Submission by the Council of Mortgage
PRE BUDGET REPORT
48. The Council of Mortgage Lenders (CML)
is the representative trade body for the mortgage industry in
the UK. Its 144 members comprise banks, building societies, insurance
companies and other specialist residential mortgage lenders, which
together represent around 98% of the assets of the mortgage market
49. The CML fully supports the Government's
stated aim of assisting more people to realise the dream of owning
a home. Indeed, we have worked closely with many arms of Government
in recent years to increase both the accessibility to and the
sustainability of home-ownership. We will continue to do so. There
is, however, a growing problem with regard to the environment
within which lenders seek to assist the Government's realisation
of its ambition to increase home-ownershipthe continually
increasing burden of regulatory costs faced by both home-buyers
50. Our submission does not seek to influence
decisions regarding next year's Budget. Rather, we aim to open
a longer-term debate regarding how the Government can improve
both access to and sustainability of home-ownership. In particular
we want the Government to carefully consider the impact of the
continually expanding regulatory and legislative environment within
which it requires both home-buyers and lenders to operate. If
the Government does not join up its policies and procedures and
view them in the round, there is the distinct possibility that
these ever increasing costs resulting from regulation and legislation
will seriously threaten attempts to increase home-ownership levels.
51. In summary, the main points in this
The Government's efforts to expand
home-ownership will be undermined by the continued growth of housing
and mortgage market related regulation and legislation which is
having the effect of increasing costs and reducing choices for
The Government's renewed commitment
to deregulation (and to better regulation) is not evident in the
mortgage market where regulatory costs continue to increase year
Estimating the cost of this regulatory
burden is not easy because of the limited data available. However,
it is likely to be at least £500 to £1,000 per housing
The consequence of this is that the
Government is in danger in undermining its own efforts to increase
home-ownership and develop its asset based welfare policies.
52. We would welcome an opportunity to discuss
the contents of this submission in more detail over the coming
53. The Chancellor of the Exchequer recently
set out the Government's ambition to expand home-ownership to
75% of all households. This, along with previous statements about
one million more households becoming home-owners over the next
five years has set an agenda for growth. The CML warmly welcomes
this. There is clear evidence of unmet demand and the industry
has been working with the Government to see if there are ways
of "stretching" current public assistance so that more
of those on the margins of home-ownership can be helped to realise
54. At the same time we should note that
the Government is currently intervening in key areas of the UK's
housing and mortgage markets. It is taking on issues including
housing supply, building type and location, affordability and
access to home-ownership, tenure balance and choice, the structure
of the mortgage industry, mortgage choice and pricing and the
home-buying and selling process.
55. The scale, diversity and complexity
of these interventions is particularly notable given that they
relate to markets that, in general terms, are already highly competitive
and efficient. These interventions create significant additional
costs for mortgage borrowers and lenders and threaten the Government's
ambition of extending home-ownership. If that is not problematic
enough, current taxation arrangements add to this, not least through
the Government's refusal to address the inefficiencies created
by the current structure of Stamp Duty.
56. While lenders accept that some of interventions
are at least aimed at creating a more efficient market, such an
outcome is often predicated on co-ordinated Government intervention.
At present, a wide range of departments develop policy with housing
market impacts. Sometimes this is intended but often the linkages
are not acknowledged nor even recognised.
57. The creation of a Housing Group within
HM Treasury was a welcome first step to a more integrated strategy.
However, the CML would like to see this taken further by better
cross-Whitehall co-ordination. Mortgage lenders must deal with
interventions from not only HM Treasury but also the ODPM, DTI,
FSA, OFT, DEFRA, DCA, Home Office, DWP, devolved administrations
and the European Union. To reflect the diverse nature of the Government's
intervention in the housing and mortgage markets the CML would
like to see the development of a ministerial "housing"
committee. Such a committee could include amongst its terms of
reference liaison with the industry to ensure initiatives across
Government are co-ordinated and that potential public/private
partnership solutions are properly investigated.
58. Our main concerns, however, are the
regulatory cost burden now falling on borrowers and lenders. These
derive not just from formal regulation, eg, the Mortgage Conduct
of Business rules introduced in October 2004, but also from a
wide array of policies and procedures (some of which simply act
to restrict the market and thus deny borrowers a full range of
competitive products). We briefly list some examples below:
(a) In May 2003 the FSA published a cost-benefit
analysis that concluded that the one-off costs of the introduction
of the new regulated mortgage regime would be £136 million,
of which £83 million would fall directly to lenders with
an annual operating cost of £27.8 million. Our own estimates,
undertaken as our members felt the FSA had underestimated, suggest
that the one-off transition costs incurred by lenders were in
fact nearer £181 million and applying the same factor, one
might suggest an annual operating cost of around £60 million.
It is not clear whether there have been real benefits to consumers
and the length of mortgage interviews has increased, on average,
by around 30 minutes.
(b) Basel 2 and the EU Capital Requirements
Directive will impose huge new costs on the industry in terms
of new risk management systems and approaches. It may also usher
in a new era of risk based pricing. Some consumers may benefit
directly but the main thrust of the regime is towards better risk
management and safer financial systems. The cost of Basel implementation
in the UK is estimated at around £600 million.
(c) The introduction of home-buying and selling
reform across the UK will put pressure on lenders to amend their
underwriting process to account for the availability of pre sales
survey and legal information. In England and Wales the ODPM is
in the process of implementing Home Information Packs. These will
include a Home Condition Report that the Government would like
to see lenders utilise in underwriting. If lenders are to do this
they will face significant costs in amending their systems, as
well as the difficulties of assessing whether or not the new system
provides reliable, insured and transparent information for them
to use. The same applies to the development of the Single Survey
in Scotland. In Northern Ireland there is no intention of introducing
pre sales disclosure of survey and legal information. Differing
national solutions create their own set of problems. If lenders
amend their systems to cope with pre sales disclosure in England,
Wales and Scotland but need to maintain the current underwriting
system for the 2% of transactions that take place in Northern
Ireland they will face significant costs in maintaining two separate
systems. In terms of costs and taking 2004 as a measure there
were 1.79 million transactions in the year. If packs cost sellers
around £1,000 to produce the cost will be £1.79 billion
minus the cost no longer borne by buyers in terms of commissioned
surveys and legal documentation. There are also the costs to lenders
and others for bringing a complex new system into being and its
operating cost going forward. It is difficult to put any precise
cost on the new regime but a figure of additional costs of at
least £600 million a year would seem reasonable (plus a set-up
cost of perhaps £40 million). These will be borne by the
"system" (initially sellers and lendersthe question
then is how much is passed on to buyers) and we must ask if this
will be matched by benefits in terms of speedier and better informed
(d) The Government's low cost home-ownership
programme provides a number of examples of regulatory impacts
upon market price and choice. First, the number of lenders prepared
to offer mortgages to potential purchasers under these schemes
is small, as is the range of products on offer. This is because
the market is small, complicated to administer and the performance
of some housing associations has been poor. Second, lending to
Right to Buy purchasers is restricted to a Government-defined
list of lenders. This has not been regularly updated despite massive
changes in the industry and frequent requests. This has the effect
of limiting the product choice available to buyers. Third, despite
frequent representations to Government the constraints imposed
on lenders with respect to those who can buy a property on an
exceptions site under section 106 are such that lenders are now
withdrawing from this market.
(e) The new requirements in England, Wales
and Scotland regarding the licensing of landlords will impose
costs on lenders and will adversely affect the growth of the private
rented sector. In Scotland all private rented sector properties
will have to be registered and lenders will have (in their own
interests) to make sure that all new borrowers have applied to
register and, later, that such registration has been successful.
Existing borrowers will need to be reminded of the requirement.
In England and Wales, HMO licensing, will be introduced in all
areas, with additional licensing and selective licensing to be
introduced in some areas. Again, lenders will have to ensure that
borrowers are aware of and compliant with the requirements. No
estimate of this cost has been made; however, there are clearly
costs associated with making extra checks and supplying additional
information to borrowers.
(f) In addition to facing implementation
costs associated with mortgage regulation, our members also fund
the work of the FSA via levies and other charges. While not specifically
focused on mortgage lenders, the FSA did cost the financial services
industry £240.5 million during 2004-05.
(g) The Financial Ombudsman Service came
into being on 30 November 2001 as a result of the Financial Services
and Markets Act (2000). It cost the financial services industry
£45.5 million in 2004-05.
(h) The EU Mortgage Green Paper is seen as
a key vehicle for driving forward the EU agenda on creating an
integrated financial services sector. However, the cost-benefit
assessment that accompanies the Green Paper, undertaken by London
Economics, makes uncomfortable reading for residential mortgage
lenders in the UK (Heywood, 2005). While we have some concerns
regarding how London Economics calculate the costs of harmonising
the EU mortgage market, the estimated one-off implementation costs
are £450 million and ongoing costs are £465 million.
This is likely to be a significant underestimate. Moreover, there
is real potential for such a regime, if introduced, to completely
cross cut the newly introduced UK regulatory framework. As is
evident, we face an absence of joined-up thinking at all levels
of Government and massive regulatory cost burdens.
59. The UK mortgage lending industry is
facing a large number of Government-related and inspired changes
to its operating environment. This submission has highlighted
only some of them. All have strategic and operational consequences
that ultimately bear down on the shape and structure of the mortgage
market and the costs and choices faced by borrowers. Indeed, in
a recent report on UK mortgage lenders Moody's Investor Services
"We believe the complexity of
regulation may have two effects. Firstly, it may begin to restrict
the flexibility and timelines of price adjustments; secondly,
the cost of complying with the raft of regulatory requirements
itself may become an increasingly onerous burden, particularly
for smaller mortgage lenders."
60. An accurate assessment of the cost of
setting up and operating new regulatory structures is difficult.
Somewhat speculatively we have estimated new regulatory set up
costs of at least £1.2 billion and an annual cost of new
regulatory requirements now and going forward of between £600
million and £1.1 billion per annum This suggests regulatory
costs are adding between £500 and £1,000 to each new
housing market transaction.
61. The Government has set out its ambition
both to expand home-ownership and to cut regulation. In this submission
we have sought to link these two agendas. The Government's efforts
to promote home-ownership are currently being undermined by a
range of policies and procedures which have the effect of increasing
costs for both sellers and buyers and reducing the range of products
potential borrowers might be able to choose from (thus lowering
their costs). For buyers at the margins, and this is where Government
is focussing its efforts, the extra costs, reduced choice and
other constraints are of vital importance.
62. A recent DTI report Public Policy:
Using Market-Based ApproachesLessons and Guidance for Policy
Makers (DTI, 2005) is instructive here. What the report highlights
is the potential for market-based mechanisms to be used to deal
with market failure rather than public policy interventions in
the form of direct provision or regulation. The report suggests
that it is possible to create outcomes where costs are lower and
services better. It is our view that the ODPM and HM Treasury
should more evidently embrace this stance.
63. The Government's renewed interest in
deregulation is welcome here, as is its work to develop the same
debate within Europe. However, at the UK level it has co-incided
with having introduced new regulatory regimes for both the mortgage
and insurance markets, the consumer benefits of which have yet
to be established, a planned new consumer credit bill and much
else. In reality, the mortgage industry's regulatory burdens are
increasing apace and there is simply no sign of deregulation.
The FSA begins a review of the effectiveness of MCOB later this
year and it is the CML's hope that this will provide some hard
facts on the costs and benefits of the new regime and open the
way to reducing the costs of the new system. Many of these regulatory
requirements have been put in place to benefit the consumer but
there is no evidence to date to suggest this has been borne out
64. Within two years, home buying consumers
will probably be experiencing the Government's new home-buying
and selling regime. Again, there are very divergent views as to
whether the increased information derived from this will result
in a more satisfactory sales process. Certainly, the empirical
information derived from the Government's own pilot study was
far from convincing.
65. Both point to the continuing appetite
for direct regulation rather than the use of market forces and
incentives and to a serious question mark about the Government's
real commitment to de-regulation or even better regulation. Perhaps
most damagingly, the continuing regulatory drive also threatens
to undermine the commitment to extend opportunity and choice by
helping more lower income households into home-ownership as a
central pillar to an asset owning democracy.
66. While we can all applaud the Government's
achievements in securing low and stable interest rates and a strong
labour market, as well as its commitment to expanding home-ownership,
we cannot overlook a track record of increasingly significant
regulatory costs that bear down on home-buyers and lenders. The
Government must tackle the issue of how, on the one hand, its
regulatory and legislative requirements increase the cost of accessing
and maintaining home-ownership while, on the other, its stated
aim is to create an environment within which owner-occupation
levels can increase significantly. Hard questions need to be asked
and answered. What are the benefits of existing regulatory regimes
versus their cost? Are there market based solutions that hold
out the possibility of better services at lower cost without regulation?
Does fiscal policy, such as stamp duty, create inefficiencies
in the housing market and discourage potential home-owners? Does
the state safety net consider home-owners and tenants equally?
67. In recent weeks the Government has been
strident in its calls for less and better regulation in both the
UK and the EU. The Chancellor has recently raised the question
of EU regulatory activity posing a threat to global competitiveness
(HM Treasury, 2005). We concur with this but bringing it closer
to home it also threatens domestic ambitions to grow home-ownership.
This is a debate the Government must now embrace and with a willingness
to consider radical change to some of its regulatory ambitions.
Without this, the threats to home-ownership and to the growth
of an asset rich society remain considerable.
Better Regulation Executive (2005), A Bill for Better
Regulation: Consultation Document, Cabinet Office, London.
Department of Trade and Industry (2005), Public Policy:
Using Market-Based Approaches, Lessons and Guidance for Policy
Makers, DTI, London.
Heywood, A ( 2005), Mortgage Credit in the EU: the
case for integration is not proven, Housing Finance, Issue 12/2005,
HM Treasury (2005) Statement by the Rt Hon Gordon
Brown MP, Chancellor of the Exchequer, to the European Parliament's
Committee on Economic and Monetary Affairs, HM Treasury, London.
Moody's Investor Services (2005), UK Mortgage Lenders,
Global Credit Research, Moody's, London.