Since everyone in the industry has lived, breathed and dreamt mortgage regulation for the past couple of years, it is easy to forget how consumers view Financial Services Authority (FSA) regulation and the effect it has on their experience of the mortgage industry. After all, at the end of the day it is consumers who are supposed to benefit from improved information and increased protection.
So what is the man on the street’s perception of what is going on? Has regulation changed consumers’ views of brokers, lenders and the mortgage industry as a whole? Or, in the real world, has little really changed?
Consumer opinion
Earlier this year the Council of Mortgage Lenders (CML) released the findings of a consumer survey designed to gauge consumers’ views of the UK mortgage market since regulation and looked at how these views have changed since 2004, prior to regulation.
The results make interesting reading. Essentially it seems regulation has prompted little dramatic change in consumers’ perception. But, where views have changed, they have generally become more positive.
In 2004 and 2005, the CML asked borrowers for their views on people who sell or advise on mortgages. There was a noticeable improvement in consumers’ views in 2005.
In the more recent survey, the proportion who agreed advisers ‘generally provide clear and fair product information’ rose from 43 per cent to 48 per cent, that ‘they are professional and take needs into account’ rose from 31 per cent to 40 per cent, and that ‘they clearly tell you what effect rate changes will have when you borrow’ rose from 17 per cent to 22 per cent. About 42 per cent of people surveyed used a financial adviser when arranging their mortgage.
But post-regulation, are people still shopping around for their mortgage? One of the main concerns about statutory regulation has been whether the increase in paperwork would reduce consumers’ appetite for shopping around. But so far this does not seem to be the case. But nor has it encouraged borrowers to shop around more. The number of firms consumers sought information from before making an application showed the same profile as before regulation, according to the CML.
Melanie Bien, associate director at mortgage broker Savills Private Finance, says: “It is encouraging to see that consumers are still shopping around for mortgage advice, safe in the knowledge that they can expect certain minimum standards from their broker and have recourse to some redress if things go wrong.
“But it is a shame that borrowers are not more likely to use an intermediary than before however, as the quality of advice across the board has inevitably improved.”
Two camps
Of course, it may be consumers are shopping around without the help of a broker. An increase in consumer-friendly price comparison websites such as Moneyfacts and Moneysupermarket.com means borrowers can generate a shortlist of suitable mortgage products themselves, rather than seeking personalised illustrations or product information from specific companies.
Merhdad Yousefi, head of intermediary mortgages at Alliance & Leicester, says consumers tend to fall into two camps when it comes to using brokers and regulation makes little difference to this. He says: “People use a broker for three main reasons; to get independent advice and look at the whole market, because they are cash rich and time poor and haven’t got the time to look at different products or because they are simply uninterested in financial services and want someone else to do the legwork for them.”
Ray Boulger, senior technical director at mortgage broker John Charcol, says in general mortgage brokers have a pretty good reputation. Industry data suggests that about 65 to 70 per cent of mortgages are arranged via a broker and if the public didn’t have a good impression of intermediaries the figures would not be so high. He says: “I think the public is increasingly understanding how complex mortgages are and that they are not just about interest rates. That’s why – after doing some of their own research – they seek professional advice from an intermediary.”
Some borrowers still go straight to their chosen lender, especially if their mortgage is relatively small and they are happy with the service they have had from that lender in the past. Others simply prefer not to pay a broker’s fee. “This could be false economy,” warns Boulger, “as they may save on the broker’s fee but not end up with the best product for them and waste more money further down the line. And many of them probably don’t realise this.”
Mortgage lenders generally have a better reputation that brokers when it comes to who consumers trust. The latest CML survey reported over 90 per cent trust in lenders.
Boulger says: “Those customers that chose to stay with the same lender must have a good impression of the lender or they would chose another or go to a broker. Generally most people think they get good value on their mortgage unlike other financial products such as current accounts, so tend to trust their lender.”
Overall, the CML figures suggest the mortgage lending industry continues to be seen as broadly responsible by the bulk of borrowers. 16 per cent of respondents said the industry ‘lends responsibly’, and 65 per cent said it is ‘mostly responsible but there is some irresponsible lending’.
Consumer understanding
Whether the majority of the general public realise mortgage regulation has actually happened is, itself, up for debate. As most people only switch mortgages every two or three years, if at all, it may be difficult for them to remember the process they went through several years ago compared to more recently.
Yousefi believes the vast majority of consumers will not be sure what all the fuss is about when it comes to statutory FSA regulation. “Only a small minority of financially savvy consumers with an interest in financial services will realise what regulation means and what documents such as the key facts illustration (KFI) are for.”
Yousefi’s views are perhaps a timely reminder that there is still a long way to go to encourage consumers to take an active interest in their financial affairs. It also clearly illustrates the challenging nature of the FSA’s statutory responsibility, and current initiative to promote financial capability among consumers.
As well as many consumers not realising that FSA regulation has come into effect, many will not care nor understand the implications. But if someone had asked customers if they believed they should have all the information necessary to make an informed decision about the biggest financial commitment of their lives and the seller be answerable to a higher authority, I am sure the answer would be a resounding ‘yes’. Many consumers would be surprised to find that was not the case already.
Halifax spokesperson Paul Fincham says KFIs are the one major tangible difference consumers will see under the regulated regime. Other changes relate mainly to audit trails and record-keeping which are behind the scenes. “We have feedback from customers that they like receiving a KFI as well as an adviser talking them through it. Customers like the fact that the information for a variety of products is presented in a comparable format across the board,” he says. “Regulation also provides additional peace of mind. The one simple compelling factor for borrowers is that you are more protected whether you go to a broker or straight to a lender.”
Feedback suggests that consumers generally see KFIs in a favourable light and consider them the most useful mortgage document. But, according to the CML, a third of borrowers did not remember receiving either a KFI or initial disclosure document (IDD). Chances are, the documents were simply put to one side and not read, rather than not being received. This raises challenges for the industry and FSA alike, in reaching these customers and ensuring they read all the information and know what they are signing up for.
The danger of the KFI is that, at five pages long, people will only look at how much they have to pay each month and will not check the effect that a 1 per cent rise in interest rates will have on their monthly payments, for example. Lack of understanding by consumers is demonstrated by FSA research, which says 36 per cent of mortgage-holders did not understand at least half of the mortgage product literature they recieved.
Post-regulation the key changes should be that customers are better informed and better protected. Under regulation, brokers must give customers an IDD which tells consumers who the firm is, which mortgage and insurance products they offer, costs and how the adviser is paid.
Spot the difference
The service from good intermediaries and lenders should, in theory, be broadly similar as to what it was before. And unless a borrower has received bad advice in the past, or had reason to complain, it would be hard for them to spot any difference in a regulated environment.
Both Bien and Fincham say the same thing about the customer experience at Savills Private Finance and Halifax respectively; that it should not be much different as the companies were trading as if they were regulated prior to October 2004 and clients will simply have seen a continuation of that service. No doubt other reputable brokers and lenders would say the same thing.
“Mortgage regulation has presented quite a challenge for the industry but its benefits have already been felt,” says Bien, “Consumers like the fact they are protected and that their broker must follow certain procedures when giving them advice.”
While some critics could argue that regulation should have increased the FSA’s profile, in reality this does not seem to be the case. Most consumers do not know any more about the FSA’s role in the industry than they did prior to regulation; but this is not necessarily a bad thing.
“People don’t really need to know much about the FSA unless they have a problem,” says Boulger. “It’s important they know how to go about solving a dispute. Now if you take out a mortgage the information you will receive makes reference to the FSA and the complaints process, but how much do people read and understand it?”
Yousefi says consumers’ main experience of the FSA is what they read in the press about its shortcomings, but FSA regulation has helped people understand their rights. “Generally the FSA is giving more information about the complaints procedure than was available prior to statutory regulation so consumers are more aware of the steps they can take,” he says.
But the FSA reckons it is doing its bit to improve customer understanding of mortgages, regulation and the role of the regulator. Coinciding with the first anniversary of regulation in October 2005, it launched a consumer website, www.mortgageslaidbare.info, which brings together for the first time new and existing FSA mortgage tools and resources. The tools include budget calculators that will help consumers work out how much they can afford to borrow and how much a mortgage will cost them each month; mortgage tables that give consumers a list of what mortgages are available on the market to help them shop around and a ‘firm check’ service so consumers can check that the firm they are dealing with is authorised.
Knowledge gaps
But gaps in the FSA’s own consumer research indicated there are still some gaps in borrowers’ knowledge of mortgages. 56 per cent of first-time buyers and mortgage-holders did not know what APR stood for and 65 per cent of first-time buyers felt daunted by buying a mortgage.
In June the Financial Services Consumer Panel (FSCP) published its annual report and included a more formal assessment of how the FSCP thinks the FSA is doing in fulfilling its obligations to consumers in the way that it regulates the industry.
Overall the assessment was acceptable to strong, with the FSA scoring well in having paid more attention to communicating with consumers and in being a dedicated voice for the UK consumer in discussions on European proposals to change financial services markets across Europe.
However, there are issues where the FSCP would like the FSA to do more and has therefore given it a weak score. The Panel uses the annual report to re-emphasise its disappointment with FSA’s delay in action on the selling of self-cert mortgages and generic advice and the FSA’s decision not to remove the limits on borrower compensation through both the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS).
CCommenting on its findings, chairman of the FSCP, John Howard says: “
There is no area where we have scored the FSA as very weak, and believe that overall the regulator has done a reasonable job in safeguarding consumers of financial services over the past year.”
