The nightmare for the mortgage industry is that lenders, besides selling mortgages, may have to turn themselves into mini regulators.
With the FSA in little mood to compromise, lenders are distinctly unhappy.
This was particularly evident at last week's Council of Mortgage Lenders conference, where chairman Philip Will iamson asked providers to raise their hands to signify they are happy with the way mortgage regulation is shaping up.
Not a hand was raised. This could be an indication that lenders are nervous of mortgage regulation, which inc ludes FSA proposals to charge lenders with the task of monitoring the disclosure regime for mortgage intermediaries.
It perhaps came as no surprise when CML director general Michael Coogan criticised these proposals at the conference, warning of dramatic changes if mortgage advice is brought under the regulatory radar of lenders rather than the FSA.
Arguably, the most controversial part of the speech was on the percentage of market shrinkage predicted by Coogan.
He claimed that up to three-quarters of intermediaries and up to half of lenders could fall out of the market if lenders are forced effectively to become the regulator.
Chase de Vere Mortgage Management managing director Simon Tyler says the figures are slightly alarmist but does not doubt the validity of Coogan's argument. He says the move to turn lenders into regulators would be time-consuming and impractical.
Some intermediaries fear they will have to deal with excessive paperwork and endless compliance visits from lenders keen to ensure disclosure requirements are met.
Tyler says: “It could raise questions of who is running the company.”
This could be a major headache for the bigger intermediaries who may be forced to cope with disclosure monitoring from dozens of lenders.
John Charcol (Guildford) sales manager Colin Bell says: “It is not right for the lenders to be responsible and it will cause brokers to leave the market. It should be regulated by a separate body, not necessarily the FSA.”
But it is not only bigger intermediaries which are likely to feel the strain but also smaller firms which complete only a handful of mortgages a month. It is possible lenders will not be able to afford to monitor low levels of business, meaning small firms will be marginalised out of the market.
Riach Independent Financial Advisers sole trader Bob Riach says: “The small IFAs will be the most affected. They will not have the time to go through all the procedures involved with selling a mortgage. I cannot see how lenders can be responsible for these small firms. How will they be able to monitor them?” The FSA says the key purpose of its mortgage regulation strategy is to increase transparency and give consumers greater choice by increasing the levels of information.
In the regulator's view, consumers do not shop around enough for the best deal and end up tied to a mortgage which is not necessarily the most suitable product for them.
FSA head of mortgage regulation Sarah Wilson told the CML conference of the high number of complaints the banking ombudsman has rec eived recently about mortgage misselling.
She said the best way to combat this is to increase the amount of up-front information available to the consumer. Wilson argues this will put borrowers in a better position to make informed choices and that the only route for this is to “get to intermediaries through lenders”.
But Allied Dunbar franchise support director and board member of the mortgage code compliance board David Seviour says: “It is not viable for lenders to ensure compliance every time. The MCCB is a ready-made non-partisan platform for monitoring disclosure. Allowing the mortgage code to fail in this way will be an act of irresponsibility.”
Some brokers consider Coogan's belief that 50-75 per cent of intermediaries will be forced out of the market is an exaggeration but they do not dispute the fact that there will be casualties.
Riach says: “All intermediaries dealing with less than 20 mortgage transactions a month will have to come out of the market. I think the CML should be the regulator. The FSA will go over the top as they usually do and over-regulate. IFAs will ask themselves if it is worth doing the business.”
Some lenders are less con-cerned about the consequences of being forced to monitor disclosure and are calling for the industry to be patient. Legal & General marketing manager (housing) Rich ard Verdin says: “It is a bit early to make any sort of assessment with only a small amount of detail on how the activities that take place bet ween lenders and IFAs will be catered for and how they will be monitored.”
But others see the market going down a different path than the numbers of brokers and lenders dropping and instead predict an increase in takeovers and merger activities.
Scottish Amicable national mortgage manager John Malone says: “There will probably be some form of convergence. Within five years, there will be less mainstream players standing alone, very much like the life industry. The big lenders will end up doing more business.”
Whether making lenders take responsibility for regulating intermediaries leads to a contracting or a consolidating market, both lenders and brokers are hoping the FSA is prepared to take their concerns on board but the signs are not good.