Financial Services and Markets Appendices to the Minutes of Evidence


Note by the Financial Services Authority on regulating mortgage advice


  1. The Joint Committee has expressed interest in whether mortgage advice should be included within the scope of the new legislation.

  2. The Economic Secretary to the Treasury has asked the Financial Services Authority to undertake a cost benefit analysis of the impact of mortgage advice regulation. This will be one input to the Treasury's review of whether the FSA should have powers to regulate mortgage advice. New work will be required to undertake this analysis, since we have not looked at the market since the Council of Mortgage Lending Code of Mortgage Lending Practice came fully into effect in July 1998.

  3. This Memorandum summarises some preliminary work which the FSA has undertaken on the regulation of mortgage advice. Further and more detailed research is under way in response to the request from the Treasury.


  4. In 1998 there were approximately 1.1 million new mortgages for home purchase, with an average loan size of almost £60,000. This excludes remortgages, further advances and top-ups. Including these categories brings the total to around 1.8 million. Mortgages are therefore one of the largest categories of long-term financial products purchased by retail consumers.

  5. Most mortgage providers (for example banks and building societies) and providers of other loans secured on property (banks, buildings societies and some finance houses) are already regulated by the FSA, as are those mortgage advisers who also give financial advice on investments. But this regulation does not currently extend to mortgage advice, although it does cover advising on, and selling, investment products which can be used to repay mortgages. In addition, a large number of firms who currently do not give investment advice and hence are not regulated by the FSA (including many firms of mortgage brokers, estate agents, solicitors and accountants) give mortgage advice to their customers. Other firms not authorised for investment advice (including credit brokers and finance houses) give advice on other loans which are secured on property but where the purpose of the loan is not to purchase property.

  6. It is difficult to be precise about the number of firms which would be affected. Around 20,000 firms currently provide advice on mortgages (most acting as intermediaries but some as providers who advise only on their own in-house mortgage products). Of these 20,000 firms, a few thousand who are not currently authorised for investment business might choose to seek authorisation for mortgage advice; others might choose to become appointed representatives of mortgage providers; and no doubt some firms currently providing mortgage advice would choose to cease that activity if it became subject to statutory regulation.


  7. The total cost of regulating mortgage advice could be substantial. This would depend in part on whether the regime applied only to loans for home purchase or whether it included all loans secured on people's homes. The second option would be significantly more costly, because credit brokers and finance houses could then come within the scope of the regime.

  8. We assume that the regulation of mortgage advice would involve conduct of business requirements broadly similar to those already applied to the sale of retail investments; and that the existing regulation of the giving of advice on and the sale of endowment policies, and of other investment products which can be used to repay mortgage borrowing, will continue largely unchanged.

  9. At a very speculative illustration of the additional compliance costs that might be involved, let us assume that there are 5,000 firms who are not currently authorised for investment business but who would choose to become authorised for mortgage advice. If the annual additional compliance cost for these firms were to be the same per registered individual as the estimated current additional compliance cost for a one-adviser IFA firm (namely £2,400), then the total annual cost to the industry would be £22 million, in addition to which there could be significant one-off costs. However, this could understate the total annual additional compliance cost because it takes no account of additional costs for firms who are already authorised to give investment advice or for firms who would choose to become appointed representatives of mortgage providers. An additional cost of £1,000 for each of these firms could add up to a further £15 million per year. But these illustrations could be an overstatement because, for a firm already following the CML code, the additional compliance cost per registered individual should be significantly less than has been assumed. The Code has not been in operation long enough to allow us to assess these costs with any accuracy.

  10. In addition to additional compliance costs, there would also be a direct impact on the FSA's own costs, which are met by fees levied on regulated firms. The magnitude of this impact is difficult to estimate but our preliminary work suggests that the regulation of mortgage advice could require something in the region of an additional 100-200 FSA staff.

  11. The cost benefit analysis we will be undertaking for the Treasury will aim to establish more precisely the number of firms likely to be affected by the regulation of mortgage advice, how the effect will vary from one type of firm to another and the likely additional costs which regulation would impose on firms. We will also consider the risk that if regulation leads to a reduction in the number of intermediaries in the mortgage market this could impose costs through a reduction in competition and through a reduction in the availability of advice to some consumers.

  12. For most consumers, taking out a mortgage is a large, complex and infrequent transaction. The benefits of regulating mortgage advice should include a reduction in the number of consumers entering into inappropriate commitments; and an enhancement in the quantity and quality of the information available to consumers, and thus in their ability to exercise more informed and effective choice in the mortgage market. The CML Code may already be achieving some of these benefits, where firms comply fully with its provisions. The cost-benefit analysis will aim to compare the cost-benefit balance of regulating mortgage advice with the cost-benefit balance of continuing with the CML Code. We will also be able to consider the results of research into consumer detriment being undertaken by the FSA's Consumer Panel.

31 March 1999

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