Mike Green, managing director at Mortgage Brain Ltd (MBL), takes a close look at the FSA's proposed mortgage regulations and the effect these will have on the mortgage industry.
These codes have become central to debate throughout the mortgage industry for the last few months; perhaps the most notorious is CP98, the code for the FSA's draft Mortgage Sourcebook, a 400 plus page tome setting out the seemingly endless array of rules and guidelines which the FSA is setting in order to bring about the regulation of the mortgage industry.
With a whole host of extremely menacing changes in the pipeline, intermediaries throughout the industry are trying to understand three things – who is due to be affected, to what extent, and exactly what are the ramifications for those who fail to comply?
You can run but you can't hide Despite what some may think, the FSA's proposals, effective from September 1 2002, will affect all mortgage lenders, all administrators and all intermediaries. No one can afford to be complacent about these regulations, they will invade every aspect of your business from disclosure agreements, secure lending, advertising and promotion to cooling off periods, arrears and possessions.
Nevertheless, the new regulations have been brought in with the best intentions and no-body would argue that it's not a bad thing to try and ensure consumers are given all available information and are thoroughly educated, before a contract is signed. However, the prevailing question is how on earth this situation can work?
First of all, the legislation sets out a number of conditions that mortgages must meet for them to fall within the definition of a 'regulated mortgage contract'. These are that the loan must be to an individual or a trustee, the loan must be secured by a first charge over property in the UK, and at least 40% of the property must be for the residential use of the borrower or their immediate family. The revised definition of a mortgage means a whole host of loans will now fall within the proposal. Covering remortgages to new lenders and home improvement loans, which include, believe it or not, double-glazing! Straightforward so far? Well, it gets confusing.
The current proposal also states that mortgage advice will not be regulated by the FSA, but the quality of the information given to consumers will. To confuse matters further, this 'information' won't actually be regulated by the FSA itself.
They have kindly decided to appoint an 'authorised firm' to take responsibility to ensure that all disclosure documents, which an intermediary puts in front of a potential borrower falls safely within the FSA's new regime. And who might that be I hear you ask? The lender…. yep, the lender.
So from September 1 2002, mortgage intermediaries will have to get their pre application illustrations, financial promotions i.e. wording of ads, comparative tables and consumer education initiatives - essentially everything you usually give a borrower to help them make a decision about a mortgage - approved by lenders. Confused? So was I, I'm sure many of you suddenly feel a headache coming on.
Unfortunately, it doesn't stop there. The new regulations also propose that intermediaries must be monitored. This is likely to include collecting and analysing relevant data from mortgage intermediaries, visiting intermediaries in the workplace and carrying out mystery shopping exercises. It kind of brings a whole new meaning to the phrase 'Big Brother is watching'!
Some of the proposed rules and regulations may seem slightly implausible, however, they certainly shouldn't be taken lightly. Since the start of this year the FSA has imposed more than £2m in fines. Over 57 firms have set aside around £46 billion for possible compensation payments. Last year it imposed its biggest fine ever, a staggering £2m to Royal Scottish Assurance for mis-selling endowment policies; it had given homebuyers extremely optimistic forecasts of future returns. So with the wrath of the FSA on your back, you will want to make sure you comply. How's the headache?
There is hope, however, not in the form of paracetamol but from technology. Think about it; in its basic format to comply with the FSA's regulations, lenders will need to ensure that you are providing specified pre-sale disclosure documents to potential borrowers. And, in a fast moving industry with new products and new rates coming on the market almost every day, you need a solution that will allow this to happen as quickly as possible and cause minimum disruption to your business.
The solution is technology, a system that will allow two way-online communication between lenders and intermediaries. A system that will allow lenders to send documentation guidelines necessary to comply with the regulations down the line to an intermediary. A system that would allow the intermediary to present this to borrowers, a system that would, once confirmed by the borrower, allow the intermediary to then send the relevant documentation i.e. mortgage application forms, back to the lender who can finally send confirmation and approval back to the intermediary allowing you to complete your sale.
Well here's the good news, this system exists, its here, its ready, and its proven to work – the common trading platform for mortgages. And it's not just the two-way transmission of required documentation that technology can help with.
One of the key points of the regulations is that prospective borrowers must be given a 'pre-application illustration' before making an application for a mortgage. The illustration will have to set out the terms and conditions of the mortgage in a standardised format and furthermore, the illustration will be personalised to the amount the consumer wants to borrow and to the particular mortgage they are interested in.
This can easily be overcome by using the latest technology within the leading mortgage sourcing software systems that allows intermediaries to have ready access to the latest information provided by lenders.
So, now that there is light at the end of the tunnel, the next question is what do I need to do and who's going to help me? Well, MBL is one step ahead and is currently holding a series of free seminars which will help intermediaries fully understand and prepare for the anticipated changes that will take place.
The seminars, 'Building Better Business' are being held throughout the country and will address everything an intermediary needs to know in order to comply. They will focus in detail on issues such as the regulations themselves, pre-application illustrations, electronic transmission, point of sale 'financial promotion' documentation and the creation of comprehensive client records for the protection of the threat of 'Big Brother' visits.
We want to put everything in place to help intermediaries and make the transition as smooth as possible. For those of you who aren't ready for these changes I would recommend you call our support team now and book your place at one of the seminars. Mike Green is managing director of Mortgage Brain Limited.IFAonline
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