It is worth reiterating at the start that although the Financial Services Authority (FSA) has overall responsibility for regulation through the Treasury in the UK, the European Union (EU) holds the whip hand when it comes to the move towards harmonisation of regulatory procedures for members. This point is rather appropriate as we had expected at the start of the year to be in a position to know what the FSA had in mind in the next month.
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However, the two White Papers on mortgage and consumer credit from the EU that we had been promised in June will not now be with us until September. Our ‘real life’ government in Europe is considering the results of its consultation among all the member states of the EU and dealing with the higher than expected volume of responses. Bearing this in mind, trying to guess what might come out of the latest FSA review is likely to be a bit of a lottery as the expected results are still a little way down the road. All of this makes it difficult to second guess what the FSA might be considering as part of its Mortgage Code Of Business (MCOB) review as the contents of EU White Papers will need to be taken into account. The best that I can do is to try to predict the likely areas where the FSA will look to make changes to the rulebook and associated areas which have been causing great uncertainty in the way they have been applied, such as the wording on Financial Promotions.
Looking back to look forward
In order to look forward it is worth looking back at recent reviews. This will give the themes that the FSA will be pursuing within the framework of the larger EU plan.
The FSA has now completed stage one of the effectiveness of the MCOB sourcebook. The focus of stage one was pre-sale disclosure and advice and selling standards. This work will be used by the FSA as a baseline for future reviews. In order to carry out the review, the FSA commissioned three separate pieces of research: qualitative consumer research on mortgage disclosure; quantitative consumer research on the mortgage purchasing process and mystery shopping, looking at both the advice process and information only – or non-advised – sales. The FSA also commissioned an in-house market analysis study which looked at price dispersion and the efficiency of consumer purchasing decisions.
The stage one review has concentrated on the overall mortgage market. Whereas some information has been gathered on the non-conforming and lifetime markets, it was not intended to look in detail at these areas at this time. The review was also committed to consider the recommendations of the Miles Report ‘on measures relating to the provision of advice and to the disclosures provided by firms to consumers’, particularly in relation to interest rate risk.
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The review focused on how the new conduct of business rules delivered the intended benefits for consumers. The review looked at this against five consumer outcomes:
- Consumers shop around.
- Consumers understand whether they are being given advice or information by firms.
- Consumers better understand the risks and features of the mortgages they take out, including the affordability risks.
- Consumers take out suitable and good value mortgages.
- Consumers are treated fairly over the life of the mortgage, including when they go into arrears.
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At this time, no specific areas have been identified which have led to the view that rule changes would be appropriate. This is in accordance with the industry feedback. But the FSA will also use the next phase of the review to consider moves towards a principles-based regime. This will concentrate on the sub-sectors of the mortgage market where it is believed there is a greater propensity for consumer detriment. This will include non-conforming and lifetime mortgages. Stage two will also consider the fifth consumer outcome – that ‘customers are treated fairly over the life of the mortgage, including when they go into arrears’. As part of this, the FSA will look at post-sale disclosure and arrears handling.
Good practice
The main argument that could be put forward is that under principles-based regulation, it is unlikely that the FSA will make many changes to MCOB. The outcome of its review work will lead to it publishing good and poor practice guidance which is what I think much of the interpretation of principles-based regulation will hang on. Rather than make any big changes to MCOB four and five, the FSA could use the Principles for Business as the means of taking any actions against firms. The conclusions it comes to as a result of its thematic work and the effectiveness review will drive this. So, for example, it will be looking closely at areas where there is greater consumer vulnerability – non-conforming, and possibly self-cert because of concerns over income stretching. There are currently no specific rules which cover the ‘dos’ and ‘don’ts’ of this market, but based on the guidance it intends to issue, it will take action under its Principles for Business.
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On the subject of Financial Promotions, the FSA made a number of concessions in respect of the existing regime last year including the requirement to allow the APR to be dropped from periodic publications that had a long shelf life, such as Yellow Pages along with the relaxation of the risk warnings. It is anticipated that this is a key area that the FSA will review as a priority of any MCOB review as clearly the existing regime is not working well and is currently being reviewed as part of the FSA’s overall effectiveness review of the MCOB rules. I would be surprised if changes did not take place fairly soon after the EU White Paper is issued in September and then consulted upon.
These are main points:
- The EU is delaying the two White Papers on mortgages and consumer credit until September 2007. This follows a greater than expected positive response from member countries.
- The announcement is expected to include a Consumer Credit Directive setting out the integration of mortgage, to include secured second charges, and credit markets through EEA cross border activity.
- As a direct result of the positive response the EU Commission will consider the introduction of a 26th Regime. This is the methodology for a legal process which operates above the laws of individual countries. Timing is unknown, but is likely to be at least three years; although member countries may adopt some common practices in the interim.
- It is highly unlikely that the FSA will look to change initial disclosure documents and Key Facts Illustration requirements at this moment in time as it has already undertaken a review of these areas and the feedback was very positive. The FSA is unlikely to make major changes to the KFI particularly in light of ongoing reviews of legislation at European level that could impact widely on the mortgage market and UK financial services.
- The FSA supports the EU plans but points out that UK mortgage regulation is already ‘gold plated’.
