In its detailed response to the FSA's Mortgage Market Review consultation paper 11/31, the CML identifies four main areas on which changes and clarification are needed, which are: a one size fits all approach to advice; supervisory uncertainty; help for existing trapped borrowers, and interaction with the European mortgages directive.
On advice, the proposed rules seem to be based on the presumption that advice is face to face, whereas in fact it is developing increasingly into telephone and internet channels, says the CML.
It points out that the requirement to give advice whenever there is spoken or interactive dialogue would drag into an advice process many borrowers who do not want or need it.
The CML suggests that the FSA needs to ensure there is a consistent approach with the perimeter guidance which allows dialogue to occur with borrowers without it necessarily being deemed to be advice and amend the proposed rules which do not.
It also wants the FSA to ensure that the advice proposals only capture those customer contact activities that will be undertaken by approved persons and require that where new money is being lent, borrowers are encouraged to receive advice but can opt for execution only if they want to.
But it says that the new rules should require that customers in the four higher risk borrowing groups, that is equity release, sale and rent back, right to buy, and debt consolidation, should not be able to opt out of advice.
On supervisory uncertainty, the CML's concern is that, while the responsible lending rules appear to allow certain flexibility to lenders, it is possible that supervisors may be more prescriptive. The CML urges the FSA to ensure that its monitoring, supervision and enforcement are in line with its policy intentions, reducing the risk of lenders adopting an over cautious approach due to supervisory uncertainty.
Existing borrowers could find future borrowing problematic under the new rules and the CML is concerned that the transitional arrangements, as currently drafted, are complex and may not be widely used.
The CML suggests that, instead, lenders should be able to lend with discretion on an exceptional basis to borrowers who would otherwise be trapped.
Finally, the CML reflects that the nature and scale of the changes proposed in the MMR cannot be underestimated, and suggests that 18 months rather than 12 months would be an appropriate minimum period for implementing the necessary changes once the final policy has been published.
The CML also re-emphasises the need for implementation of the MMR to reflect the outcome of the European directive, as there is otherwise a risk of contradictory requirements that could result in two sets of changes having to be implemented in quick succession.
‘After four consultation papers, the FSA has demonstrated a welcome ability to listen. It needs to continue to do so as we progress towards implementation of some very dramatic regulatory changes,’ said Paul Smee, CML director general.
‘It will be important for the FSA to continue to flex if it becomes clear that the new framework will cause too much risk aversion in a market that needs to be able to serve the whole diverse range of creditworthy customers, not just those with the most straightforward circumstances,’ he added.
The Building Societies Association said it is concerned that new rules will be too intrusive and consumer reaction to the extra information that lenders will have to collect to assess affordability.
‘The policy decisions of this government are focused on putting consumers back in control of their own finances. The proposal from the FSA to move to a fully advised mortgage market flies directly in the face of this taking consumer control in the opposite direction,’ said Paul Broadhead, head of mortgage policy at the BSA.
‘The FSA is right to ensure that vulnerable consumers always get mortgage advice. That said, to force other financially savvy consumers with previous experience to take advice, whether they want it or not, runs the real risk of detaching the applicant from both decision and process,’ he explained.
‘We understand that the move to a fully advised market is designed to solve the issue of consumer confusion. This can happen if a lender or an intermediary is not crystal clear with a mortgage applicant about whether they are receiving advice on what's right for them or just information on the product range and features available. If this is true, this issue can be addressed simply, and with no risk of unintended consequence, by tightening the disclosure requirements for lenders. This will ensure that a consumer has a clear choice on having advice or information when they first apply,’ he pointed out.
He believes that under the proposed new regime consumers will have to get used to far more intrusive questioning from lenders and lenders will need to get used to asking more probing questions and it will take adjustment on both sides.
‘Some management of consumer expectation and understanding, perhaps through the Money Advice Service would be helpful before 2013 to avoid a potential consumer backlash,’ he said.
‘Even with these significant concerns, we welcome the substantial shift made by the FSA compared to the controversial set of proposals published in 2010. The proposals on the table now are broadly sensible and in many areas are likely to deliver the intended outcomes,’ he added.
