This is the keynote finding of a major new report published by The Actuarial Profession.
The report’s authors believe that the eventual consolidation in the number of lenders will result from changes in distribution patterns, greater competition – and the increased compliance costs resulting from FSA supervision. Additional costs, both transitional and ongoing, “will be significant”. The authors point to the experience of the life industry, where regular amendments to the regulations ensured that cost rises in sales, marketing, IT and administration became a regular feature of the industry.
The report’s authors also point to the increased likelihood of mis-selling fines and costs “for some companies, if not the whole industry”. This is because the FSA polices its regulations rigorously and the authors consider it unlikely that mortgage lenders will be able to control every aspect of their operations – especially in a very competitive environment.
The report also highlights which groups are expected to be the ‘winners and losers’ of the likely consolidation process. Broadly speaking, the winners are expected to be the big lenders able to absorb additional regulatory costs, lenders which currently deal with investment business and which therefore have compliance departments already in place and specialist lenders – provided the new rules do not “stifle their creativity”.
Losers will tend to be small to medium sized lenders, businesses which are poor at dealing with customers and broker-only businesses, because of the impact of a smaller broker market and lack of direct control over the sales process.
Mark Joannes, who co-authored the report, commented: “There are a number of key steps lenders should be considering right now, ahead of the changes in October 2004. These include understanding the forthcoming changes and developing new market positioning; addressing the question of integrating investment and mortgage advice as efficiently as possible and looking at possible partnerships between large and small lenders, which may include the option of sharing expertise and/or systems.”
Jeremy Goford, President of the Institute of Actuaries commented. “This report provides lenders and distributors with serious food for thought on the way forward. The authors assessment of likely winners and losers in the new regime may surprise some readers – and not just the projected losers. The expected winners will be under pressure to deliver.”
