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Mr. Paul Flynn (Newport, West): Does my hon. Friend agree that many of the practices discovered in Suffolk are common throughout the country and reflected in almost every independent examination of the industry? Because endowment mortgages are now discredited, they are disguised as flexible mortgages, and many so-called independent brokers are anything but independent. The situation that my hon. Friend describes is a scandal in the making that could be of epic proportions and equivalent to the pension scandals of the 1980s.
Mr. Blizzard: My hon. Friend is right. That scandal in the making has been in evidence for some time and is not confined to Suffolk. Indeed, Suffolk is a relatively law-abiding county with some of the lowest crime rates in the country. Sharp practice and failure to observe the code is certainly not confined to Suffolk. The picture revealed by the mystery shopping exercise is replicated around the country.
The Consumers Association has also carried out a mystery shopping exercise and reported it in Which? in October. It, too, found evidence of widespread endowment mis-selling and non-compliance with the code. I have also come across another report from Market Audit Research, published last month. That contains the results of its mystery shopping exercise for 61 mortgage lenders. I tried to find out from the report which lenders
failed to comply with the code, but it was easier to find those who were code compliant--only three, according to that report. For example, 91 per cent. failed to inform the consumer of the service levels offered at the outset. Some 54 per cent. did not include mandatory information when providing quotations or illustrations. Some 60 per cent. did not comply when quoting future repayment amounts at standard variable rates outside the initial, incentivised period. The report concluded that, in certain sections, the code of practice appeared to have been written for the convenience of lenders rather than the assistance and protection of consumers. It did not believe that lenders were complying with the spirit of the code. If a voluntary code is to work, those operating under it must comply with its spirit.
Another practice, called bundling, also causes concern. It is the practice of tying home insurance policies to the mortgage product. Allegations of such practices come from competitors, but I have personal experience of taking out such an insurance policy and then finding that it is more expensive than those available on the open market. Many people walk into the trap. Although the code prohibits it, it is still happening.
A report in The Sunday Times on 7 March was headlined:
Ms Margaret Moran (Luton, South):
The selling of endowments is undoubtedly a national scandal with serious implications because home owners rely on a lump sum payment at the end of their mortgage to repay it. If that is not available, home owners could face repossession of their homes. Incentives and fees for brokers have encouraged them, to put it politely, to direct home owners towards a type of mortgage that may be damaging to their future housing prospects and may even lead to homelessness.
Mr. Blizzard:
My hon. Friend is right. At one time, many people were sold optimistic endowments with monthly payments that anybody advising them should have realised were never likely to generate the amount required when the debt needed to be repaid.
Out of all the evidence, there emerge two main areas of concern. The first is to do with endowment mis-selling. That is now covered by the Financial Services Authority, but it is still clearly going on. I hope that, when my hon. Friend replies, she will say something about what plans there might be to ensure that the FSA considers compliance there.
There is evidence that the code is not working in practice. It has some weaknesses. First, there is nothing to define the competence of an individual broker. Anyone with a consumer credit licence and £95 can register. There is no entry test or qualification, and there is still no mandatory qualification once someone is registered.
The value of registration of the broker depends upon the lender. Lenders have said that they will deal only with registered brokers, but I think that that is questionable, and so do Suffolk county council's trading standards officers, because they found 10 members who made no checks at all.
Market audit research found that most lenders were not following the code. There is also the question of whether all lenders are, or future lenders will be, members of the Council of Mortgage Lenders. It is more and more likely that foreign banks and lenders, particularly in the European dimension, may be providing the money for mortgages. So there are all kinds of questions there.
There is also the question of compliance and monitoring. I have not been able to find out how many people the Mortgage Code Register of Intermediaries has working on compliance and monitoring. I suspect that it is not many. I am not sure what it can do given its resources based on the registration fees about which I have spoken. In addition, it has no local knowledge. It relies on a centralised service.
There are huge question marks over compliance. In December, the MCRI, in its publication, said:
It can be argued that these are early days. To be fair to the MCRI, it was a big job to take us out of a completely unregulated situation, and it has made progress. One could argue that, over time, compliance will develop and improve. On the other hand, one could also say that, as time passes, it is equally likely that some brokers will find more and more ways to sidestep the code as they become used to it.
We then come to the question of sanctions. I asked whether the fines under the voluntary code were enforceable. I asked whether the MCRI would expel large firms on which it depends for income, and what would happen to someone who is deregistered. Will they just continue working--often they can--or could they re-register in another capacity?
What is really alarming about the evidence is the scale of non-compliance in terms of the number of firms and individuals involved and the number of points on which each is not complying. It is not surprising that the National Consumer Council recommends that the regulation of the mortgage business come under the FSA.
Furthermore, the Treasury Select Committee, when it reported, also came out in favour of regulation by the FSA. From following the discussions of the joint committee on the Financial Services and Markets Bill, it appears to me that it is heading in that direction.
It is difficult to see why mortgages should be kept separate from other key parts of the home-buying package, such as endowment PEPs--now ISAs, I think--
and so on. Why should we think that the voluntary code will work with mortgage selling when it is now widely accepted that such a code could not be trusted to work with the selling of other financial products and services?
It is not just that similar people are involved. I am not suggesting that all mortgage brokers or financial advisers are at fault; my personal experience of them has been good. Rather, it is that a similar process is involved, in which many customers are unclear, unsure and confused about what they are buying and getting. On the other side, we have the broker or adviser who stands to make various gains depending on the customer's choice or the products sold to him. The test for the broker at each stage of the process must be to ask himself or herself, "Am I acting in the best interests of the customer?" We need to have a system that ensures that the answer is always yes. Statutory regulation focuses minds far better than a voluntary code and, moreover, for longer. My concern is that, over time, a voluntary code would relax.
There is also a question about the European dimension. Can a voluntary code operate in isolation from Europe? I do not know, but we must have in place a system that can link in with Europe.
"Salesmen admit to dirty tricks on endowments".
It said:
"Former staff at several of Britain's leading insurers . . . have revealed how they were trained to 'frighten' clients into buying endowment mortgages with a variety of slick sales tricks.
Whoever sold the most would win a day at the races or a champagne dinner.
One of the salesmen . . . said: 'On my first day of training I was told, "If you are not frightening your clients you are not doing your job."'"
"All agreed that it would not be economic for MCRI to endeavour to check all of its 19,000"--
now 20,000--
"registered firms every three or four years and accepted that compliance activity should be focused on areas and firms where the potential risk appeared highest."
There was a suggestion that some of the larger firms had compliance methodologies that could be applied--but again, who decides whether those firms are complying? As I have said, many of them do not comply.
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