'M' Day - FSA regulation of mortgages

On October 31st the Financial Services Authority (FSA) took on responsibility for regulating mortgages in the UK. This covers mortgage lending, advice and administration. By law, all mortgage lenders, including banks and buildings societies, need to be licensed by the FSA, as do mortgage brokers and other mortgage intermediaries.

Statutory regulation by the FSA follows from a Government decision and replaces a non-statutory system of regulation that has been operated by the mortgage industry for a number of years.

The FSA conscious that this is a major extension in its remit – particularly when taken together with general insurance regulation which starts in January next year, and, of course, many consumers buy general insurance products at the same time as mortgages, so the two are quite closely connected.

“We have developed the mortgage regime so as to improve protection for consumers through the entire life of their mortgage from the day they start searching for it to the day it is finally paid off. Our intention is that borrowers will get clear, comprehensible information about both mortgages and mortgage services in a format use to make comparisons of products and lenders. While giving advice about mortgages will not be mandatory, we expect to see high standards among firms who choose to give advice. They will need competent advisers that recommend mortgages that are suitable to a customer's particular circumstance,” said the FSA.

2.6 million new mortgages for new home purchases, re-mortgaging or equity release were taken out in 2002. There is £827b of outstanding mortgage debt in the UK. One of the key elements of the new regime relates to responsible lending, which requires the lender to have regard to the affordability of the loan to the customer and of his/her ability to repay it. The FSA’s rule sets out the procedures for the situation where a borrower may have difficulty in meeting payments and gets into arrears – broadly the aim is for the lender and borrower to be able to adjust payment arrangements so that repossession is the last resort.

There are currently in the region of 5,000 products in the mortgage marketplace. The FSA’s estimates (derived in large part from industry surveys) suggest that there is every reason to expect such a level of diversity and innovation to remain as regulation is introduced. In particular, it estimates that statutory regulation will increase the cost of each mortgage on average by £3.90 per month in the first year of the product.

An extensive programme of consumer research was conducted to establish how to present information in terms of style, volume, language etc., so that consumers are likely to engage with and use it. All this research has been published. The first exposure of the consumer is typically the marketing material or advertising. Here, the FSA has introduced requirements to present price information much more clearly and systematically; and to require any commentary on advantages to be accompanied by information about related disadvantages.

The second wave of information provided to the customer is the new so-called Initial Disclosure Document, which provides information in tick-box format on the services available and what the consumer has chosen.

Thirdly the customer is presented with information explaining product features through a Key Facts Illustration, which provides information in a standardised format.

The FSA expects lenders and intermediaries to take a pride in both documents and to use them in the sales process; they can be branded by the firm. But, in order to ensure that each is easily identifiable and consumers understand that these are key documents to focus on, firms will be required to use the Key Facts logo on each.

Finally on information to help consumers to understand and compare products, we have introduced improvements to mortgage offers (so that firms can relate what they are offered to what was first discussed with them) and to annual statements.

The FSA has a special set of rules relating to ‘lifetime mortgages’, i.e. where people – typically retired or elderly - release equity from their home by taking out a loan which can provide them with an income for a life with the loan paid off by future sale of the property. Given the potential vulnerability of the target market for these types of mortgage, the FSA rules provide extra protection particularly with regard to advice and suitability.

According to the FSA, the approach throughout has been to design a set of requirements that retains the consumer benefits of an innovative market place – with a wide range of providers, delivery channels and products.

For more information, contact www.fsa.gov.uk

Countdown to Mortgage Regulation

January 2000: Government announces that the FSA will regulate mortgage lending and administration

2000/2001 FSA consults on mortgage rules in CP70 and CP98

December 2001: Government extends FSA’s remit to include mortgage advice and arranging, as well as lending and administration.

August 2002: FSA publishes CP 146 setting out The FSA's approach to regulating mortgage sales and Feedback on CP98, setting out 'near- final' rules on post-sale areas such as the fair treatment of consumers in arrears

March 2003: FSA publishes CP 174 setting out The FSA's prudential and other requirements for Mortgage firms

September 2003: FSA publishes PS174, covering feedback and near final rules on prudential and other requirements for Mortgage firms and PS159: Appointed representatives.

October 2003: Final application fees and fee bands published in PS180.

October 2003: Final rules for mortgage conduct of business published.

November 2003: Launch of authorisation process for mortgage firms.

30 April 2004: Deadline for mortgage firms to submit applications for authorisation

31 October 2004: M Day - Mortgage regulation starts.