Published: 5 October 2011 | Author: Bernard Clarke
In this article, the CML’s head of external affairs, Sue Anderson, reflects on what may appear in the next version of mortgage market review, expected soon from the FSA, and on relationships between lenders, borrowers and intermediaries. A fuller version of this article has been published by Moneyfacts
Writing this towards the end of September, the wait is hopefully nearly over for the FSA’s next consultation package on the mortgage market review: MMR plan A-plus, if you like.
In the long period since the publication of the original set of proposals, so much has changed. Leaving aside our specific concerns about the likely market impacts of the previous set of proposals, there is now an even bigger context for the FSA to consider.
The global economy has sunk into dangerously gloomy territory, the wider regulatory debate has moved on, and with another crisis of confidence in financial markets a very real possibility, the mood music is even more downbeat than when the MMR proposals were originally published. This alone throws into sharp relief the difficulties of designing "regulation for all seasons". Difficult enough at a macro-prudential level, it is nigh on impossible the more detailed and prescriptive you try to become on conduct of business issues.
Consumer risks and responsibilities
What, then, should we be hoping for or expecting from the revised consultation package due this autumn from the FSA? From a CML perspective, we will be able to welcome regulatory reform if it is proportionate and appropriate in terms of balancing costs and benefits, and targets the real risks that consumers and lenders face, rather than notional ones that show scant evidence of causing detriment in practice.
Our ideal regulation system would perhaps go further in some respects than the regulator will. While there is an increasing regulatory reticence to articulate what is meant by consumer responsibility, and what actions it should imply in practice, a perfect regime might make the consumer’s responsibilities rather more explicit.
While there is plenty in place to inform the consumer about the characteristics of what they are buying, and the risks intrinsic in it, there is less regulatory appetite in evidence for the consumers to have their own "conduct of business" rules. Too frequently we are told by our members about cases, particularly on arrears, where all may not be quite as it seems. We do hear of cases where there appears to be a cat-and-mouse situation at the expense of the lender, where the necessary presumption in favour of the borrower can on occasions seem perverse – although all lenders would recognise that this is the necessary price to be paid for proper protection for borrowers in general.
We are also uncomfortable with the rise of claims management companies, with the potential for exploitation through encouraging give-it-a-go complainants, whether successful or not, to seek a cost-free windfall at the expense of lenders or intermediaries who may have done nothing wrong. Given the information and resource imbalance between firms and customers, perhaps it is inevitable, even when customers’ behaviour is questionable, that the onus of responsibility remains with the firm. But this is a regulatory debate that never really seems to happen in the light of day.
Communicating with consumers
Good practice, when it comes to relationships with consumers, ought to be based on two-way communication, irrespective of whether it is the lender or the intermediary that we are talking about. How can we hope to improve trust and relationships in a world where communication that is designed to be helpful is viewed with suspicion?
In this context, it was very interesting last month to see the media coverage and the responses to the news that UK Asset Resolution (UKAR) was pro-actively contacting those borrowers whose profile suggested a potential vulnerability to arrears should some tipping point in their circumstances arise. Within the CML, we have been discussing for some time the position of susceptible customers in the context of the potential for interest rates to rise – whether imminently or in the distant future. Again, this raises thorny issues.
To put paid to one myth, no lender is using "secret credit checks", as one newspaper suggested, to identify susceptible customers. Nothing they are doing leaves a footprint and all necessary consents have been obtained. Indeed, we found it ironic that while the lending code (for unsecured lending) actually requires lenders to contact customers they believe may be at risk to offer and signpost sources of help and advice, this appeared to be seen as controversial when a mortgage lender – whose debt is a higher priority where non-payment may have far more serious consequences for the borrower – did exactly the same thing.
So at the moment, there seems to be an element of ambiguity about what is seen as optimum when it comes to the relationship between lenders and their borrowers. It is also self-evident that the nature of that relationship isn’t made any easier by the fact that in many cases the consumer will have not a linear relationship with their lender, but a triangular one involving their broker/financial adviser, too.
Lenders, borrowers and intermediaries
This can be, and of course often is, extremely good for both the consumer and the lender, as well as the intermediary. It brings the benefit of advice before purchase to many who otherwise would not have it, while contributing to consumer choice and, hopefully, consumer understanding. But it can also cause a certain amount of hand-wringing – friction, even – about how both intermediaries and lenders believe their customers see their relationship, given that the customer is a customer of both. For some customers, the relationship with the intermediary may be a short-term point-of-sale one with little or no ongoing contact; for others, the relationship with the intermediary may be a far more embedded and long-term relationship than the one they may feel for a succession of lenders as they undertake serial remortgages.
For lenders, there is an element of damned-if-you-do and damned-if-you-don’t about seeking to build or nurture long-term relationships with their mortgage customers. For an intermediary, it is obvious that at the end of any period of special mortgage deal a review of the customer’s circumstances should involve examining which product from the whole of the market will best meet their customer’s needs. For a lender, it is obvious that nurturing a long-term relationship with customers built on more than simply prevailing rate or product characteristics is an intrinsically valid and sensible approach too. Reconciling the two approaches is a challenge, but not an insurmountable one. A perfect regulatory framework would encourage both.
In the past, when lenders and intermediaries had tiffs about customer relationships it was usually predicated on the assumption that those customers had a world of mortgage choices open to them. They were value-generating customers, not just valued ones. That, of course, is now a much more mixed picture. While some borrowers – with good credit records and significant equity – continue to benefit from a great deal of choice, others may no longer be as attractive a proposition for either lenders or intermediaries as far as generating income is concerned.
Addressing consumer needs
In this situation, a good intermediary with a long-term client relationship may well effectively be working pro bono, where it is help and advice that the client needs rather than any new financial product. While in no way doubting the motivation of good intermediaries to offer such good client service, this is a big ask in a market where revenue generation may be difficult enough as it is. The lender, meanwhile, as the product provider, has both a duty and an incentive to nurture their customer through bad times as well as good, and it certainly helps if lenders can do this from a position of trust from their customers – a commodity sadly lacking in financial services.
Whether or not other lenders follow UKAR’s approach, the fact is that consumer responsibility isn’t a non-issue for either lenders or intermediaries. Customer relationships are vital to both lenders and intermediaries, irrespective of who arranged the mortgage in the first place. Treating Customers Fairly matters greatly, and of course there have been too many examples of cases where financial services providers have fallen short. Nevertheless, in the CML’s fantasy world of perfect regulation, consumer responsibility would be higher on the agenda than seems likely even under the new-and-improved version of the mortgage market review. In its absence, it is more important than ever that lenders and intermediaries work together to ensure that both are able to nurture the right kind of ongoing relationship with their mutual customers, and one in which consumer responsibility is promoted.