This time last year the industry was buzzing with anticipation and some trepidation as Mortgage Day loomed and the era of Financial Services Authority regulation dawned. Many sounded the death knell for packagers and speculation was rife that many brokers would quit the industry.Key Facts Illustrations were the hot topic. Together with problems concerning the FSA register and lender websites crashing due to high demand, KFIs were the focus of most teething problems. Happily the chaos soon subsided and predictions of the demise of some sectors proved to be false. The introduction of statutory regulation has affected the specialist lending sector in numerous ways but one of the key developments in its infrastructure has been the growth of networks. Prior to M-Day networks had a less significant role in the specialist sector but the decision of many brokers to become appointed representatives led to the emergence of numerous networks offering compliance services. There were initially too many networks and inevitably some have not survived the year. The continued contribution of the packaging sector is also noteworthy. Debate about the future of packagers has been raging since the first whisperings of regulation. The sector was expected to face all manner of career-ending ramifications but the reality was different. Most packagers have been successful in showing their value and in adjusting their business models, albeit at considerable expense. In the run-up to M-Day much of the discussion centred on whether intermediaries would be ready for the big day but ultimately lenders seemed less than prepared. Problems accessing KFIs were shared across the industry and not restricted to the specialist sector. Indeed, since regulation an increasing number of traditional prime lenders have launched ranges aimed at customers with adverse credit so regulation certainly isn’t deterring new entrants. Specialist lending may be a different animal from mainstream but regulation has not had any more impact on specialist lenders and intermediaries than on the industry as a whole. As a defined niche it’s understandable it was likely to catch the FSA’s early attention and there have been a handful of instances where it’s been questioned whether a specialist mortgage was the most appropriate recommendation. But other things have affected the mortgage industry as a whole. The Mortgage Conduct of Business rules remain open to interpretation in a number of areas. This can cause confusion, with one lender choosing to interpret the rules differently from another. There has been concern that flagrant breaches – such as the form and content of consumer advertising – are not being addressed despite whistle-blowing among intermediaries. Where there is a lack of clarity, it’s important to be able to demonstrate practices that are within the spirit of regulation and where one can claim an honest interpretation of the rules. Treating Customers Fairly flows from FSA Principle 6. It is essential all players in the industry understand the concept of TCF and integrate it into their businesses. A principles-based approach will always be open to interpretation and by its nature the specialist lending sector will attract more attention. But TCF is more complex than just asking whether a specialist product was right for that customer. The principles must run through the infrastructure of the industry, sitting deep within the strategic planning of each company and understood by every employee. Prior to regulation many can legitimately claim they were treating customers fairly and don’t have to do anything differently now. But they do have to be able to prove it. This is especially so in the specialist sector where a broker must be able to show, even some years on, why they sold a product to a customer. It is perhaps understandable that the possible mis-selling of an adverse credit mortgage gets more attention than if it were a mainstream product. A case where an individual has been sold a mainstream product rather than a more appropriate product from a rival high street lender isn’t likely to be as newsworthy as a case involving a customer with financial difficulties. But surely the question of mainstream mis-selling is just as important? There has been a debate about whether amendments should be made to MCOB but it is too early to make changes. The fact the industry is still discussing KFIs and getting to grips with TCF suggests we are still in the bedding-in period and there are sure to be fresh challenges ahead. There has been a lot of speculation that the FSA will pay particular attention to self-cert, responsible lending and specialist lending in the months ahead and this is to be expected. Critics have said the introductory process has been time consuming and expensive and there’s no doubt it has. But such an important transition wouldn’t have been possible without a considerable investment in time, energy and money. Regulation has resulted in changes to the ways specialist lenders and intermediaries develop their businesses. It has heightened the industry’s awareness of issues such as the need to look at things from a customer’s perspective, though much of that awareness already existed. It has generated a lot of discussion about the nature of the specialist lending sector, including the validity of differing proc fees and charges. That conversation was taking place before but now it has a more defined structure as it interacts with the MCOB rulebook. KFIs have been focus of attention
The most obvious change since regulation has been the introduction of the Key Facts Illustration. The accuracy, complexity, and length of KFIs are still a topic of debate one year on, with some critics arguing more guidance should have been given to lenders. In May this year, the FSA issued a press release calling for mortgage firms to improve the quality of their Key Facts documents as it had “identified variable quality and widespread inaccuracies in many of them and want firms to undertake a review of their own documentation”. The press release went on to say that it considered it good practice for a KFI to be no longer than five pages for a standard mortgage. Understandably, intermediaries have welcomed moves by lenders to shorten KFIs. Many have argued they were already giving customers all the necessary information but in a much shorter format before M-Day and some continue to hand over an abbreviated summary of the terms in addition to the KFI. Specialist mortgages may be complex but the problems with KFIs remain the same and there is no evidence to suggest that a specialist lender’s KFI is any longer than that of a prime lender.