I wanted to alert the readers of Mortgage Strategy of a recent adjournment debate, secured by my MP for Scunthorpe Nic Dakin into the behaviour of claims management companies.
There are generally two types of adjournment debate: those proposed by the Government, which are used from time to time to permit general debates on topical subjects and also the half-hour adjournment at the end of each day’s sitting.
The half-hour adjournment is an opportunity for a backbench member of Parliament to raise a subject of his or her choosing, of which advance notice has been given, with the appropriate Government minister.
Normally, only the member raising the debate and the Minister who is replying speak in the half-hour adjournment.
As well as talking about the actions of CMC, Dakin also used this time to talk about the direction the UK’s claims culture is taking and the inequality of the current arbitration arrangements.
As you will appreciate CMCs, wary of the finite life of payment protection insurnace claims, are busy identifying new issues which can generate future income.
In my opinion this is likely to be targeted at mortgages despite the fact the FSA itself does not believe any widespread mis-selling has taken place.
In the event such a claim is made from a CMC it is often pre-populated with dozens of Mortgage Conduct of Business references and can be quite daunting to a small financial intermediary.
In addition to this we must consider that the complaint is often ill researched by a non qualified individual and, in the event it is then referred to the Financial Ombudsman Service, adjudicated upon by a similarly unqualified individual whose decision is binding on the adviser.
I believe there are fundamental ,structural inadequacies in the current system, something my MP agrees with and is willing to advance with the lawmakers.
To date I am pleased that we have achieved the adjournment debate, despite the fact the minister responding appeared to make little effort to address our questions.
The key issues are these :
1) CMCs are not addressing genuine client concerns but fishing and looking to instigate claims with aggressive marketing and promises of money for nothing. They have no capital adequacy, professional indemnity, qualifications or ongoing continuing professional development requirements or authorised persons regime.
2) Cases are often reviewed within CMC’s offices by individuals with no formal qualification and using standard templates where any element that ‘might’ be relevant to a claim appear, such as interest-only, adverse credit, lending into retirement and the list goes on. These are forwarded to an adviser in the form of a substantial document which he/she is obliged to respond too regardless of merit.
3) There is no financial disincentive to a CMC referring a case to the FOS. The adviser by contrast is often part of a mortgage network therefore, despite there being a number of free cases, these are grouped to the network so an adviser with just one or two claims can find themselves financially penalised even when entirely innocent.
4) The case is then reviewed by an individual whose qualifications for doing so are not known ( but who is almost certainly not qualified to the standard an adviser must be) and their decision is then binding. This could amount to tens of thousands of pounds and be critical to the adviser’s survival.
This is an issue I am very confident is close to the hearts of your readers and one which we have managed to establish a modest amount of momentum and support in the House of Commons for. If this opportunity is not seized by the industry press I fear that little momentum we have gained will be quickly lost.
Blue Sky Mortgages
Mortgage Strategy reported last week that the Financial Conduct Authority is concerned about the availability of interest-only mortgages after a lender exodus from the sector over the last year.
In its first annual risk outlook, the FCA says a combination of uncertainty and increased changes means firms may not be making the right strategic choices and may be misinterpreting regulatory guidance.
It states: “[It] may make it difficult for firms to step back and strategically assess the adjustments they need to make to their business models and strategies to ensure future viability and sustainability.”
I find it strange that nobody understands that repayment is better for a lender than interest-only.
The opportunity to get out of interest-only and use the regulator as an excuse was too good to miss for a lot of lenders.
Not only does capital repayment reduce the risk on an annualised basis but there is a better profit in capital repayment. I think that there needs to be caution before blaming the regulator for the way that interest-only is disappearing.
I also wonder sometimes whether this furore is another one of those situations where the history of our market is forgotten.
In days of yore (about 25 years ago) lenders used to charge a premium for interest-only but this went out of favour when the lender realised they could make some nice commissions from the sale of endowments.
Those commissions disappeared as the broker market became more active but the lenders didn’t have the cojones to reinstate the premium on the interest rate.
Now that they have the excuse, isn’t it amazing how quickly it is being taken advantage off.
So, to those that criticised the regulator last week, ask yourselves whether an improving loan book and a better profit margin might have something to do with the situation.
Grey Haired Underwriter
With regards the story last week that the FCA is concerned about lenders heading for the hills on interest-only, clearly someone has woken up to what is actually happening to borrowers.
There are clients out there who have a sound repayment plan for interest only mortgages but are now unable to remortgage because of the additional costs involved with a repayment mortgage or, who are cashing in their investments early and paying off some of the borrowing to reduce the overall cost.
Both ways have disadvantaged the client and all because someone in the FSA said it was not good, so with the lenders terrified about upsetting the FSA they jumped to its silly tune. If you wrote a book on current day regulation to be studied by students 100 years from now they would think it was a work of fiction. The sad fact is it’s not going to get any better.
While I agree with criticisms made about the FSA’s role in causing lenders to pull out from interest-only, at least the FCA is making public pronouncements that flag up the issue rather than its predecessor’s approach of saying different things to different people.
Unfortunately, it will take stronger words to make a difference, such as making it clear that the FCA believes in treating customers fairly and will hit lenders hard for ignoring it.
Or that they will insist on lenders making interest-only available to those with appropriate repayment strategies and not just formal repayment vehicles.
If regulators insist on intervening in the market, then at least it should be done intelligently in the interests of consumers and not just for some four-legs-good-two-legs-bad reason.
The current situation with lenders pulling out of interest-only looks set to continue for some considerable time.
However, in the dim and distant future, it is just possible to visualise a situation where the clients current financial position is fully known to an automated valuation model, which is fully approved by the regulator.
Therefore, if the AVM spits out computer says yes for interest-only, then the deal can happen, otherwise no.
As the AVM model will be regulator-approved, there should not be any problems with misselling to follow.
However, this type of scenario is some way off as I believe fully automated conveyancing has only just got going in England.
Everything takes forever in England, except the Olympics of course, where there was an immovable deadline.
Name and address supplied
I was interested to read Mortgage Strategy’s cover feature last week on house price indexes and the sometimes contradictory bits of information that they spit out.
I was also interested in John Charcol senior technical manager Ray Boulger’s comment that his favourite HPIs were Nationwide and Academetrics.
I thought it would be interesting to value a property that I am familiar with according to both of these.
The property was valued (purchased) at £57,000 in the first quarter of 1985 in the South West region of England.
According to Nationwide, it is now, as of December 2012, worth £303,000 and according to Acadametrics it is worth £400,000.
Hmmm, think I’ll stick to the tea leaves if thats OK with you Ray.
Name and address supplied
The Financial Conduct Authority’s chief executive Martin Wheatley admitted last week that the regulator’s expanding remit will inevitably lead to higher industry costs.
Wheatley said the FCA is taking on more responsibilities such as the supervision of the consumer credit market and a new competition objective but none of the FSA’s existing remit is being taken away, adding that “clearly that comes at a cost”.
He said: “I have worked very hard to try and minimise the additional costs to the industry both this year and going forward. We have got a set of practitioner panels that we have talked to about our cost structure and we explain to them what the drivers of our costs are, where we can control them, and where there will be additional costs.”
But I’m sorry, clearly this should not come at an additional cost.
The FCA needs to address its budgets and cut the cloth according to the industry capability the FSA has destroyed.
This industry has shrunk in size of contributors to the regulatory governors.
You cannot simply keep saying “more more more”, expecting those that remain to cough up for the mistakes if those who have exited the industry in shame. Frankly, enough is enough.