Mr Right

5 December 2011 | By Robert Thickett

It came as something of a shock in February this year when it was announced that Michael Coogan was bowing out as director-general of the Council of Mortgage Lenders.

Over the previous two years Coogan had experienced a shaky relationship with mortgage intermediaries in the wake of a speech made at a CML conference in May 2009.

In it he accused some brokers of acting “more like sales people interested in cashflow rather than customers’ interests”, which provoked outrage in some quarters.
Nevertheless he was widely respected in the mortgage industry, having headed the trade body since 1996.

With the CML continuing to lobby for changes to the Financial Services Authority’s Mortgage Market Review, not to mention the European Commission’s mortgage directive, he left big shoes to fill.

In the wake of his departure lots of names were bandied about for a possible replacement, from other leaders of trade bodies to senior members of the CML. And it would be fair to say that it was something of a surprise when Paul Smee, former director-general of the Association of Independent Financial Advisers, was announced as the new head of the organisation in June 2011 as he had not been in the frame for the role.

Since leaving his position as director-general of AIFA in 2004, Smee had gone to work for the Payments Council, the body that manages the likes of BACS and cheque payments.

But the big question is, with gross lending continuing to decline and the mortgage market hanging on a regulatory knife edge, is he the right man to manage the CML?

The man with five brains

Just three months into the job Smee has had feedback from the industry which is enthusiastic to say the least. One industry contact described him as a man blessed with five brains and that was without ever having even met him. His reason for the slightly monsterish description of Smee was simple - as this critic saw it, the mortgage industry had been held back over the last four years by a collective inability to successfully articulate its wants and needs to government. He felt that Smee’s varied background would be advantageous here.

AIFA is probably the most well-known job that Smee has had in the advisory market and he is more than familiar with the wants of mortgage advisers - he says it was he who decided to set up the Association of Mortgage Intermediaries in April 2003.

But a quick glance through his CV shows Smee has not just lobbied governments and regulators via industry trade bodies. He has also worked within government as well.

“The theme in my career has been dealing with regulators and regulation,” he confirms.

After completing an MA in classics at Oxford University, Smee’s first job as a 21 year old was as a civil servant at the Department for Trade and Industry, these days less catchily called the Department for Business, Enterprise and Regulatory Reform.

He was desk officer for the DTI at the London Stock Exchange during the deregulation of UK financial markets on October 27 1986 - the aptly named Big Bang - that radically altered Britain’s financial landscape.

“I was also working on the financial services bill and taking certain clauses in the bill through, one of which survives to this day,” he says.

The bill in question was the Rehabilitation of Offenders Act 1974 (Exceptions) (Amendment No. 2) Order 1986, which made it possible for building societies and their supervisory body, the Building Societies Commission, to inquire about and take into account spent convictions for certain offences in assessing the suitability of an individual to hold a senior position in a building society.

So if you’re a head of a mutual and have ever been affected by this, you know who to blame.

In 1988 he jumped ship to the London Stock Exchange to become head of public policy, effectively the first of many trade body roles.

Six years later he left the LSE to join the Association of British Insurers as head of life insurers but then made a radical shift in 1996 when he joined the Independent Television Commission as director of public affairs for a three-year stint.

He says he learnt two things from this change of tack to television regulator.

“It’s amazing how many regulatory topics are the same in different industries,” he says.

“I was dealing with complaints from TV licensees that they were over-regulated. I was dealing with proportionality and whether we should regulate the smallest producer the same way we handled the largest. Cross out TV company and replace it with mortgage company or insurance provider and the issues would be the same.”

The other thing he learnt was that the warnings about not working with animals in television are true. A Levi jeans advertisement featuring a hamster called Kevin is, he admits, still indelibly seared on his soul.

The hamster was used at the end of the advertisement, in which it appeared he had died. When it first went on air this prompted what was then a global record for complaints over a 48-hour period.

“Never use an animal in a TV advertisement or programme as there will always be somebody out there prepared to go to great lengths to prove you were mistreating the animal in some way,” he comments ruefully.

Walk on back

But the charm of pseudo dead rodents was no match for financial services and in 1999 he joined AIFA as director-general.

This was when polarisation was coming to an end and that was the theme that dogged his time at the trade body.

In 1988 the government had introduced the polarisation regime which forced advisers either to be tied to a single insurer or product provider, or to be an independent practitioner.

The FSA had put forward proposals which he says AIFA managed to change radically. They got to the point where it was easier for IFAs to keep charging commission and developed a menu system, which while ultimately doomed by regulatory developments, aimed to help advisers demonstrate their worth.

“I felt passionately that advisers were always measured on how much they charged rather than their value,” he says.

On that basis it sounds almost identical to today’s debate in the mortgage broker market about demonstrating the value of advice.

“If you can do a job well then the labour is worthy of their hire,” he says. “That’s what we were trying to put over and this is a theme that intermediaries need to keep focussing on - explaining what they do and why they’re worth it.”

In 2004 though he moved on again, this time to the Payments Council. The payments industry was facing major regulatory change - with the widespread adoption of internet banking customers were no longer happy at their payments taking three days to clear. The Office of Fair Trading set up a task force investigating the payments industry.

But he says that coming up with a good self-regulatory solution caused the OFT’s investigation to end two years ahead of time.

“The lesson is that if the regulator is looking at you always come forward with your own proposals - never just wait for their solution,” he says.

This brings us to his current position at the CML.

Will the government-backed MIG work?

The government unveiled its housing strategy last month and most of the press headlines were interested in its mortgage indemnity guarantee scheme.

As Smee admits, the deal between the house building and mortgage lending industries crosses a big cultural divide. But has that divide been too big? Latest figures from the Homes and Communities Agency shows the building of affordable homes is at a record low. And part of the problem with the market has been that lenders are reluctant to provide finance for the homes being built.

Smee argues this is purely symptomatic of the last four years.

“The problem has been we’ve had a boom followed by a bust and in any bust there will be moments when trust breaks down,” he says. “And you can see why that happens - lenders have been nursing losses on new developments, builders have felt mortgage firms were not helping their production by not lending at reasonable rates. So trust took a blow during the crash.

“What I think we now have with this scheme is an opportunity to work together - for both sides to get to know each other and build back some of the trust.”

He says the MIG proposal is a good place to start. Whether the scheme will actually work - there are scant details at the moment - he says bluntly that he would never have agreed to working with the Home Builders Federation to set the scheme up if he didn’t think it would work. But a key part of the success or failure of the MIG scheme will be the regulator’s willingness to be flexible and allow it to reduce the amount of money that capital lenders have to put aside for high LTV lending.

Smee says he’s keen to push the fact that the FSA takes account of whether it is talking to big companies or small ones and feels it should be able to moderate its strategy to take account of the sort of lender with whom its dealing.

“There should be scope to flexible regulation - for example, to take account of the MIG package,” he says. “Risk is being mitigated by the scheme and regulators have to take that into account.”

Asked whether the FSA will be that flexible, he counters that there is no statutory or international requirement forcing the regulator not to be flexible.

He argues that by being flexible the FSA can encourage lenders to take their destiny into their own hands to mitigate risks but also means they will demand a similarly proactive response from regulators.

“So the FSA gets more constructive about devising ways in which risk can be mitigated because that’s what this regulation is about - about how risk is mitigated and whether it’s being done sensibly,” he says. “It shouldn’t be about how to put lots of burdens on people and stop those who should have mortgages from getting them.”

Unblocking the logjam

But one persistent issue with the regulator has been the lengthy process for new lenders to become authorised. Over the last three years only a handful of new lenders have come to market and unsurprisingly it’s had little impact on lending. The government constantly wheels out Metro Bank, which was regulated at the start of 2010, as a sign that it is boosting lending and competition.

However, as it recently revealed, while there are some 40,000 Metro Bank accounts, this only translates to around 100 mortgages.

Smee agrees that competition is important and argues that existing lenders should welcome it. But more radically, he has an idea for a system that could be a partial remedy.

It works on the same principle as when a car driver passes their driving test and they can swap their learner plates for a passed plate.

There has to be a level of trust between trade body and regulator, with something positive for everybody

“P plates are one up from the L plate that learners have to place on their cars but it sort of warns people that you might do something unpredictable or drive slowly, or be over-careful,” he says.

“This might be a stretched analogy - I came up with it at a conference when I was thinking on my feet - but it does strike me that if you authorise someone new there is a balance to strike between pre-authorisation checks and post-authorisation monitoring.

“And I suspect there are quite a few businesses that would be happy with higher levels of monitoring in return for this,” he adds.

This is the sort of debate that Smee believes that a trade body should develop with a regulator if it has the right relationships.

“There has to be a level of trust between you, where the regulator understands you’re not just trying to pull a fast one and that there’s actually something positive for everybody in getting to the right place,” he says.

Christmas is coming, the MMR is getting fat

But there is no getting away from the fact that a major stumbling block at the moment is the fact that the final Mortgage Market Review consultation paper has still to be published.

As Mortgage Strategy recently revealed, there are all manner of rumours flying around about when the last MMR paper will be published, from December 9 to pushing into 2012.

“Well, I hope it’s published before Christmas, because Christmas wouldn’t be Christmas without a consultation document,” he laughs.

Whenever it does come out, his watch words are proportionality and of course flexibility once again.

“The regulator is there to supervise a viable and thriving mortgage market - it’s not there to stop business,” says Smee. “The MMR should be a document that is practical, so the less bureaucracy the better. Those are my three key measurements. It’s going to be a doorstop of a document, we know that, and of course the devil will be in the detail.

“So the key will be working out where the devil is and convincing the writers that the detail should be changed. Remember it’s a consultation document and there’s still opportunity to change it.”

There also seems to be an element of what his experiences at the Payments Council taught him, namely that if an industry anticipates a regulator with a ready-made solution this can often be the best outcome for both parties.

“The thing I’ve always tried to do with regulators is understand their objective and then say to them that this is a better way of meeting that,” he says.

“In some areas the industry is talking about how it can improve best practice and that may allow us to go to the FSA and say - here is a proposal. It has downsides but here is how we as an industry can deliver what you want without you having to put a rule in place. That is something that we will look at when we’ve got the MMR in front of us.”

Europe is calling

Just as it’s clear he’s positive about the MMR, it’s also apparent that Smee takes a similar stance towards the European Commission’s mortgage directive.
There have been all manner of things suggested for inclusion in the directive, from 14-day cooling-off periods to the worrying suggestion of including the buy-to-let market within its rules.

Smee says he hopes the industry will end up with a workable text that doesn’t have great problems for the UK mortgage market.

“The inclusion of buy-to-let is a big issue at the moment and we’re still pursuing it,” he says.

“I would still like to see the European Standardised Information Sheet made compatible with the Key Facts Illustration so businesses don’t have to spend a lot of money unnecessarily producing what, in my opinion, is an inferior product for investors and mortgagees. Changing things for the sake of changing them and the sake of uniformity doesn’t seem to be a good thing.”

He believes the final wording for the directive could still accommodate the UK market, but he understands people’s unease.

“I’ve said for many years that the number of problems a European directive creates is in direct proportion to the number of words in its text,” he says.
“The shorter and higher the level the fewer problems there are. I’m sure others feel that as well.”

Light at the end of the tunnel

However, there is no getting away from the fact that the chief concern is the economy and the general gloom is suppressing not just consumer sentiment but markets as well.

And while he is keen to emphasise that in no way does he want to downplay the seriousness of the economic situation, he cautions that people lose perspective too easily.

“When you’re as old as I am you can remember the 1970s when things looked just as bad,” he says. “Let’s not talk ourselves into an ever spiralling doom.

“There is a risk that you become so pessimistic you forget that markets turn - in the same way that you can become so optimistic that you forget house prices can fall as well as rise. So we’ve been at one extreme, let’s not go to the other.” But for 2012 at least, despite the Office for Budget Responsibility’s depressing prediction of 0.7% growth for next year, it’s good to see that there is a stimulus for new-build and that housing is seen as an important part of the government’s growth strategy.

He says the other thing for next year is that the time must come when the industry seriously starts talking to people about the benefits of securitising mortgages again.

“I don’t mean by that going back to where we were over the last few years, where packages were put together, sliced and diced, sub-primed, over-primed and traded excessively,” he says.

“I’m talking about the fundamental underlying asset of a portfolio of prime residential mortgages that have been securitised by a lender to raise money. That’s going back to first principles, and it is not a bad place to start if you’re looking to raise money.

“We’ve seen a couple of these deals get away. Perhaps now it’s time to talk much more seriously to institutions about how these can be invested safely and constructed safely.”

Right man, right time

When it comes to lobbying for industries, whether for AIFA or UK Payments, Smee has an excellent track record moderating rules and regulations.
But there’s little doubt that over the next couple of years he and his colleagues at the CML have got an uphill struggle.

Various elements of the housing market, from lenders and consumers to builders, brokers, valuers and conveyancers, have had their fingers badly burnt over the last couple of years.

That said, it’s time that the mortgage market worked to promote a better image to the outside world.

Hopefully with his experience as a regulator, a trade lobbyist and working within government, Smee is the right man to get all the different parts of the housing market talking again.

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