IFAs have had a tough market for professional indemnity insurance for some time but the onset of regulation may now bring problems for mortgage brokers as well.
Premiums for some IFAs have increased by more than tenfold over the last three years. The requirements of the insurance mediation directive and the market in financial instruments directive have added to the difficulties and many IFAs are finding it difficult to find cover.
Mortgage brokers have enjoyed a relatively comfortable PI market, being seen as lower-risk than IFAs. But with statutory regulation on the horizon and the self-cert controversy still fresh in the minds of many, the market could be set for a shake-up.
PI brokers are divided on the issue. Collegiate says its experience with mortgage brokers is similar to the relationship PI insurers had with IFAs under Fimbra regulation when there were very few complaints.
Head of claims Martin Archer says: “From a claims' point of view, we see regulation making quite a big difference to mortgage PI cover in the medium term. Mortgage brokers' current benign environment will change quite quickly as the Financial Ombudsman Service is much more hostile than a voluntary scheme.”
He believes that once the FOS is available to homeowners – who could be feeling over-committed on their mortgages because of a widely predicted rise in interest rates – then mortgage-related misselling claims may start to rise as consumers look for someone to blame.
However, PI broker PYV does not think the move to statutory regulation will affect mortgage PI prem-iums. Managing director Ian Boscoe says: “There is already a strict complaints' procedure in place with the Mortgage Code Compliance Board. If there was not, then, yes, I would expect complaints to increase once the ombudsman is available to consumers. But, as it is, the MCCB already offers a free-of-charge complaints' procedure so the availability of the ombudsman should not make a material difference.”
Boscoe says the FSA can be tough on enforcement but he remains relaxed about the regulator's attitude. He says: “Some see the FSA as a heavy regulator but I believe David Kenmir and his colleagues are much more realistic and commercially minded than the PIA was. They are not trigger-happy and are not keen to do unnecessary reviews.”
Archer believes the affordability of housing will be a key issue in the future. He says affordability has until now been limited by what a provider will lend but the advent of statutory regulation means many brokers will consider it their responsibility to advise borrowers on affordability.
However, given that there is no professional consensus on what is affordable, he questions how brokers will be able to document this for the FOS. For example, if the FOS decides that only loans up to 3.5 times income are appropriate, a significant number of claims could be triggered.
Archer points to the situation of a young family facing repossession of their home. He says: “The FOS will look at this and will either say the family took a chance and lost or will sling them a lifeline, which is understandable from a human point of view. This would entail pointing the finger at the industry.”
But Boscoe says he has seen no evidence to show the FOS is biased against intermediaries and believes borrowers should be aware that interest rates could go up when they take out a mortgage.
He is also unconcerned about self-cert. “This product has been around for years and is not causing any problems for us,” he says.
However, the recent speech made by Bank of England Governor Mervyn King about possible crash in house prices must sound a warning knell for mortgage brokers.
King said: “There are some early signs from surveys of a slowdown in the housing market. After the hectic pace of price rises over the past year, it is clear that the chances of falls in house prices are greater than they were. So anyone entering or moving within the housing market should consider carefully the possible future paths of house prices and interest rates.”
Nationwide executive director Stuart Bernau believes the likelihood of a crash is very small, suggesting there is more likely to be a period of stability or lower inflation in the housing market, but he agrees with Archer that affordability is becoming more of an issue.
Archer says: “There only has to be one shock in the mortgage market for everyone to wake up to problems, which would then hang over the industry for a long time.”