The Council of Mortgage Lenders state:
Yet if you’ve been around a while, you will probably remember, perhaps even with fondness, the days of industry-led regulation. But have you noticed how eerily similar some of the FSA’s new proposals are to the old self-regulatory regime, albeit dressed up with a great deal more complexity and a huge dollop of “regulator speak”?
What goes around comes around, it seems, at least on assessing suitability. Someone over at Canary Wharf looks to have been taking a sneaky peek at a dog-eared version of the old CML Mortgage Code (a handy booklet of 24 short pages). This was the CML’s heroic, but pretty effective, mechanism of market self-regulation for lenders and intermediaries between 1997 and 2004.
Levels of service
Under the Code, lenders and intermediaries could offer three service levels, and had to confirm in writing to the borrower which one they had given.
These were, quoting from the Code itself:
- advice and a recommendation as to which mortgage is most suitable for you. When giving advice, we will take care to help you to select a mortgage to fit your needs by asking for relevant information about your circumstances and objectives.
Our advice will also depend on your particular requirements and on the market conditions at the time. The reasons for the recommendation will be given to you in writing before you complete your mortgage;
- information on the different types of mortgage product we offer so that you can make an informed choice of which to take;
- information on a single mortgage product only, if we only offer one mortgage product or if you have already made up your mind.
Alongside the Code, we published an even more concise leaflet called You and Your Mortgage (six pages, crystal marked for clarity by the Plain English Campaign). This was a sort of precursor to the unlamented information disclosure document (IDD), but a rather more user-friendly one.
Given out to potential customers at the outset, it explained the main points of the Code to customers.
You might care to take a glance at it, and reflect on whether what followed it has really been an improvement for consumers. While some lenders or intermediaries may mourn the FSA’s proposed demise for the IDD, it might have been a lot more popular if it had looked a bit more like the You and Your Mortgage leaflet.
But instead of a concise document like that, the FSA published, with the onset of statutory regulation in 2004, the Mortgage Conduct of Business requirements (running to more than 300 pages).
The “reasons why” letter
Despite our lobbying for the “reasons why” letter to be incorporated into the new statutory regime, the FSA rejected this element of the Code. But now, guess what? It looks set for a comeback, of sorts. Here is what the FSA now sees as the rationale, on page 65 of the current mortgage market review:
There are a number of ways in which suitability letters might help achieve better outcomes:
- they are more likely to be retained than an internal record to protect firms against subsequent claims. Even if firms fail to keep a record of the letters, consumers are likely to retain copies which should increase the chances of gaining access to them;
- they may help improve the quality of advice. Having to keep a record of the suitability of the product might provide advisers who do not currently fully comply with suitability requirements with an incentive to do so. Also, having to set out the suitability argument in writing, including explanations why alternative options were not recommended, might be a good discipline and help increase the quality of advice; and
- they could prompt consumers to shop around. And in subsequent years if a consumer wants to seek redress, they will have written evidence and won’t face the prospect of having to argue word against word on the basis of recollection.
You don’t say.
But what a pity that there has been a five-year hiatus, and disruption to perfectly good practice under the old Code regime, only to see it potentially re-invented under the statutory system, with all the costs that such change necessarily involve.
Taking responsibility
The FSA’s proposals are also potentially a bit more confusing this time around in terms of who is taking responsibility for what. In our view, if an intermediary gives advice, then it is the intermediary who is responsible for that advice. But the lender is responsible for any information it gives direct to the borrower.
The confusion arises from the fact that the “suitability” of the product for the borrower, even on non-advised cases, is now something that the FSA wants the seller to take responsibility for. But it is a little uncertain whether that responsibility lands with the intermediary or the lender, in the case of intermediary non-advised sales.
Perhaps one solution would be to require all intermediary sales to be advised sales, the FSA states that well over 90% of intermediary sales are probably advised, in any case.
Assessing affordability
Another of the hotly-debated elements of the FSA’s mortgage market review has been the assessment of affordability. Again, it is instructive to look at what the old Code said. In part of the section applying to “lenders only," making it quite clear that under the Code regime it was already an embedded principle for lenders to check affordability and take responsibility for doing so, the Code said:
“All lending will be subject to our assessment of your ability to repay.
This assessment may include:
- taking into account your income and commitments;
- how you have handled your financial affairs in the past;
- information obtained from credit reference agencies and, with your consent, others (for example, employers, other lenders and landlords);
- information supplied by you, including verification of your identity and the purpose of the borrowing;
- credit assessment techniques (for example, credit scoring);
- your age;
- any security provided, including the condition and value of the property.”
Semi-seriously, if the FSA were to filch this section – and turn that “may” in the second sentence into a “must," it might be able to avoid the overly prescriptive approach that it is currently proposing. This would be a win for the regulator, for the industry and for consumers.
The case for statutory regulation
The only significant reason we lobbied for statutory regulation in 2004 was because a tiny number of lenders did not subscribe to the Mortgage Code. This felt like consumer detriment to us (although apparently our requirement that Code-subscribing lenders would deal only with Code-compliant intermediaries was also potentially anti-competitive, the authorities, in their wisdom, concluded).
With some trepidation, it was therefore seen as the necessary way forward by our members and the intermediaries they worked with, who had put in significant efforts to comply with the relatively simple, but also relatively effective, requirements of the Code and the Mortgage Code Compliance Board.
Regulation in reality
What happened, of course, was that the FSA re-invented regulation and put in more cumbersome rules, and more of them, so increasing the likelihood of inadvertent non-compliance. Then, in apparent conflict with the thrust of a detailed rulebook, it tried to superimpose principles-based regulation through Treating Customers Fairly!
As an aside, the FSA estimated, before statutory regulation came in, that one-off set-up costs would total £136 million (£83 million for lenders), with annual costs of just under £68 million. In reality, however, the transitional costs were well over double the original estimate. And in 2008/09 the FSA’s retail markets business unit spent around £160 million.
Clearly, not all of this spending was mortgage-related, but however you look at it, it is a huge uplift in regulatory costs, compared to the Mortgage Code Compliance Board’s operating budget of £5 million in 2003/4. For that sum, subscribing members were vetted, registered, audited for compliance, mystery-shopped, and – yes – in some cases, fined.
Support for the review
We do agree with FSA managing director Jon Pain, who told delegates at our recent conference that good lending (and, we would add, good lending regulation), does not have to be rocket science. Under the Mortgage Code, it wasn’t.
We also agree that arguing for the status quo isn’t appropriate either. We are not doing so.
There are many outcomes of regulation, if not the means of delivering them, on which we and the regulator firmly agree.
And we will work tirelessly with the FSA to try to reach a regulatory future that is effective, intuitive to the needs of consumers, and simple and certain enough for lenders and intermediaries to feel confident with in their compliance.
But we hope that the FSA might also acknowledge that the industry argued its position in the early noughties in relation to statutory regulation from a profoundly rational and experienced sense of enlightened self-interest, just as we are attempting to do now.
While it is impossible to undo the past, we can always learn from it. Perhaps both the industry and the regulator, not to mention consumers, might be in a better place than we are now if our straightforward Code had simply been put on a statutory footing, without all the costly and unproductive disruption that the industry has experienced (and with more to come).
On this occasion, it is possible that the FSA could do worse than to re-invent the wheel.
