The Treasury is turning the screws on lenders with its warning that, if self-regulation of the mortgage market fails, they will be brought under the scope of the Financial Services Authority.
The new Financial Regulatory Reform Bill, which will be introduced in the next Parliamentary session, will include provisions to allow the Treasury to extend the scope of the FSA to include mortgages.
The industry is now officially on trial and, if the Government decides the Council of Mortgage Lenders' code of practice has failed, it will be able to move swiftly to statutory regulation.
The Government will also have reserve measures to impose regulation on the retail banking and general insurance sectors if nec-essary.
Lenders will have until the middle of 1999 before the Government undertakes its first formal investigation into how the code is working.
This means that the code will have been in place for lenders for two years and one year for intermediaries. This is more breathing space than some companies had expected.
Last week, the Government also gave an indication of how it will measure the code's success or failure.
The code will be judged on its ability to secure good advice for borrowers and how well it remedies borrowers' grievances.
By these criteria, Lloyds TSB's decision to offer information on mortgages to borrowers rather than advice is a potential blow to the CML. According to the Treasury, it is a situation they are wat-ching.
There are also potential problems in that the CML has yet to decide how to police the code.
The Council of Mortgage Lenders welcomed the Government's move but others within the industry are still wary of self-regulation.
ScotLife Home Loans head Stephen Atkins says: "This is a clear warning to the mortgage market. It is better that lenders have a slightly longer period than expected, as long as they use the time to act responsibly to improve their support services to intermediaries and the market. If it is treated as though they have got longer to do nothing, then that's a problem."
Consumers' Association principal researcher Neil Walkling says: "It sounds like about as much as we can expect at the moment, as long as the ministers keep an eye on making sure the code has proper enforcement str-uctures in place in the meantime."
But IFA Donnellsons partner Richard Verdin wants regulation now. He says: "Regu- lation is inevitable. Consumers do not trust self-regulation. I do not see why we have to put up with self-regulation. It does not work. We need strict and copious regulation now to avoid a misselling scandal."
Up until now, the debate has focused on the conf lict between self-regulation and regulation, the lenders versus the Government, but this is not necessarily what is at stake.
Behind closed doors, most of the industry accept that regulation is inevitable. From this perspective – aware that they may be fighting a losing battle – the lenders' biggest fear is not that regulation will come but what form it will take.
The code can be seen as just an attempt to pre-empt the shape of legislation.
So will the code be adopted as the basis of legislation rather than onerous FSA-style legislation? Lenders are still in the dark and the Government has so far omitted to answer that question.