As the older brother in my family, I always held a certain amount of power over my younger sibling. While my brother and I didn’t fight like cat and dog, if we ever did get into a situation where mum or dad had to intervene, I quite often had the upper hand as being older meant I was usually quicker, smarter and more experienced at telling a believable lie to get me out of trouble.
The mortgage world can often be looked at through a similar eyeglass. Lenders and brokers as siblings to the parental regulator can occasionally have a fractious relationship and whatever the cause of the argument, there is always two sides to the story, which the Financial Services Authority (FSA) has to look at before deciding what punishment should be served and who should take the majority of the blame for the indiscretion.
However, as my brother and I have grown up, I have evolved from the bullying role and embraced the fact that, as the eldest, I can pass on valuable experience to him which will help him stay on the straight and narrow and, hopefully, get ahead in life. While the regulated relationship between mortgage siblings may not be such a longstanding one, much the same applies.
But in both cases, one has to ask how far does the role of the older brother extend? Since long before the introduction of regulation two years ago, the debate over how far the lender should interfere in the day-to-day running of the intermediaries business has gone on and no one has yet come up with a definitive answer.
Responsibilities
The FSA launched a discussion paper on the matter in September which talked of the ‘interlocking responsibilities’. Speaking at the time, John Tiner, chief executive of the FSA, said:
“I should emphasise that we are not placing new regulatory responsibilities on either providers or distributors. Nor are we looking for providers to ‘police’ their distribution channels or for distributors to transfer current responsibilities to providers. We know some firms are doing this already, but we do expect providers and distributors to work together to ensure that consumers are dealt with in an effective and fair way.”
However, the question resurfaced once more this week with the news that John Vincent Burton, director at Mortgage and Finance Club Limited, has been prevented from carrying out regulated duties by the FSA after two lenders reported him for misconduct. While the detection of an allegedly errant broker will be applauded by the majority within the industry, should lenders be responsible for ‘telling’ on their broker siblings if they stray from the enlightened path? Whatever the answer to this question, the biggest quandary must be how much responsibility do lenders have when it comes to enforcing the principles of regulation and ‘Treating Customers Fairly’ (TCF)?
A backgound role
For Linda Will, managing director of Accord Mortgages, lenders have no more than a background role.
“From a TCF point of view, there is no way the lender can second guess the advice process as we have only got what information is in the lending decision, while the broker will know all the details of the client’s finances and situation. We can discuss this with the broker but lenders should never put themselves in the position of a quasi-regulator.”
This view is backed up by Rob Griffiths, associate director of the Association of Mortgage Intermediaries (AMI). When it comes to the best interests of the client, it is usually agreed that, as it is the intermediary who sits down with them, they should be in the ascendant position to judge what is the best advice for that person. Therefore, as the one at the coalface who is authorised to give that advice, it is on the broker’s head if things go wrong.
Griffiths says: “Mortgage lenders have to be satisfied with the business they are expecting, but it is the broker who is authorised by the FSA to give advice. The customer is not looked after by the lender so the intermediary has the responsibility to that client. If an adviser isn’t going to work within the rules of MCOB then they should be thrown out and lenders will clearly flag up those firms not working within those rules.”
No need to argue
No one would argue, be they intermediary, lender or regulator, that if rules were being broken and consumers endangered, then the guilty party should be up-ended and there are processes in place to make sure fraudulent behaviour, such as that implied against Burton, is reported. However, when it comes to making sure the customer is treated fairly, the boundaries are much more blurred.
This is especially the case with interest only mortgages. Much debate has gone on in recent months about this type of product and concerns have been raised that consumers are failing to ensure that a repayment vehicle is given full and proper consideration. However, how far should lenders intervene to ensure clients are paying off the capital, not just the interest?
In the eyes of Will and Griffiths, the responsibility lies with the mortgage intermediary to varying extents.
Will comments: “The lender can do two things on interest only. One – ask upfront if a repayment vehicle is in place. However, you shouldn’t say no to lending if there isn’t one, and two – when you send the customer their annual review, you should make sure the intermediary is aware the client is only repaying the interest on the mortgage and will have to repay the capital, at some point.”
However, according to Griffiths, “Some lenders include information about the necessity of a repayment vehicle on the mortgage application form but it is up to the intermediary to inform the client of their responsibilities on interest only mortgages. Lenders, meanwhile, have their own issues regarding responsible lending to attend to. All the broker can do is make sure the client is fully aware of all the pros and cons of taking out an interest only mortgage.”
However, this difference of opinion can be traced back to another contentious issue currently in the marketplace – client ownership and whether the mortgage intermediary should be allowed access to the client once the mortgage deal has completed. One can only believe the entire issue of lenders and brokers working in an ‘interlocking partnership’ will only be truly decided when a common policy on who is ultimately responsible for the client throughout the lifetime of their mortgage, whichever provider they might be with, is universally accepted.
