Sting in the tail

It is no secret that 2009 was a tough year for the mortgage market. With funding problems still dominating the intermediary market, brokers were faced with a number of challenges. While battling these market forces and wholesale economic problems, October saw the industry also having to deal with the FSA publishing its Mortgage Market Review (MMR) discussion paper.

Much has been made of this document and debate continues regarding its content, but with the consultation paper shortly coming to a close it is vital that we, as an industry, are fully aware of its ramifications so we can issue the necessary feedback to ensure the market remains one in which intermediary firms can survive Joanne Smith takes a look at the potential hornets’ nest that is the FSA’s Mortgage Market Review and prosper.

The idea behind the MMR is to outline the major reforms required in the UK mortgage market to ensure that it works better for consumers and is sustainable for all market participants. The proposals reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation.

The review’s key features include imposing affordability tests for making lenders ultimately responsible for assessing a consumer’s ability to pay and requiring all mortgage advisers to be personally accountable to the FSA. It also covers the banning of self-cert mortgages through required verification of borrowers’ income and calling for the FSA’s scope to cover buy to let and all lending secured on a home.

The review has also identified that the irresponsible lending practices seen in the market until recently will be curtailed by the FSA’s existing work on capital and liquidity.

The proposals are designed to tackle the problems identified while maintaining a vibrant and sustainable market. But the FSA has not ruled out further change if the initial proposals do not have sufficient effect, including caps on loan-to-value, loan-to-income or debt-to-income. The discussion paper is open for discussion until 30 January 2010 and the FSA will be actively seeking views from consumer groups and industry. A feedback statement will be published in March. Implementation will be phased, with the focus on speed for areas of high detriment, such as arrears.

It is fair to say that the MMR has certainly stirred up something of a hornets’ nest within the intermediary market. According to feedback from Platform’s interactive seminar at the Mortgage Business Expo in November, brokers illustrated little faith in the review, with 70% saying its recommendations are more likely to make life worse than better for consumers.

Only 9% believe that the MMR would make the market more flexible and sustainable for consumers, with 21% not sure. On the question of pinning down the biggest threats to the intermediary sector, 42% identified restricted criteria followed by dual pricing at 28% and tighter regulation at 21%.

In terms of what brokers thought was the most important thing to come out of the MMR for lenders, 28% named income verification, 31% said the plan to ban self-cert and 16% said regulation of the buy-to-let and secured loan markets.

Many brokers are currently feeling neglected by the industry so these results come as no real surprise but there are some misconceptions that need addressing. The MMR is not proposing to ban selfemployed or interest-only mortgages.

It is not aimed at forcing consumers to take advice or trying to drive wholesale lenders from the market. It is also not proposing that consumers should not take some form of responsibility for their decisions and acting as a barrier for first-time buyers to enter the market.

Despite these factors there is no doubting that brokers have some big challenges in dealing with the changes being requested. Establishing what the role of the intermediary will be in a new world where income verification and affordability rest with the lender will certainly be a challenge for many.

However, let us just clarify the FSA aims set out in the MMR before taking too many pot-shots at the regulator. Having a greater understanding of these should make it easier for firms to take a step back and assess how to deal with the various implications and of course help with their responses to the discussion paper. We can break down these aims into 10 main areas:

Reform of prudential regulation

The FSA is calling for well-capitalised firms, especially non-banks with stronger regulation of mortgage-backed securities and more stringent regulation of credit ratings agencies. In addition, changes to capital requirements, more stress testing and new quantative liquidity standards are all high on the regulator’s agenda.

Reform of controls on non-bank lenders

There is little doubt that the FSA is requiring firms to have more stringent assessments of their business models. It has also made a point of considering asset limits for specific lenders, increased capital requirement and limiting the funding means available.

Requiring income verification for all sales

The regulator has made it clear that the existing market practice is inadequate, as up to 45% of loans provided no income verification. With a three to five times higher probability of self-cert mortgages failing, it firmly believes that self-employed people should be able to verify their income.

Strengthening affordability assessments and sales standards

The FSA has stated that it wants to make lenders responsible for affordability by prescribing more detailed affordability for lenders. It has outlined plans for basic affordability and appropriateness check requirements for all sales, including those that are non-advised.

Disclosure and consumer responsibility

Again the FSA has pointed to disclosure in its current form as not being entirely effective and as a measure to help bridge this gap it will look to replace the IDD with requirements to disclose key info. This doesn’t mean it will get rid of KFIs but it does mean that it is also considering oral disclosure as being an integral component on the advice process.

Relying less on disclosure and consumer rationality to protect consumers

The MMR indicates that the licensing and registration of individual advisers and arrangers will come under greater scrutiny along with the extension of the Approved Person regime to mortgage advisers and arrangers. This means that individual advisers and arrangers will need to be authorised and that the FSA will undertake additional vetting and background checks to assist with fraud investigations in the mortgage market

Toughening regime on arrears/repossessions

The FSA announced that it will be consulting in Q1 2010 on strengthening arrears rules and is considering the banning of monthly arrears charges when an agreement to repay is in place. Other potential sanctions highlighted in the MMR was the limiting of any ERCs so that it does not cover arrears fees, the strengthening existing guidance on forbearance and wider investigations into arrears charging.

Unfair charging and price regulation

A more robust approach to monitoring was emphasised as well as a requirement to develop better understanding of charging models. This is to help the FSA and consumers gain a better grasp of transactions as despite previously relying largely on disclosure and transparency of charges, many consumers are still only focusing on initial payments or headline rates.

Second charge and buy-to-let lending

This was a key element of the report and it underlines the Government’s commitment in considering FSA regulation of these markets. The FSA announced it is willing to regulate these sectors as it wants unified regulation to provide better oversight but ultimately the final decision is with the Treasury. FSA change in strategic direction The FSA is taking a more interventionist approach by moving into exploring the potential banning of products and relying less on disclosure and consumer rationality. A more intrusive business modelling analysis and a greater willingness to intervene on charging issues will provide the intermediary market with a fresh set of challenges over their compliance requirements.

It is perhaps this final point that really emphasises the FSA intentions, good or bad. Whatever the outcomes of the MMR it is prudent for intermediaries to realise the potential implications and it could well be a case of ‘forewarned is forearmed.’ It will be interesting, come March, to see what the feedback statement will comprise of and how the industry will react. But, importantly, until then there is still a small window left for the industry to band together to ensure that any necessary feedback is firmly lodged before this discussion period ends.

Joanne Smith is chief executive and creative officer at The Consulting Consortium