Financial Services and Markets Appendices to the Minutes of Evidence


APPENDIX 45

Memorandum from Kensington Mortgage Company (KMC)

  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 different products.

  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 patterns.

  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 statutory regulation.


 
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