as when it came to passing mortgage exams.

“About a quarter of brokers did not sit the exams until eight weeks before the deadline and I know many left it right up until the last minute to make their authorisation decisions,” he says.

He adds that he is still hearing “unbelievable” discussions and questions at conferences and industry events which he fears betray a frightening ignorance of the new regulatory reality.

Despite the problems, neither lenders nor brokers say they would have been grateful for a grace period after M-Day. Cotton says: “It would be difficult to have a period where the consumer might find themselves not fully protected.”

He feels that M-Day had to be absolute and is pleased by the idea this might have driven some unprepared brokers out of the market. He also makes the point that there is a three-month window for firms to make some changes after M-Day, such as changing their letterheads to reflect their new status.

Will feels that rather than a grace period, the FSA should look to organise focus groups with consumers to reveal if they feel they are better informed or feel better protected before deciding which parts of the regulations should stay in the longer term.

Scott agrees. He is eager to hear customer feedback and feels there will be changes to come in the near future but is happy there was a clear cut-off date for compliance. “When you make such significant changes but leave it grey at the edges you would be making it more difficult for everyone,” he says.

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