Documents released alongside the FSA's Consultation Paper 186 "Mortgage regulation: draft conduct of...
Documents released alongside the FSA's Consultation Paper 186 "Mortgage regulation: draft conduct of business rules and feedback on CP 146", reveal that the potential cost of mortgage regulation being introduced next year could hit more than £750m over a 15-year period.
That is the view of consultancy National Economic Research Associates, appointed by the FSA to research the costs and benefits of proposals put forward in CP 146 "The FSA's approach to regulating mortgage sales", released in August last year.
NERA says that the additional one-off cost of the new rules to lenders will be £83m, which added to "ongoing cost per annum" of £27.8m would increase the "net present value" costs over a 15-year period to £336.1m.
The additional cost to intermediaries is pegged at £51.1m, which added to the existing annual cost of £39.9m produces an NPV over 15 years of £414.1m.
The total cost on the NPV basis is pegged at £752.4m, including "financial promotions".
NERA estimates that the proposals in CP 146 would add a cost of £52.90 per mortgage sold.
NERA's report also identifies another "cost" in terms of concerns about the impact on availability of products for consumers.
"Surveyed firms expected some intermediaries to exit the market as a result of the FSA's proposals with regard to conduct of business and authorisation," it says.
"To the extent that this occurs, both competition and variety will suffer. However, firms expected that those intermediaries exiting the market would be those facing the largest incremental compliance costs, which were believed to be 'low quality' intermediaries. In other words, average quality was expected to improve as a result of market exit. However, quality improvements resulting from firm exit raises the risk of some consumers not being served."
The FSA says the responses it received to CP 146 has led it to simplify its approach to the question of mortgage regulation.
Instead of the three-pronged approach suggested in CP 146, the regulator now says it wants comment on the two-tier system suggested in CP 186, which would mean a regime of advised and non-advised mortgage broking, along with two levels of risk, "standard" or "higher risk".
Key Facts documentation will also be a requirement under CP 186 – the proposed regime for producing, packaging and distributing Key Facts is laid out in CP 170.
Issuing Key Facts before the details of a mortgage are discussed is difficult when engaged in, e.g., telephone sales, the FSA admits, but it will still press for KFs to be distributed to consumers "early in the mortgage buying process".
CP 186 also tackles the issue of guarantees for client money held by mortgage firms and makes proposals for mortgage sales already under way when the new rules take effect next year.
The FSA says consumers will benefit from the proposed new rules in several ways.
Sales of mortgages will be better regulated; better documentation will be required from those offering mortgage services; cold-calling will be banned; and new rules will be put in place for dealing with complaints and providing compensation to customers.
The deadline for submitting comments on CP 186 is 22 August.
The deadline for the FSA taking over responsibility for regulating the mortgage industry is 31 October 2004.
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