Memorandum from Kensington Mortgage Company
1. KMC welcomes the Committee's decision to
examine the position of mortgage advice and for the opportunity
to respond to the Committee's inquiry. KMC supports the extension
of statutory regulation to cover mortgage products.
2. KMC is the UK's largest "non-conforming"
mortgage company providing mortgages to those people who do not
meet the increasingly stringent criteria laid down by most high
street banks and building societies.
3. KMC provides mortgages to 14,000 customers
in the UK. The current total value of its lending is £750
million.These loans are securitised and KMC has received an AAA
rating from the markets;
4. KMC was the first "non-conforming"
mortgage company to sign up to the Council of Mortgage Lenders
Code of Mortgage Lending Practice and the Office of Fair Trading's
non-status lending guidelines.
5. The CML's Code has been in operation for
a relatively short period of time; since July 1997 in the case
of lenders and April 1998 in the case of intermediaries. Some
may assess that it is too early to guess the degree of compliance
with the Code, although the Treasury intends to carry out a review
later this year. It is not within the scope of this submission
to comment on the level of compliance with the Code.
6. The case for statutory regulation should
not rest on the extent to which those who sign up to the Code
comply with it. Voluntary regulation is ineffective because by
definition not all lenders and mortgage intermediaries fall within
it. For example, in the specialist "non-conforming"
sector of the mortgage market there are nine lenders operating.
Eight have signed up to the CML Code, one has not. There are other
overseas lenders who tend to come into the market for short periods
and then exit again. Moreover, there are many reputable financial
institutions that remain outside the CML because there is a waiting
period before companies can become full members.
7. If regulation is to be effective its coverage
must be total, not partial. Even if 90 per cent of the industry
is covered by the CML Code (as is the case in the "non-conforming"
sector), it is surely unacceptable that customers run the risk
of being mis-sold a mortgage because they find themselves dealing
with the 10 per cent of the industry that does not adhere to the
highest standards of disclosure and transparency.
8. The best means for disciplining and regulating
the market is to ensure that consumers have the necessary information
to make effective choices. The information must, therefore, be
disclosed in a consistent form that enables customers to make
meaningful comparisons of the true costs of credit inherent with
9. There are still too many instances of where
charges are not clear, compulsory insurance products are bundled
in with the other costs of the mortgage or where customers are
unaware that their financial adviser is receiving a substantial
commission to sell a particular product. A mortgage is one of
the largest commitments individuals will take-on throughout their
life. It is surely right that they should enjoy similar levels
of protection to those they would enjoy in other sectors of the
financial services industry.
10. "Non-conforming" mortgage lending
is a specialist sector of the market. It is, however, becoming
increasingly important. The world of work is changing. Eight and
a half million people are in less secure forms of employment.
Temporary and contract workers, divorced men and women, single
parents and those suffering illness can all suffer from poor credit
ratings through no fault of their own. While at the same time
High Street Banks are excluding more and more people as they increasingly
make use of inflexible computerised credit-scoring techniques
in the drive for cost savings. Non-conforming lending can, therefore,
provide short-term bridging measures to allow borrowers to prove
their credit-worthiness. They are also a tailored product for
the self-employed, consultants and others with irregular work
11. Suitability is a critical issue in the selling
of any mortgage product. It is particularly important in the non-conforming
sector. "Non-conforming" lenders should not accept customers
who could get a standard mortgage and equally should not hesitate
to turn down applications from those at high risk of defaulting.
12. In summary, therefore:
the vast majority of non-conforming
UK mortgage lenders have voluntarily signed-up to the CML Code;
voluntary regulation will continue
to be ineffective because its coverage is partial;
effective disclosure and transparency
is essential if customers are to be able to make informed choices
about suitable products;
customers will not be able to make
like-for-like comparisons unless the whole industry adheres to
the same standards;
this can only be achieved through