Last month the Financial Services Authority (FSA) announced proposals to simplify the Key Features Documents relating to investment products, prompting renewed calls from the mortgage industry for the regulator to do the same with KFIs (Key Facts Illustrations) – the equivalent disclosure document issued by lenders for the sale of home loans.
This was swiftly followed by an announcement by Peter Williams, the newly installed executive chairman of the Intermediary Mortgage Lenders Association (IMLA), that simplification of the KFI would be one of its priorities for 2007. Williams said the body would seek to work with the Association of Mortgage Intermediaries (AMI) to urge the FSA to slim down the document as part of its MCOB review this year.
Williams was quoted as saying: “The Mortgage Code of Business (MCOB) Review is an opportunity for both sides to look at simplifying KFIs while retaining enough information to satisfy the FSA’s requirements. The benefits would be simpler processing and less paperwork. But this is just an ambition and it may not be possible to deliver it.”
Controversial beginnings
Since the mortgage sector was regulated, the KFI has been mired in controversy and is widely disliked, particularly among intermediaries, who claim that is too long and too confusing for consumers. Some lenders also have reservations about the current KFI, although critics claim that lenders have made the document more complicated by including detailed information beyond the FSA’s requirements in a ‘belts and braces’ attempt to cover themselves against consumer complaints.
AMI agrees that there are problems with the KFI as it stands and says that it would be happy to get onboard with any moves to make it better. However Rob Griffiths, associate director at AMI, questions whether there is the appetite among either the FSA or the wider intermediary community to overhaul the existing KFI.
He admits that the changes to disclosure documents relating to investments products could set a precedent to be followed in the mortgage market. “You could read across, as the FSA does like to equalise the market, so maybe it will seek to simplify the KFI document,” he told Mortgage Introducer. But he adds: “The real question is does the mortgage market need more change? It is difficult, especially for small intermediaries, to plan in an ever-changing market. Would the benefits of simplifying the KFI be outweighed by the cost to intermediaries of implementing those changes? What would simplification of the KFI actually mean? Would it be simpler? What brokers and the mortgage market actually need is stability.”
Griffiths says that AMI, on behalf of its intermediary membership, along with the lenders, made its feelings clear about the disclosure document during consultation prior to the introduction of mortgage regulation. There were misgivings then, he says, particularly in relation to the FSA’s stated aim that the document should help consumers to compare products. “The KFI was never as simple as it should have been. Lenders have different interpretations of the rules so it means that the documents are not as easily comparable as the FSA had envisioned.”
AMI believes that the FSA is unlikely to make major changes to the KFI, particularly in-light of ongoing reviews of legislation at European level that could impact widely on the mortgage market and the UK financial services industry.
Griffiths explains: “All messages coming from the FSA indicate that it is not looking at making any changes to the KFI. It is not in the FSA’s thematic work to look at it again, so I would be quite surprised if it did.
“One of the areas being looked at by Europe is disclosure documentation, so there may have to be changes as a result of a future EU directive. We won’t know what’s in that directive until later, so it is unlikely that the FSA will make any major changes until the EU has published its White Paper. AMI would, of course, be keen to be involved in looking at any changes to ensure that a new document worked for intermediaries and was of benefit to consumers.”
Adviser importance
Currently, Griffiths believes, the best way for consumers to get to grips with KFIs and compare products is to turn to a mortgage adviser. He continues: “Intermediaries go through the KFI with their clients, highlighting the important parts and explaining the document, so anecdotally this could be taken of evidence that the KFI should be streamlined. But it is the intermediary’s job to ensure clients get all the information they need from the KFI, so that they can compare KFIs and therefore different mortgages.”
Many mortgage advisers are far less diplomatic in their criticism of the KFI and the FSA’s role in managing the process. Danny Lovey, who runs The Mortgage Practitioner, has long campaigned for a single page summary highlighting the headline data of the product, which would then be attached to the front of a
traditional KFI.
He supports IMLA’s stance, saying: “I’d welcome any discussion towards making changes to the KFI – all my arguments for simplification remain the same. I welcome IMLA’s statement and anything that puts more pressure of the FSA to do something.
“With regards to European legislation, as the UK is acknowledged as a leader in mortgages, we should be saying: ‘Here is our model – now follow our lead’.”
Lovey believes that the opinions of advisers have been largely ignored by the FSA when it comes to compiling the KFI, resulting in a disclosure document that simply does not do what it is supposed to do – help the general public.
“Let’s stop confusing clients and allow lenders to give borrowers a front page that summarises the main points of the KFI,” Lovey says. “The FSA says it wants the mortgage market to be consumer friendly, but the KFI is very consumer unfriendly. As intermediaries we are saying this is what is required to make sense of the KFI. As we are at the sharp end dealing with consumers, our view
is important.”
Making things simpler
Lovey believes the KFI has become complicated and is in fact a deterrent to consumers being better informed. In principle, he says, the KFI is a good and important document, citing changes to disclosure for investment products as a way forward for the mortgage industry. “I don’t have a problem with the KFI, except that it’s elongated, and written in ‘FSA speak’,” he says. “You have to hunt through it to find the main details. The FSA wants information to be fair and not misleading, but in some places the KFI is not fair and is extremely misleading.
“The section on solicitor’s costs is misleading. The section on the overall costs of the mortgage is rubbish because it is based on the assumption that the client is going to pay the standard variable rate after the period of the deal is finished. And the section on APR is completely misleading for clients as well.”
From his own experience, Lovey says that the vast majority of his clients depend on his experience and understanding to navigate them through the KFI. This means that consumers cannot use their own judgment to decide what products are best suited to them, so they could fall foul of poor or unscrupulous mortgage advisers.
He explains: “You have to go through the KFI line by line with clients to explain to them each section – but what they want can be summarised on page one. We need a single page that can be attached to the KFI, showing the important details, but also making it possible for clients to easily compare mortgages, which they cannot do at the moment because the document is so complicated.
“Clients rely on intermediaries for their advice, so we sit with them and go through the KFI. But that is the level of service you expect from an intermediary. A client would not necessarily get that on the high street, so if they are comparing lots of KFIs, they are likely to get lost.”
Rod Murdison, of brokers Murdison and Browning, agrees that the current KFI is flawed, saying that the document obviously was not designed by anyone with a working understanding of advising clients. He says: “When the FSA introduced the KFI and I saw it was more than two pages long, mostly of closely-typed print and an array of numbers, I realised that the vast majority of people would be put off.
“If it could simplify the document dramatically it would help the consumer. The irony is that this was brought in by solicitors and accountants and civil servants to help consumers, but in fact you lose 90 per cent of the UK public. It has the opposite effect – people see lots of text and lots of numbers and are frightened.”
Again Murdison says that most of the time it is down to mortgage advisers to actually make sense of the KFI for consumers. “Clients are intimidated by it and you have to slightly spoon feed them,” he explains. “I go through the document and point out the vital points and explain to them that the KFI tells them everything they could ever want to know about their mortgage.
“A more simple layout is needed – after all most people are not going to read the entire document, unless you are a computer geek or into conspiracy theories. We are always told, whether it’s an advert or a CV, put your message on the first page.”
Murdison believes that confusion surrounding the KFI comes as a result of an over-cautious regulator trying to over-manage an industry that has suffered, somewhat unfairly, from poor public perception. He also feels this approach has backfired.
He says: “The problem is that there was still the whiff of the double glazing salesman about the mortgage industry before regulation, despite the fact that very few complaints were ever upheld against advisers. So regulation was really using a sledgehammer to crush a nut. But the FSA has shot itself in the foot because now it realises it probably has to include other areas such as secured loans, buy-to-let and commercial mortgages under its regulatory umbrella.”
Taking a different stance
The Council of Mortgage Lenders, however, has not said that it will be following IMLA’s lead over KFIs. Communications manager, Bernard Clarke, told MI: “We continue to look at all aspects of regulation, but we have to balance the cost of changing any processes related to regulation against the improvements in what is presented to the consumer. It is a comparison of costs versus benefits.”
He said that, by and large, mortgage lenders were comfortable with the current document, saying that: “Individual lenders would need to be convinced of the merits of changing KFIs.”
Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, does admit to some reservations about the KFI. He told MI: “Currently KFIs are good, but they could be better. If intermediaries have suggestions for improving KFIs, then we should act upon them.”
Yousefi feels that a major problem is how different lenders present KFIs differently, despite the fact that the FSA is prescriptive about what the document should contain. He explains: “There should be a standardised and uniformed approach to explaining products. Why does it take one lender a whole page to describe a Base tracker mortgage when another lender will explain it in a paragraph?”
He agrees that further consultation is required to improve the document, even suggesting that the complexity of the KFI is sometimes a barrier to product innovation as some lenders feel that tinkering with the KFI template for a new mortgage is too onerous. “There is room for a succinct debate between the regulator, product manufacturers and distributors,” Yousefi says. “ We need a structure to make the KFI simpler and get away from jargon. But this needs co-operation from the entire mortgage market.”
KFI issues
Even the FSA admits to issues with the KFI. In phase one of its review of the effectiveness of MCOB, the regulator described the KFI as ‘a short (no more than five pages), straightforward document that sets out key facts about a specific mortgage product in enough detail to allow comparison to be made with other products’. However, research by the FSA found that many firms ‘were not providing the KFI documents at the right time or in the correct format’.
Overall, however, the FSA has said it is happy with the current document, adding weight to the argument that no changes to the KFI are due in the near future. FSA spokesperson, Robin Gordon-Walker, says that changes to disclosure for investment products does not necessarily mean the same will happen with mortgages.
He explains: “The changes to investment products come as part of the Simplification Plan, which is work to simplify the rules relating to investment products as a direct result of Markets in Financial Instruments Directive (MiFID), which is a directive from the EU. The changes to the Key Features Document for investment products is not therefore a direct read across to the disclosure document for mortgages because MiFID does not currently apply to mortgages.”
He continues: “The Mortgage Effectiveness Review, which is currently in its second phase, is essentially looking at MCOB to see how it is working, but we have not come to any conclusions about KFIs yet. The review looks across the board at all parts of mortgage regulation. The final report will be published towards the end of the year with recommendations, and they are likely to include KFIs. But we cannot anticipate what impact any recommendations will have on disclosure. We will have practical solutions to any issues we identify.”
So it is a case of watch this space – just don’t expect any major surprises surrounding KFIs in the near future.
