The Treasury's long-awaited mortgage regulations received a cautious welcome last week. The regulations are the outcome of extensive consultation after the Treasury announced plans to regulate mortgage advice alongside general insurance on December 12 2001 (Mortgage Strategy, December 17 2001).
Ruth Kelly, financial secretary to the Treasury, announced the new regulations on Thursday. “Buying a mortgage is the biggest financial decision most people will ever make. It's vital that people make the right choice – these regulations will make it easier to do that.”
The result, she says, is “a proportionate and streamlined set of regulations”.
So what next? Kelly made it clear that there will be no more consultation on the regulations and that the final detail will be left to the Financial Services Authority. The FSA's latest consultation paper is expected today (August 12) and will set out details about how it proposes to implement the regulation of advice. (You can download a copy by visiting the FSA website at www.fsa.gov.uk and clicking on the relevant link.)
Then, once the European Parliament adopts the Insurance Mediation Directive, expected later this year, there will be a further announcement about the timetable for implementation of mortgage regulation.
There are several main points to the Treasury's regulations that should be taken on board, most notably 'arranging'.
As originally drafted, an estate agent couldn't introduce his client, the homebuyer, to a mortgage adviser without carrying on an 'arranging' activity and requiring authorisation by the FSA.
But following submissions by a number of respondents requesting the Treasury to reconsider its treatment of persons who introduce clients to mortgage advisers, 'introducers' will now not require authorisation from the FSA if they introduce clients to an authorised person or firm, regardless of whether that firm is independent or otherwise.
“The only exemption to this rule was if the mortgage adviser that received the introduction was independent,” says James Mayne, head of strategic development at Britannic Money.
Indeed, Mayne adds that this change is good news for the many estate agents and house builders who introduce clients to mortgage advisers.
Brad Baker, spokesman for the Mortgage Code Compliance Board, refused to be drawn on the MCCB's exact feelings about the Treasury's new regulations but says that its recommendation that introducers should not be included under arranging was clearly taken on board.
“We're pleased that the introducers will not be included in the authorisation requirements as that would have changed the shape of the industry,” he says. “Introducers are not involved in the sales process and that's something we flagged up with the FSA.”
Kevin Duffy, managing director of Hamptons International, agrees. “Hamptons International Mortgages is particularly pleased to note that estate agents, who introduce the majority of our business, are to be exempted,” he says. “When a significant portion of your business is derived from introducers it is essential that they can introduce the business as easily as possible. Introducers are usually just giving the name and number of a client to an authorised person or an appointed representative, so why should they be regulated?” asks Duffy. “The onus has to be on the mortgage adviser to fully explain their status.”
Duffy says that the majority of responsible firms would already disclose the fact that they pay a fee to the introducer of the business.
“It is simply the correct and professional thing to do – we have acted under disclosure requirements for quite some time,” he says. “When you are employed by a mortgage brokerage that operates under an estate agency brand it is essential that the flow of business is as seamless as possible.”
The Treasury itself say that as “no respondent disagreed with the proposed exclusion of introductions made with a view to the provision of independent advice”, the exclusion was retained. And it concludes that there are sufficient safeguards built in later in the lending process (with lenders, advisers and arrangers all having to be authorised and to comply with FSA rules) that will go a long way to prevent consumer detriment.
And it's on this basis that the Treasury has also concluded that introductions to appointed representatives will also be exempted, arguing that the same protections will be in place.
Concerns were soon raised that the decision to include the appointed representative regime in mortgage regulation posed potential problems – not least because mortgage brokers who would not be able to operate as an independent mortgage adviser and be an appointed representative of an authorised firm such as a life insurance company.
“The Financial Services and Markets Act 2000 basically says that you cannot be an authorised representative for one product and be independent for another,” says Mayne.
Such independent mortgage brokers would need to make a choice between being authorised and giving up appointed representative status for life products, or becoming an appointed representative of a mortgage lender.
“Independent mortgage advisers tied to a life company are currently very predominant in the mortgage industry and their status across the two product areas is not viewed as causing consumer detriment,” says Mayne. “The Treasury has made no changes to the Regulated Activities Order (RAO) and believes that that this is a matter for the FSA and its detailed rules.”
A Treasury spokesman says, however, that there will be conditions attached. “The introducer must not handle any money paid by the client in connection with any transaction that the client enters into with the authorised person as a result of the introduction,” he says. “Also, the introducer must disclose if he is a member of the same group as the authorised person to whom the introduction is made, together with any financial interest that he has in making the introduction.”
Bill Dudgeon, managing director of HBOS subsidiary The Mortgage Business, is another that welcomes the move.
“The exemption of introductions to authorised firms and appointed representatives is to be welcomed,” he says. “The condition that any financial interest should be disclosed makes sense.”
And Patrick Bunton, head of operations and compliance at London & Country, says that the Treasury has clearly listened to industry lobbying with regards to exempting introducers from regulation.
“This is a common sense approach,” he says. “But we are pleased to see that introducers will have to disclose if they are a member of the same group as the person they are introducing to.”
And he adds, perhaps more importantly, introducers will also have to disclose any financial interest they might have in making the introduction.
“This should help to ensure that all customers are able to determine whether or not any individual has a vested interest in them proceeding down any particular route – particularly pertinent in the new-build sector of the market,” he says.
So why the change of heart?
Mayne believes that the Treasury has listened to the arguments put forward that the original drafting would have caused a huge burden on 'introducer' firms and the FSA itself for an area of the market where there was little risk of consumer detriment.
“This is a significant decision when you consider that the original drafting of the RAO was in line with the treatment of the introduction of clients for investment advice,” he says. And, almost hopefully, Mayne adds that this may signal that “the FSA will simply not 'mirror' its rules” on investment advice for the treatment of mortgages. For that though, it seems the industry will have to wait and see what the FSA proposes.
Another of the main points to come out in the new mortgage regulations is the issue of packagers – some of whom will be regulated and some of whom will not.
The Treasury has taken on board the feedback on whether packagers are or are not caught by the 'arranging' definition.
The original RAO made no mention of packagers at all and many packagers feared that that in itself would mean they would be left by the wayside.
For Paul Robinson, managing director of Solent Mortgage Services, the new regulations finally put packagers on the official mortgage map.
“It's with a sigh of relief that the Treasury has finally recognised the role of the packager in the mortgage market,” he says. “Everyone who operated in this area of the market was concerned when, last year, the government seemed to completely ignore packagers, clubs and networks. The balance, however, has been redressed in this response to the consultation.”
The Treasury says mortgage clubs and mortgage packaging companies do not carry on the regulated activity of arranging, while the others (broker packagers and correspondent lenders) may or would and so, therefore, could be subject to regulation.
Robinson says the Treasury seems to have a clear understanding of how packagers operate.
“Its decision regarding clubs, packagers, broker packagers and correspondent lenders seems to make sense and fit in with how we perceive ourselves,” he says. “My greatest concern was that if we were excluded we would have little say in the development of the mortgage market, which is intrinsic to our business. More importantly, the views of a significant independent majority would not have been heard.”
Mayne agrees and says that despite calls from the industry that the drafting was unclear regarding who would be caught, the Treasury has now made it quite plain.
“'Mortgage clubs' and 'mortgage packaging companies' will not be caught under 'arranging' but 'broker packagers' and 'correspondent lenders' will be caught,” he says.
“The Treasury is clear on this point and actually I think the industry is probably equally as clear (though it may not admit it) as to what activities should be caught under the 'arranging' definition. The baton is, therefore, passed to the FSA to interpret this into sensible rule-making.”
Kevin Duffy also questions why processors of mortgage business should be regulated.
“I am pleased to see that mortgage clubs and mortgage packagers are to be exempted,” he says. “After all, these companies usually just advise the brokers of the products that are available or process the business after the advice has been given.”
But he goes further and says there is no reason that he can see why “broker packagers or correspondent lenders” should be included either.
“The only time I can see an exception to this is where the company has to replace a mortgage that has failed for whatever reason,” he says. “The simple way round this would be to make the sure the adviser who was responsible in the first place was responsible for the subsequent advice.”
Patrick Bunton also believes packagers and mortgage clubs will be pleased that the Treasury has confirmed that they will not need to be authorised as they do not play a part in the advice process.
“Broker packagers and correspondent lenders will, however, be regulated and in the interests of customer transparency this seems to make perfect sense,” he says.
But Sean Hornsby, director of Mortgage 2000, is not convinced by this argument.
“What the Treasury has effectively said is that some packagers will be regulated and some will not. The role of packagers in the mortgage market still needs to be defined.”
Taking the M2000 Group as an example, Hornsby says that its packaging arms could fit into either definition and a decision needs to be taken as to which one.
“That mortgage clubs have escaped regulation could be construed as good news,” says Hornsby. “But I'm not sure it's the right decision.”
“Regulation is about the consumer,” he says. “You can have a situation where a packager has no contact with the consumer and neither do mortgage clubs. But then we have a situation where one will be regulated and one will not. It's a little strange. It's the same with correspondent lending – one lender could deal with the public and one could not, yet both will be regulated.”
TMB's Bill Dudgeon also thinks that the definitions in this section are less than clear.
“However, the Treasury has recognised that it is the activities that involve dealing with clients and the influence of product choice that should determine whether or not an activity should be regulated,” he says.
Dudgeon adds that the two main activities packagers provide to lenders – product distribution and origination administration – are not going to be regulated. “The Treasury is proposing to look at other activities that packager firms are involved in – broker packagers, a complete outsourcing service and correspondent lenders.
“It is true that broker packagers may or would carry on the regulated activity of arranging, but correspondent lenders are merely providing a range of products that intermediaries can include in those that may be appropriate for their clients,” he says.
Ron Howell, director of secured lending at First National, says there are going to be some interesting times ahead for packagers.
“There is obviously a lot of information to digest and it will be interesting to hear the FSA's viewpoint. However, my initial thoughts are regarding the impact on packagers,” he says.
“During the regulation process of the mortgage market, there has, to date, been a degree of uncertainty as to where mortgage packagers sit. The new regulations finally clarify this issue and, for mortgage packagers, it will signal the end of an uncertain period. Interestingly, the packagers named (broker packagers and correspondent lenders), who represent a high percentage of the mortgage market, will now be caught inside the mortgage regulations and will have to carefully consider the implications.”
Despite there being no mention of polarisation in the initial RAO consultation document, a number of concerns were raised that the consultation should not be dealt with in isolation from the FSA's CP121.
The Treasury says that a number of bodies responded with comments on polarisation seeing a read-across with CP121. Some were concerned that the FSA proposals on depolarisation should not be dealt with in isolation from the RAO consultation document, while others believed finalising the RAO before decisions were taken on CP121 was unhelpful timing.
The reason was that, while CP121 was concerned with investment business, market failures highlighted in that consultation could similarly occur in the mortgage market.
When CP121 was issued earlier this year, some pundits believed that applying the same model to the mortgage market would result in a reduction of the number of independent mortgage advisers. The reason being that many consumers would not be prepared to pay a fee for advice and advisers would not generate enough income to stay in business.
Britannic's James Mayne is sure CP121 will continue to be a “hot potato”.
“It's down to the FSA to consider the links between CP121 and mortgages in developing its proposals for mortgage regulation,” he says. “So while the Treasury recognises that finalising the RAO before decisions are taken on CP121 is unhelpful, there is little doubt that it views this as an issue for the FSA to consider. With the results of CP121 not anticipated until the end of the year, this hot potato looks like hanging around for some time. This is a fundamental issue when considering the regulation of advice and we can hope that the industry is given a greater steer when the FSA publish their consultation.”
London & Country's Patrick Bunton agrees and says it was always inevitable that there would be an element of “wait and see”.
“The Treasury has deferred making judgement on the impact of CP121 on the mortgage market but, given that we are still waiting for the FSA's formal position on this area, there has to be an element of wait and see,” he says. “The Treasury has sensibly not got drawn on the impact of CP121 on mortgage regulation, but has instead indicated that the links between CP121 and mortgages will be considered when the regulatory regime for mortgages is developed.”
Stuart Aitken, director of credit at Southern Pacific Mortgage Limited, is not surprised either.
“It is clear that there has been a lot of comment from lenders and the CML regarding the links between CP121 and mortgage regulation,” he says. “But it would appear that the Treasury does not wish to tie the hands of the FSA as the matter is still under FSA consultation. Therefore, no news here is of little surprise.”
Another area highlighted by the Treasury's RAO was the controversial Section 155 of the Consumer Credit Act. This part of the CCA restricts the brokerage fee to a limit of £5 in relation to transactions that do not lead to the client entering into a contract. The Treasury was applauded when it stated in its RAO that it believed that removing this provision was justified because “there may well be occasions when the appropriate advice is not to take out a mortgage”.
Some respondents to the RAO wanted the £5 limit to remain for consumer protection reasons, others wanted it increased because it did not cover the amount of work that a broker puts in, while some wanted it to be removed altogether. Meanwhile, others wanted it to be removed if similar provision was included in FSA rules.
But after much deliberation the Treasury has decided it will be removing Section 155 of the CCA – potentially good news.
“Despite some respondents who were not happy that this consumer protection instrument was going, the Treasury is sticking with its plans to carve this out from the CCA,” says Britannic's James Mayne. ” This is good news for fee-charging mortgage advisers.”
As we reveal across five pages of news in this issue of Mortgage Strategy, the new mortgage regulations have prompted a mixed response across all sectors of the industry – some pundits are happy and some less happy with the final content. We can be certain that these regulations will not change. In the words of Ruth Kelly, these are “a proportionate and streamlined set of regulations” and the final detail will be down to the FSA, which is expected to publish its consultation on near-final rules at 10am today.
Buying a mortgage is the biggest financial decision most people will ever make and it is vital that they make the right choice. But whether these regulations will make it easier to do that will depend on your response to the FSA.
Richard Griffiths, managing director, Network Data Limited
Throughout the Treasury's documents there is a continued reference to “independent mortgage advisers” without any definition of what this means. Respondents said that a loan that had been “sold inappropriately would be a matter for the FSA as regulator to pursue with the lender direct”.
Is there still a suggestion that lenders will be held accountable or partially accountable for the actions of the intermediaries? This is not explicitly stated in HMT's consultation and I suppose we will have to await the detailed FSA's CP due out today.
It says introducers are to be exempt from the regulations, but they must “disclose if they are a member of the same group as the authorised person to whom the introduction is made, together with any financial interest that he has in making the introduction”.
Really! So who polices this, the FSA? How can it if introducers fall outside the regulations (power) of the FSA. Is the authorised person meant to monitor and ensure that such disclosure has taken place?
The bit on packagers is wishy-washy but leaves the distinct impression that they will be classified under two groups, 'broker packagers' who will fall under the regulations and 'mortgage clubs' who will not.
On the matter of advising, I thought it was a good try for some respondents to claim that “matching is not advice”, but HMT says that such activity is nevertheless caught under the definition of 'arranging' a mortgage. HMT's decision says that: “The FSA will consider the links between CP121 and mortgages.” Is this the first time that this has been explicitly stated/acknowledged?
Also, a number of respondents (including Pink Home Loans and me) were quite vociferous in saying that second charge mortgages (secured loans) should be covered by the regulations. These assertions have apparently fallen on deaf ears.
It is no surprise that home reversion schemes (which effectively sell/transfer ownership of the property but leave the client in residence) fall outside of HMT/FSA powers.
Nevertheless, this is a vitally important subject that may well have an adverse effect (publicity) on the whole of the emerging equity release market. It may be left to the responsible practitioners in the market to ensure that elderly clients are fully advised and understand the implications of going down one route or the other.
Scott Mowbray, marketing manager, VirginOne Account
There was nothing surprising announced last Thursday and we must now turn to the implementation of mortgage regulation at the earliest opportunity. It has been clear for some time that the cost to consumers of buying an inappropriate mortgage can be high. Good quality advice is absolutely essential for the mortgage market to operate efficiently in the future. The Treasury's decision to enforce effective and proportionate mortgage regulation will ensure advice is available to all who need it and will improve consumer confidence.
However, regulation is not the only weapon in our armoury. Ruth Kelly, economic secretary to the Treasury, has pointed out the importance of improving available information and improving consumer education alongside effective regulation and I tend to agree with this approach – informing consumers is key. This is why the FSA should rethink its approach to mortgage tables and look to introduce dedicated comparisons for hybrid accounts such as VirginOne and other offset accounts. They currently account for around 15% of net new lending and will form the most important part of the mortgage industry within the next three years.
Frank Eve, Frank Eve Consulting
The interesting points are that introducers will be outside the regulation, as will home reversion and buy-to-let. This would appear to be the home for those that do not choose to become qualified to give mortgage advice. However, packagers and correspondent lenders are also the link between CP121 and mortgage regulation and this, together with the reference to appointed rep status, will give the mortgage strategist plenty to think about over the coming months as lenders look for ways of securing distribution in the intermediary mortgage market post-legislation. There is still a lot of hard thinking to be done.
Julian Wells, head of marketing, Mortgages PLC
There has been ongoing debate about the difference between information and advice. This was reflected by the fact that a number of respondents to the document stated that lenders and intermediaries have given 'advice' to a consumer when they have simply matched the consumer's preferences and expectations to the products available to them. The Treasury has said that it believes this is not advice and merely aids the consumer to select their preferred product and, as a result, it is not going to change its definition of advice.
Under the Mortgage Code, matching is classed as Level B – information-only on a number of products. Both lenders and intermediaries have a responsibility to continually reiterate to the customer they are giving advice or information.
The Treasury makes a clear distinction between mortgage clubs and packaging companies and broker packagers and correspondent lenders, thus meaning they are subject to regulation.
When a broker recognises that a client needs a specialist mortgage they will often discuss the most appropriate product with the packager. Isn't this involving the packager in arranging?
Although this doesn't happen in every case, it does show that the Treasury has a rather rose-tinted view of this particular sector of the industry.
John Mawdsley, director, The Mortgage Partnership
There were some surprises in that the definitions of regulated products are unchanged but, if those that have been decided upon are adopted, they will create more transparency for the consumer.
I am particularly pleased about the part of the response that relates to the role of packagers. Having recognised that packagers play an important role in the value chain, the Treasury has seen fit to bring to the surface the differences between types of packager and how much influence they may have with the consumer and their choice of product. Excluding from the regulation those organisations that provide an information service for intermediaries and/or a service for the benefit of lenders only, appears a pragmatic decision.
The differences between packagers that have been identified will open up the debate about the roles they undertake. This debate will have to include definitions of 'packager' and any other descriptive title used by organisations so that they, the intermediary, and the consumer may differentiate from those undertaking regulated work and those that do not.
The position of appointed representative status still has a question mark hanging over it. Perhaps more concerning to everyone whose livelihood depends on mortgages, is the apparently innocuous comment that the FSA will now consider the links between CP121 and mortgages in developing its proposals for mortgages. What is needed is a continued proportional approach to regulation. It is up to mortgage professionals everywhere to continue to make their voices heard.
Stuart Aitken, director of credit, SPML
I welcome the clarity around packager status regarding regulation. The Treasury has acknowledged the role of the packager, which is to provide an outsourced service to lenders and so, quite rightly, such packagers should be exempt. However, the regulation has included correspondent lenders as previously set out in CP98 and they would appear to have been swept under regulatory control due to the new legislation and definition of arranging.
It is clear that there has been a lot of comment regarding the links between CP121 and mortgage regulation. It would appear that the Treasury does not wish to tie the hands of the FSA as the matter is still under FSA consultation. Therefore, no news here is of little surprise.
As a lender that does securitise, we welcome the clarification and refinements to a number of clauses in the Regulated Activities Order to ensure that SPV's are not inadvertently caught under the new regulation framework.
Finally, on the matter of buy-to-let exclusion from regulation at this point, we have long argued that it should be regulated and would hope that it will eventually be so as FSA regulation is developed in the future.
We are all holding our breath for the FSA consultation document (due out today), which should show the 'near-final' rules for post-completion activities but will be a thick document as it will be seeking intermediaries views this time round.
Paul Robinson, managing director, Solent Mortgage Services
It is with a sigh of relief that the Treasury has finally recognised the role of the packager in the mortgage market. Everyone who operated in this area of the market was concerned when the government last year seemed to complete ignore packagers, clubs and networks. The balance, however, has been redressed.
The Treasury seems to now have a clear understanding of how we operate in the market and its decision regarding clubs, packagers, broker packagers and correspondent lenders seems to make sense and fit in with how we perceive ourselves. Our greatest concern was that if we were excluded we would have little say in the development of the mortgage market. More importantly, the views of a significant independent majority would not have been heard.
Overall, my initial thoughts are that it is quite a balanced paper and as a company we will do anything to try and support the drive to improve standards throughout the industry. We are obviously interested to see the full details in due course, particularly relating to the section on advice and recommendation that at present is still slightly unclear.
Tony Jones, managing director, Pink Home Loans
Pink Home Loans warmly embraces regulation and, with such a large proportion of the intermediary mortgage market placed via third-party distribution, this is a vital part of the regulatory process. We have requested that clear definitions be in place so that those packagers who offer advice to the consumer can be regulated. The four definitions given to packagers in the Treasury response require more clarification. In my opinion they do not clearly define who gives advice and this could very easily lead to problems in ensuring proper accountability and that regulation is adhered to. I trust that the FSA will rectify this point. We are also disappointed to see second charge loans excluded from regulation. People with poor credit histories often seek to mitigate debt problems by consolidation into loans secured on the equity in their homes. We remain concerned that if the burden of regulation is higher on first charge there is a distinct possibility that some advisers may seek to avoid regulation by arranging seconds.
We were also surprised by the Treasury's comment that only one other company beside ourselves highlighted this fact in the consultation process. We believe that keeping introducers of mortgage business outside of regulation is right and that the conditions set in place are prudent. This allows intermediaries who place very little mortgage business to introduce to third parties who have the expertise to offer advice. This scenario would also help brokers who perhaps wish to give mortgage advice in the future but are unable, for whatever reason, to pass CeMAP before the year-end deadline.
Bernard Clarke, head of communications, the Council of Mortgage Lenders
Generally, we welcome the Treasury's announcement, particularly for its useful clarification on mortgage introducers, buy-to-let loans and securitisation.
We have always argued strongly for proportionate regulation, so we welcome the decision not to require authorisation for those that introduce mortgage customers to authorised firms and appointed representatives. We also welcome the Treasury's confirmation that it does not propose to extend regulation to buy-to-let loans.
The securitisation of mortgage assets is developing rapidly and the Treasury's announcement that it will make technical amendments to prevent this being caught up in regulatory requirements is similarly welcome.
We are, however, disappointed that Treasury has not agreed that authorisation should extend to local authority staff who may be advising householders about loan products.