Those of us working in the mortgage industry have virtually lived, breathed and dreamt regulation from the moment it was announced up until October 2004 when it came into effect. And since then adhering to the new rules, procedures and processes are always at the forefront of our minds. But it is not the same for consumers. So how much do they actually know about regulation, and how much has it impacted on them? Most consumers who have shopped around for a mortgage recently would have been aware that something has changed, mainly because – if the adviser is following procedures correctly – they would be told this during the mortgage interview. But whether they recognise the benefits of such changes is debatable.
The main benefit of regulation to consumers is it gives them the ability to shop around and compare deals with the key facts illustration (KFI) they receive from every lender. But some lenders only provide information, not advice, so in some cases it is not always comparing like for like. But regulation has definitely increased clarity and transparency for customers about the overall mortgage process. Consumers might not always understand the technical language that is used on KFIs but at least the language and information is uniform and standardised.
Regulation has also improved consumers’ rights and protection under the FSA’s ‘Treating Customers Fairly’ (TCF) charter. Fees and charges are more transparent as are key events in the mortgage process. If a consumer has a complaint against a lender or intermediary, they have greater transparency and better signposts about where to go than they did before regulation.
Better informed
Since regulation, the overall focus has been on consumers being better informed by both lenders and intermediaries. If, after the mortgage completes, the consumer faces financial hardship and fall into arrears for whatever reasons, there are guidelines about how the lender should act. The Financial Ombudsman Service (FOS) is also there to adjudicate in those cases where the lender or intermediary and consumer involved cannot agree on a course of action.
Whether consumers felt regulation was necessary is uncertain. If we had asked them whether 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 answerable to a higher authority, the answer would likely be a resounding yes. But many consumers would be surprised to find that was not officially the case already (although reputable lenders were already operating in this fashion). So regulation in many ways just confirmed best practice, giving increased accountability and protection against the less reputable ends of the mortgage market.
Regulation certainly gives consumers more information before they commit to a mortgage deal, but the downside is that reading and digesting the information requires a degree of financial understanding that many people simply do not have. KFI documents are typically five pages long and many 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. If KFIs are five pages long and customers look at three or four products, that is a lot of reading.
However, standardised communication across lenders should make comparisons easier, especially with fees and charges all explained up front. The jury is still out on whether that happens in practise as KFIs vary in length between lenders and might not always be as easy to compare as was originally intended.
Flip side
Although consumers are now much better informed and protected, the flip side is they are going to have to be more careful when they read the information contained on the KFI. The danger is they will say they have read and understood information when they have not. If they later complain they have been mis-sold a product, they will find it very difficult to prove.
However, whether they read it all or not, people will see KFIs and interview length as the main difference next time they buy a mortgage. Mortgage interviews now take about an hour and a half and this could put people off seeing too many lenders, instead driving them straight into the welcoming arms of mortgage intermediaries where they can get information and advice on a number of products after only one interview and factfinding mission. Under regulation, intermediaries must also give customers an initial disclosure document (IDD), which tells consumers who the firm is, which mortgage and insurance products they offer, costs and how the adviser is paid.
Other benefits to the consumer are that all firms will have to meet FSA standards for authorisation including capital, approved persons and PII cover. Regulation can only have enhanced consumer’s confidence in the mortgage market and has gone some way to eradicate the reported cowboy image that sometimes cast its long shadow over the industry.
Of real benefit?
Whether KFIs are proving to be useful to consumers is debatable. Research by Alliance & Leicester (A&L) around the anniversary of ‘Mortgage-Day’ found that 53 per cent of intermediaries think KFIs are not proving to be of real benefit to customers, although 69 per cent of intermediaries think KFIs and IDDs play an important part in the regulated environment. Of those that thought that KFIs and IDDs were not an important part in the regulated environment, 76 per cent thought they are too confusing, and 55 per cent thought customers didn’t understand their purpose. 24 per cent thought IDDs alone do not allow customers to shop around for the best deal, and 6 per cent say there’s no consistency between KFIs.
More than 80 per cent of intermediaries feel the sales process per mortgage application takes longer post-regulation with nearly half (49 per cent) saying that it takes one and a half hours longer than it did before. But regulation has always meant that more paper and a longer sales process were inevitable.
Since regulation, most lenders have a higher volume of sales through intermediary channels, mainly because it takes longer for consumers to shop around, so rather than doing it themselves they prefer an intermediary to shop around for them to save them a bit of time.
However, intermediaries are still painting a picture of decreased profits and frustration more than a year on from regulation. Findings from an A&L survey of independent intermediaries show that more intermediaries are experiencing decreased profits as well as having to spend more time on maintaining business levels, and many say KFIs do not provide a real benefit to customers. Over half say that they need to increase their turnover in order to achieve the same level of profitability they enjoyed pre-regulation.
The majority of intermediaries (77 per cent) feel that being a mortgage intermediary has become more difficult since regulation. The research suggests that appointed representatives find it the most challenging, with 82 per cent saying it is more difficult compared with 72 per cent of those who are directly authorised.
Prior to October 2004, accusations that regulation would lead to less product choice and a less innovative industry were rife and whether this is the case is still to be proven. Some brokers argue that more red tape will make it more difficult for lenders to be innovative and responsive to the market, while some intermediaries are exiting the market altogether. Overall the market continues to be extremely competitive and product innovation continues to benefit consumers.
We have seen differences in the way products are advertised as certain product types work less well in promotions now. For example, stepped products, which have a number of rates over a set time period, work less well in an advert as it would be difficult to explain this to consumers in the limited space available. Promotions need to contain the downsides of products as well as their more attractive features in the same size print. The FSA has set up a team to monitor adverts for compliance, which has resulted in less product advertising and more brand advertising.
Mortgage lending slowed slightly after the introduction of regulation but this could also be a result of a slower housing market at around the same period. The past six months have seen things picking up though. This year looks set to be a good year for mortgage brokers and consumers alike – regulation is bedding down against the backdrop of a robust housing market, and increased competition in all markets means great mortgage deals are there for the taking.
Mehrdad Yousefi is head of intermediary mortgages at Alliance & Leicester
