We have always been supportive of statutory mortgage regulation as we believe it will be good for borrowers. We also believe that the majority of customers actively benefit from full mortgage advice and that statutory regulation provides greater clarity in a complex regulatory environment.
But mortgage regulation needs to be aligned with the FSA's work on polarisation rules as there are many areas where mortgage business is interlinked with investment business. In light of this, we are pleased that the FSA's powers have now been extended to include mortgage advice. Borrowers normally regard all mortgage-related transactions as integrated if they transact mortgage and investment business with the same company. The regulatory framework should reflect this to ensure that the consumer is fully protected and not confused by who regulates what.
Neither paper contains many surprises, although there are clearly some areas that need further consultation.
One such is the announcement by the Treasury that home reversion schemes are to be excluded from mortgage regulation. This means that these could be sold by non-authorised advisers. It could be that these advisers will not have adequate skills or training to be able to judge the pros and cons of these schemes against regulated equity release schemes (or lifetime mortgages as the FSA refers to them) in the sales process. There is, therefore, a clear danger that some people will opt for a home reversion scheme where an equity release product may be better suited to their circumstances. This highlights the need for independent advice from regulated advisers who will be able to present all options to clients.
This is a sector of the market that is likely to expand rapidly, particularly in view of declining pension income and it is important that the regulatory structure does not result in mis-buying or mis-selling in this area. It is especially surprising that the Treasury has decided to exclude these schemes in view of the fact that the 1980s home income plans were unregulated when they were sold and the Ombudsman and the FSA had to pick up the pieces later.
The Treasury justifies this exclusion by saying that it “does not consider that it has the power to give FSA responsibility for regulating home reversion schemes [because they] are not financial services products, but are sale and purchase arrangements in relation to real property”. But the government makes the rules and so, if they need changing, it should change them. It seems bizarre in the extreme that a person needs to be authorised to sell a £10 per month investment savings plan but not authorised to advise a pensioner to raise cash by selling their home! As unauthorised businesses will have lower costs and may, therefore, offer their so-called services more cheaply, there is a very real danger that vulnerable pensioners will sign up for a home reversion scheme without ever knowing that there are alternatives.
If the exclusion of home reversion schemes from statutory regulation is not rectified it is easy to see that the result is likely to be serious consumer detriment in the future.
One other important aspect which, at first glance, appears to be a missed opportunity, is the lack of further clarification surrounding the status of appointed representatives. This is vital if the industry is to be simple for consumers to navigate. This point, however, is so closely linked with CP121 that, on balance, it makes sense to delay a decision until the FSA has fully consulted on depolarisation.
The Treasury also highlighted the fear among some pundits that the number of independent advisers might fall as consumers will be reluctant to pay a fee. We believe there will always be a demand for quality fee-based independent advice. Our experience shows that a high number of consumers recognise that paying a reasonable fee for quality advice removes product and commission bias. Indeed, our successful strategy of fee-based advisory and fee-free online is based on the fact that different consumers have different requirements.
In the CP146 consultation process, this is an important area for brokers who want to continue to be able to call themselves independent to comment upon, as there are likely to be a wide variety of views. For example, it is obviously important for customers to know whether they will be charged a fee and, if so, how much, before they commit themselves to dealing with any particular broker. Note; there is often a change in the loan initially proposed by the time it completes – possibly just a small change in the amount borrowed, but sometimes a change of lender which may result in a significant difference in the fee received. The requirements to be met in respect of fees for brokers to be allowed to call themselves independent need careful consideration.
Also, the consultation document has some interesting comments on early repayment charges (ERCs) and states that “early redemption charges [are] to be limited to a reasonable pre-estimate of the costs”. In reality it is impossible to make an even remotely accurate pre-estimate of the cost to a lender of a borrower redeeming their mortgage before the end of the fixed or capped rate term because the biggest component of this cost would depend on the level of interest rates at the time of redemption compared with the rate the borrower was paying. Arguably, the fairest way to calculate the ERC, if any, on fixed and capped rate mortgages is on a market-to-market basis. However, it is inappropriate to use this method because it is very difficult for borrowers to understand – and in any case it is impossible to make a pre-estimate of what the charge will be.
Lenders with CAT-style ERCs, i.e. those reducing evenly over the fixed or capped rate term, are unlikely to fall foul of the new rules. However, lenders who have a flat rate ERC throughout the fixed or capped rate term are likely to have to have a rethink.