The year that was, and the one ahead

This year saw the mortgage market scramble to prepare for FSA regulation while next year will see changes in the packager community and network consolidation, says Richard Griffiths

2004 – a busy year for the industry
I must admit I woke up on January 1 2004 with a certain amount of trepidation; the year of FSA regulation of the mortgage market had arrived.

In common with all the other new mortgage networks, the considerable challenges that lay ahead were a) getting authorised by the FSA and b) proving that our proposition for appointed representatives would attract the anticipated numbers.

On Monday January 19, the first day for applying for FSA authorisation, we were anxiously awaiting the application form to arrive electronically at our offices. Two weeks later we were still waiting and the initial enthusiasm for completing the form totally evaporated.

The form was eventually submitted in February, followed by a four-month silence from the FSA until June, in turn followed by a visit on July 1, our minded to approve letter on July 31 and eventual full permission in September.

This pattern will no doubt ring a bell with the other mortgage networks and, in the meantime, the FSA was busy processing applications for direct authorisation from more than 4,000 mortgage companies that had previously been non-regulated.
The MCCB duly sent out notices of final renewals for the self-regulatory regime to cover the six-month period May-October, and 10,419 firms in total sent in their cut-price subscriptions.

Following the exposure in this column (Mortgage Strategy November 8) of the surplus funds of circa £1.5m remaining in the MCCB bank account, there is now a campaign for the return of the money to the broker community.

The latter part of the year saw an increasing scramble to secure lines of distribution. The insurance facilitators such as Paymentshield, CETA, Select & Protect and Source were all busy chatting up networks new and old, as were many of the mortgage packagers, at least those that were not setting up their own networks.

However, the FSA stuck to its guns and refused to postpone Mortgage Day, sticking to October 31. The number of mortgage companies that applied for direct authorisation was 4,226 at the last count, representing a 40% shortfall on the 7,000 that the FSA has predicted in their consultation papers.

Despite this, the FSA seemed to struggle to process the applications on time and many brokers were left stranded on November 1, unable to trade.

The FSA is now in the throes of processing nearly 10,000 applications for authorisation by insurance-only firms, which again represents a significant shortfall on expected numbers.

The weird and wacky world of financial institutions, the huge and ungainly monsters that they are, continued in the traditional fashion.

Bradford & Bingley spent all year unravelling its costly foray into IFA and mortgage broking operations, the legacy of Christopher Rodrigues’ tenure as chief executive.

On the general economic front, house prices finally came off the boil with both Halifax and the Nationwide indices showing falling prices in the latter part of the year.

Likewise, mortgage lending volumes peaked out and are likely to be somewhat lower than the 2003 lending figures.

2005 – turbulent times ahead
Given the current imbalance between the large number of new mortgage networks and the relatively small number of appointed representatives, the scene is well and truly set for a consolidation of the networks.

Some will simply fade away as their ARs drift off one at a time. Others will end up merging or selling out to larger networks.

On a brighter note for the networks, many of the smaller brokers that opted for direct authorisation will come to realise that it was not simply a case of completing the FSA application form and paying £500 prior to March 31 2004.

The cost of compliance, training, professional indemnity cover, and fees to the regulatory bodies will sink in and there will be a gradual drift to the networks. This trend is likely to mimic the growth of the IFA networks during the 1990s.

The mortgage packager community is likely to see more radical and immediate changes, with many pundits predicting the demise of the pure packagers.

Many lenders will not deal with them and even some brokers are threatening to boycott these unregulated packagers.
Regulated packagers may feel the heat as Key Facts Illustrations disclose the full amount of the packaging/proc fees paid by lenders.

This transparency will illustrate the money being kept by the packagers and will possibly come as a surprise to many brokers.

There will be a fundamental shift in the flow of packaged cases as IFA networks and life company tied agents are instructed to place such business through an approved panel of packagers.

This will be a radically new environment for packagers, who previously relied on a diverse number of brokers, to find themselves reliant on staying on the panel of some of the larger networks. Nice business while they have it but rather painful when they lose it.

The institutions will no doubt spring their usual surprises. Step forward the next candidate to emulate Bradford & Bingley’s £150m loss by stepping into areas with which it is not familiar.

When will these institutions learn that some businesses are best run by smaller, more entrepreneurial firms, rather than lumbering bureaucratic monsters?

In the new depolarised world of IFAs, the first flushes of excitement will probably see insurance companies getting out their cheque books and making sure they are on the multi-tied panels of the larger networks and national IFA firms.

On the economic front, a few respected forecasters are predicting a 20-30% crash in house prices, although most people expect a soft landing. It may, however, be quite a few years before prices take off again.

Interest rates are widely forecast to decline over the course of the year, with the current base rate of 4.75% perhaps dropping to as low as 4%.

Finally, on the matter of the Mortgage Code Compliance Board returning the surplus funds, this is just wishful thinking.

Forget it – there’s no chance. The last act of the MCCB – and perhaps its lasting legacy – was to bite the hand that had fed it for more than five years.