Since the Financial Services Authority (FSA) began its regulation of the mortgage sector three years ago, much has been made of the responsibility of firms to adhere to its rulings – all 9,000 plus pages of them.
But should consumers also have a part to play? Certainly some firms believe that the consumer should take some responsibility for their actions, and in a market of continued growth and evolution, is it too much to ask for consumers to take an active interest in their own financial situation?
Borrower choice
Over recent months, a lot has been made of repossession and debt figures, and although lenders and financial institutions have to play their part in helping to lessen this burden – in the end, it is up to the borrower how much debt they place themselves under.
Credit card firms and debt consolidation organisations have come under fire for their tactics in ensnaring vulnerable borrowers, and various consumer bodies and regulators have expressed disappointment in the tactics used – which include using high profile television presenters to promote their products and services.
In its most recent analysis of arrears and repossessions in the housing market, the Council of Mortgage Lenders (CML) revealed that the number of mortgages in arrears of three months or more at the end of June rose to an estimated 125,100 – up 4 per cent compared with the end of December but 3 per cent lower than at the end of June 2006.
Of these, 71,800 were in arrears of three to six months, while 38,300 were in arrears of six to 12 months, and 15,000 more than 12 months. Around 1 per cent of all mortgages were in arrears.
Michael Coogan, director-general at the CML, admitted that repossession rates would be a cause for concern if they continued to increase, but dismissed suggestions that they were reaching the highs of the 1990s, claiming that there were an extra 1.5 million mortgages now within the market. He said: “Interest rates are clearly higher than many were expecting, and are set to remain so. And the greater risks inherent in non-conforming lending are resulting in significantly higher levels of repossession in that part of the market compared to mainstream experience.
Lenders see possession as a last resort, but allowing arrears to mount up makes repayment difficulties more difficult to deal with, and is not a sustainable strategy for everyone.”
According to the Bank of England, credit card debt also peaked in the summer to £53.5 billion, with debt levels rising by £224 million in July.
Taking a financial hit
Of course, continued rises in the Bank of England Base Rate has had an impact on the monthly cost of a mortgage, while those coming to the end of their initial deals have taken a financial hit, further exacerbated by the recent non-conforming crisis engulfing the global market.
Since August 2006, the Monetary Policy Committee has moved the Base Rate upwards five times, to its current level of 5.75 per cent. While this is still well down on the 10 per cent plus levels seen in the 1980s, the staggered increases have led to an increase in borrower expenditure, which has led to borrowers facing increased monthly payments. Analysis from one source suggested that these rises could have resulted in borrowers facing extra costs of up to 25 per cent.
However, as Hugh Nichols, proprietor at Badbury Berkeley Financial Services, believes consumers should have been made well aware of this possibility before their mortgage offer was confirmed. He says: “Consumers should definitely have to take more control of their own finances. At the moment there is the attitude that they can go back to the adviser if things go wrong.”
He adds: “At the moment there is far too much paperwork and more consumer responsibility could see a few trees saved. Borrowers expect to be cocooned, and wrapped in cotton wool. I would like it if my customers asked me questions; that’s what I’m here for. But at the moment they have too much to read and are confused by it, so don’t bother reading it at all.”
Responsibility
The FSA has confirmed that it is looking at consumer responsibility and in a changing market environment it is clear that some consumers have been poorly advised and misled.
The Northern Rock debacle is perhaps the most poignant example, in which borrowers queued at various branches in the belief that their money was unsafe. Indeed speaking in front of the Treasury Select Committee, Adam Applegarth, chief executive of Northern Rock, blamed the BBC for exacerbating the crisis, indicating that the broadcaster had caused a state of misinformed panic.
The role of the FSA going forward should be to continue its watchful gaze over the mortgage market. But it should also perhaps consider increasing its drive to promote financial education, weaning borrowers off the ‘compensation culture’ they have come to expect.
Only then will the industry be able to truly innovate, safe in the knowledge that they cannot be blamed for every borrower slip up. At the moment it is fair to suggest that lenders and brokers are hindered by the reluctance, or lack of confidence and education among consumers to get to grips with their own financial situation.
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