Financial Services and Markets Appendices to the Minutes of Evidence


APPENDIX 29

Memorandum by the Council of Mortgage Lenders (CML)

INTRODUCTION

  1. The Council of Mortgage Lenders (CML) is the representative trade association for mortgage lenders in the UK. Its 118 members hold 98 per cent. of the assets of the residential mortgage market and comprise banks, building societies, insurance companies and other specialist mortgage lenders. The CML welcomes this opportunity to comment on the Joint Committee's inquiry into the Financial Services and Markets Bill, particularly with reference to the position of mortgage advice and the scope of the new regime.

SUMMARY OF THE RESPONSE

  2. The main points in this submission are as follows:

    —  The industry believes the regulatory framework for selling mortgages must deliver sufficient consumer protection in an effective and cost effective way. The Mortgage Code provides such a framework and it is a secondary issue whether regulation should be on a voluntary or statutory basis in the longer term.

    —  The decision whether to incorporate mortgage advice within the scope of the Bill should be undertaken after an analysis of the perceived additional benefits to consumers of a statutory approach, balanced against the potential cost implications. This analysis will be undertaken during the Treasury review later this year.

    —  The reserve power in Schedule 2 of the Bill does not refer to "mortgage advice", but rather to "loans secured on land". The Treasury review and the analysis of costs/benefits should not, therefore, be limited to consideration of whether mortgage advice should be included within the scope of the Financial Services Authority. It should encompass other secured loans currently regulated under the Consumer Credit Act 1974 and the role of the Office of Fair Trading as the present licensing authority.

    —  In terms of consumer protection, there would be no logic in adopting an artificial distinction under the Bill between different types of loans secured on land based on the limit of £25,000 in the Consumer Credit Act 1974. A distinction could be drawn, if thought necessary after a cost/benefit analysis, between the regulation of secured loans on the basis of the Code framework under the Bill, and regulation of unsecured loans under the Consumer Credit Act 1974.

    —  The CML is disappointed that the Government has decided, as announced in its recent Progress Report on the Bill, to remove the option of giving power to the FSA to endorse voluntary Codes. This would have been a way to ensure that the FSA could influence future developments on mortgage market regulation, and would have underpinned the activity of the independent mortgage regulators, the Independent Review Body for the Banking and Mortgage Codes and the Mortgage Code Register of Intermediaries Limited, without the FSA needing to become the statutory regulator.


    —  The CML believes that the Mortgage Code has already introduced demonstrable benefits for consumers taking out mortgages in the UK since July 1997:

  —  improved consumer awareness of benchmark standards across the industry;

  —  registering all mortgage intermediaries active in the market for the first time;

  —  an advice and written recommendation service across the market for the first time;

  —  more transparent product information on the financial implications of taking out a mortgage;

  —  independently verified training and competence arrangements specifically designed for mortgage advisers;

  —  free, independent redress arrangements for customers with a mortgage complaint, with universal coverage for the first time;

  —  enhanced compliance monitoring regimes by the independent regulators, the MCRI and the IRB, including prompt responses to compliance concerns raised by recent mystery shopper exercises on the Code.

BACKGROUND

  3. The CML provided two detailed submissions to the Treasury Committee on developments in relation to the Code in 1998. In response to the Treasury Committee's Third Report on Financial Services Regulation, the CML has reiterated its support for the Treasury's approach to reviewing the Code in 1999.

COST/BENEFIT ANALYSIS UNDER A TREASURY REVIEW

  4. The CML and members have consistently reinforced their support for a regulatory framework for selling mortgages which delivers appropriate consumer protection. In the industry's view, a voluntary code can achieve this in both an effective and cost effective way. The decision whether the Code framework should be on a voluntary or statutory basis in the longer term is a secondary issue. The case for statutory intervention has not been proven, in the light of the tangible benefits which the Code framework has already introduced. A decision to introduce statutory regulation by the FSA should only be undertaken after an appropriate cost/benefit analysis as part of the proposed Treasury review.

THE RESERVE POWER IN THE BILL

  5. Moreover, the reserve power in the Financial Services and Markets Bill refers to the FSA potentially being asked to regulate the sale of "loans secured on lending" i.e., it is not limited to first mortgages under the Mortgage Code. The CML therefore believes that the Treasury review and the cost/benefit analysis should encompass all relevant loans that might come within the scope of the Bill—mortgages and other secured loans currently regulated under the Consumer Credit Act 1974. It should cover the role of the Office of Fair Trading as the present licensing authority for secured loans below £25,000.

  6. If the objective is to ensure delivery of sufficient consumer protection to borrowers who might potentially suffer detriment through taking out a loan secured on land, the CML suggests that no logical distinction can be drawn between mortgages outside the scope of the Consumer Credit Act, as they are above £25,000, and those which are within the scope of that legislation because they are below £25,000. There would seem to be little logic in the FSA regulating a loan for £25,001 and the OFT licensing regime applying to a loan for £24,999. A distinction could be drawn, if thought necessary after a cost/benefit analysis, between the regulation of all secured loans on the basis of the Code framework under the Bill, and regulation of unsecured loans under the Consumer Credit Act 1974.

FSA ENDORSEMENT OF VOLUNTARY CODES

  7. The CML is disappointed that the Government has decided, as announced in its recent Progress Report on the Bill, to remove the option of giving power to the FSA to endorse voluntary Codes under Section 47A of the Financial Services Act 1986. By endorsing the Mortgage Code, this would have been a way to ensure that the FSA could influence future developments on mortgage market regulation, and would have underpinned the activity of the IRB and MCRI, without the FSA needing to become the statutory regulator.

  8. In other areas, flexible solutions are being considered, for example the use of local trading standards authorities to assist the FSA in its monitoring work. There is a case for the FSA to be given the power to endorse appropriate codes, and for the recent decision to remove the power from the Bill to be reversed.

CONSUMER PROTECTION UNDER THE CODE

  9. The CML believes that the Code has already introduced demonstrable benefits for consumers taking out mortgages in the UK. Firstly, awareness among consumers of the benchmark standards which they should expect to receive from lenders and mortgage intermediaries has increased since the Code was first introduced in July 1997. This is not surprising as over three million copies of the Code, and an additional three million copies of the CML's Code leaflet for consumers, have been disseminated.

  10. The CML has announced that from the end of April 1999 a copy of the leaflet describing the key principles of the Code should be given out by lenders and mortgage intermediaries at the first point of contact with consumers. 12 million copies of the Plain English Campaign crystal-marked leaflet You and your mortgage have been produced for the industry's use. Over time, this should continue to add to consumers' awareness and enable prospective borrowers to raise any queries about the mortgage before they have committed themselves.

  11. The Code framework has for the first time identified every mortgage intermediary in the market, through a registration process operated by the Mortgage Code Register of Intermediaries Limited. From its launch in April 1998, the number of MCRI registered intermediaries has increased steadily over the last 12 months so that there are now 47,000 individuals (41,000 April 1998) represented in 20,500 firms (16,000 in April 1998). Lenders have committed not to accept mortgage business from non-registered intermediaries.

  12. The Code has caused all lenders and intermediaries to review their literature to provide information about the key issues of concern to consumers, including the financial implications of taking out a loan. From the end of April, lenders are also required to make explicit reference to the Code in their product literature to set out the levels of service available to consumers under the Code i.e., advice, information or execution only.

  13. The CML has introduced a new statistical return completed by subscribers from which it is clear that the vast majority of lenders who subscribe to the Code offer an advice service and take up of advice through lenders direct is over 40 per cent of their new business in 1998. This advice figure is in addition to advice which would be given by intermediaries, who typically represent around half of new business introductions. Therefore, since the Code was introduced, there has been a significant take up of the advice service by consumers.

  14. In advance of launching the Code, in conjunction with the Chartered Institute of Bankers, the CML and lenders promoted the introduction of a targeted mortgage advice qualification, the Certificate for Mortgage Advice and Practice (CeMAP). Already over 10,000 registrations have been received by the CIB for this qualification. Recently, the CML, the IRB and the MCRI have indicated that they would be consulting on whether it should become a mandatory requirement under the Code to successfully complete an appropriate training qualification. This consultation exercise is due to take place later this year.

  15. The CML has also introduced, with the assistance of the Chartered Institute of Arbitrators, a new Mortgage Code Arbitration Scheme for use by lenders not within the current Ombudsman arrangements, and mortgage intermediaries registered with MCRI. The introduction of this Scheme was recognised in the Government's first annual report as a measure helping to deliver on its manifesto commitment to increase consumer protection for mortgage buyers.

  16. As a result of this new scheme, any individual who has a complaint about a mortgage has a free, independent redress scheme available. Once the Financial Services Ombudsman Scheme arrangements are in place, the CML would wish to investigate the possibility of all mortgage complaints being dealt with by the Financial Services Ombudsman in the future. This would ensure a single point of entry for consumers with a complaint about a mortgage or related financial service, without necessarily requiring the sale of mortgages to be regulated by the FSA.

  17. The CML has also liaised closely with the IRB and MCRI, the independent regulators, on plans to strengthen their compliance monitoring arrangements and enhance their funding under the Code in 1999. This has already led to a number of initiatives, including an MCRI report being published on potential concerns in the area of "accelerator" products sold with a mortgage.

  18. Later this year, the IRB and MCRI will be undertaking their own mystery shopper exercises, the results of which should be known by the time of the Treasury review. This is in addition to planned compliance visits to lenders and mortgage intermediaries, and builds upon the compliance regime which has been in place for lenders since the Code came into effect in July 1997.

CONCLUSION

  19. The CML remains of the view that the objective should be to deliver a regulatory framework which is effective, cost effective and delivers robust and appropriate consumer protection. It believes that through the progress to date it has already demonstrated improvements in consumer protection. If the Treasury review concludes, after an appropriate cost/benefit analysis, that the sale of mortgages and other loans secured on land should be regulated by the Financial Services Authority, the CML believes that the regulatory framework which has been put in place under the Code should be adopted.

  20. To seek to re-write the current regulatory framework would be costly, time consuming and, ultimately, would not add significantly to the consumer protection in place under the voluntary Code.

31 March 1999


 
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