Following an initial review of the sector, the regulator has decided to focus on areas where it deemed that ‘the risk of consumer detriment may be higher.’
Confirming the FSA’s decision, Dan Waters, FSA director of retail policy at the FSA, said: “This next stage of the Mortgage Effectiveness Review will focus on more specialised sectors where we think there is greater risk of consumer detriment. We will also look at the treatment of customers in arrears. The findings of the review will help inform our thinking about how we might apply a more principles-based approach to our mortgage rules.”
As part of the review, the FSA will include consumer research, in addition to analysing market data, before reporting back with its findings in 2008.
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Louise Cuming, head of mortgages at moneysupermarket.com, welcomed the review: “I wholeheartedly agree with the FSA’s decision to focus on areas where consumer detriment may be higher, such as non-conforming or lifetime mortgages. These borrowers could be considered the most vulnerable in the mortgage market and so I welcome any move to ensure they are treated fairly.
“The fact is, intermediaries recommending non-conforming or lifetime mortgages benefit from greater fees and it is imperative that we can prove appropriate advice is given and that there is no bias because of higher earning potential for the broker. With this higher fee structure in place, can we safely assume people are always matched appropriately to the right product for their needs? This is potentially an area that could muddy the name of our industry if not approached in a completely transparent and fair manner.”
However Cuming indicated that the FSA would have to make the distinction between the level of risk compared to price. She added: “There needs to be more alignment between the level of risk and the price the person pays. While it makes sense for lenders to adopt this methodology and increase prices where people are deemed higher risk, it means those least able to afford more, i.e. those in financial difficulty or home owners in retirement, end up paying the higher fees. We must ensure that the balance is fair and the industry is not preying on those with the least options. I await for the FSA’s findings to enlighten us.”
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Simon Kent, head of retail banking at Troika, admitted his disappointment over the FSA’s decision to look at the non-conforming market, and warned that niche lenders would have to look at possibly altering their offerings. He said: “Lenders will be concerned to see the announcement of further investigations into the mortgage market. Many lenders have entered the non-conforming market over the last two to three years as a way of replacing lost margin income from the prime market.
"For many this has meant the move into near-prime as opposed to the very poor credit end of the market, where the FSA will have most concern. The major lenders who can demonstrate a responsible lending policy and approach to collections will have nothing to worry about – the niche non-conforming lenders will be much more concerned as the rates, collections approach and administration charges drive the economics of their businesses.”
Brett Davidson, managing director at FP Advance, welcomed the review, admitting the market now focused on ‘survival of the fittest. He said: “Good businesses find out what their clients want and give it to them; profitably. The changes outlined by the FSA will hopefully accelerate that process for the whole industry. If that creates a ‘Darwinian’ survival of the fittest environment then so be it.”
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