While 2007 might be the Chinese year of the pig, in Financial Services Authority (FSA) terms it was the year of the mortgage market under the microscope.
The first two years of the FSA’s mortgage regulation regime have passed by relatively uneventfully, if you exclude the enormous cost to the industry of implementing ‘Mortgage Day’ change – valued by some to be around £123 million in the first year alone.
However, the industry could almost be forgiven for feeling fairly complacent with the whole principles-based set up – although for those of us working hard to implement a compliant business, there was a touch of bitterness that others were ‘getting away with it’. The ‘light touch’ approach might even have appeared somewhat laissez-faire, especially for those of us that had experienced prescriptive regulation in other areas of financial services.
As we approached the third year of regulation, there had been no culls, and no sign of the anticipated eradication of certain sectors of our mortgage advice community. Was mortgage regulation a storm in a teacup? Or was the FSA simply biding its time?
Showing its teeth
While some were still sleeping off their New Year hangovers, the regulator showed his teeth. 2007 began with a wake up call for mortgage advisers with a clear directive from the regulator calling for the industry to improve processes. A baseline research study had found the system wanting at every level.
Clive Briault, managing director of retail markets at the FSA, said:
“We found significant failings in the advice giving processes in a number of mortgage firms. Poor processes increase the risk of unsuitable advice being given. It is essential that firms have robust processes in place, so that they treat their customers fairly and provide suitable advice.”
The FSA additionally placed mortgage exit administration fees (MEAFs) and mortgages in retirement on its hit list.
Hot on the heels of this announcement came the challenge to the lenders, with an indication – not prescription – as to how lenders should draft MEAF terms. As I see it, a few lenders capitulated, others rebranded their fee and some lenders confirmed their intention to continue charging the fee on the basis it was justifiable. So who was testing whom? I suspect it was merely the first round of a bloodier battle.
Incidentally, in a bizarre twist, the government’s measure of inflation dropped under target in August, and the Office of National Statistics says the largest downward contribution came from reductions in the cost of financial services with some lenders cutting their mortgage exit fees.
Yet the Retail Price Index rose to 4.1 per cent in August, up from 3.8 per cent in July, mainly due to an increase in average mortgage interest payments, with most lenders passing on July’s quarter point increase in the Bank of England Base Rate. It really is a case of giving with one hand and taking away with the other.
In April, the FSA made good its intent to expand its remit to cover home reversion plans and home purchase plans as well as lifetime mortgages. In creating this level playing field, all sectors of the equity release market receive consumer protection.
Significant impact
Still viewed by many as something already implicit within their business, the FSA’s drive to establish its ‘Treating Customers Fairly (TCF) principle is beginning to have a significant impact on the mortgage industry. Or rather the recent fines, handed out to firms and individuals have sent ripples around the mortgage community.
In June, the FSA announced a deadline of December 2008 for firms to demonstrate they are consistently treating customers fairly. For those small retail firms who still believe the ‘folklore’ that they are under the regulatory radar, the FSA’s risk-based approach to supervision will lead to appropriate action against firms who pose a significant risk to consumers.
Stephen Bland, director of the FSA’s small firms division, has said: “Our focus is on changing firms’ behaviour to benefit consumers. We identify and prioritise risks, take action to mitigate those risks by taking specific action against individual firms. We also conduct industry wide sampling exercises to look at specific issues which enables us to communicate the results to benefit the market as a whole. Firms that are not trying to comply with our requirements should be aware that they could be visited at any time.”
The FSA has already identified that it uses regulatory returns, information from other sources, mystery shopping and the results of firm-specific, supervisory and thematic work to maintain an accurate and up-to-date picture of small retail firms, and this allows it to target resources most efficiently.
The FSA also used the Retail Distribution Review platform to further establish principles-based regulation with a tantalising glimpse of a regulatory dividend for those firms and networks that properly embrace TCF and the rest of the light touch regulatory regime. For those that don’t, a regulatory backlash in the form of greater FSA supervision, maybe even the requirement to recruit audit or supervisory staff, could be the least of your financial worries when six figure fines are being handed out for failing to treat customers fairly.
While regulatory dividend is unlikely to result in a reduction of costs for those of us doing the job well, being trusted to get on with the job incurrs far less cost.
Making a difference?
For professional mortgage intermediaries, the regulatory roadmap is so much part of our business as usual that many can’t even remember life before ‘Mortgage Day'. So has mortgage regulation made a difference? And are customers safer as a result of mortgage regulation?
It’s not an exact science, but it is interesting to note how the market has moved over the three years since the introduction of mortgage regulation:
- The average house price according to Nationwide’s Autumn 2004 review was £153,727, just as ‘Mortgage Day’ launched, increasing to £184,131 at the end of Q3 2007.
- The Bank of England Base Rate has increased from 4.75 per cent in October 2004 to 5.75 per cent in October 2007.
- Mortgages in arrears are also on the increase – a typical example of mortgages in arrears of three to six months has increased from 58,400 at the half-year point in 2004 to 71,800 at the half-year point in 2007.
- Using the Council of Mortgage Lenders figures based on a sample of lenders, 3,700 properties were taken into possession in the first half of 2004 (before the introduction of statutory mortgage regulation), compared with 10,700 properties taken into possession in the first half of 2007.
But in a more competitive market, as this is, with vulnerable people desperate to become home owners or move up the property ladder, the temptation for brokers to bypass the rules – however well-intentioned – has been nipped in the bud. Providing unsuitable advice might satisfy your client’s short-term needs, but it is not treating them fairly.
The FSA has had three years to test the market. In this third year we have seen some challenges to some of the industry’s power bases, a fulfillment of the pledges laid down on ‘Mortgage Day’, and the principles-based approach becoming solidly embedded and accepted as working principles.
I’m looking forward to this next generation of regulatory dividend for the companies that are prepared to police their business and the industry.
And for those last remaining ‘cowboys’ in the industry, it’s now time to leave the the mortgage market because our regulator has you firmly in its sights.
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