Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Written Evidence


Submission by the Council of Mortgage Lenders



  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-ownership—the continually increasing burden of regulatory costs faced by both home-buyers and lenders.

  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 submission are:

    —  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 home-buyers.

    —  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 on 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 market transaction.

    —  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 months.


  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 their dreams.

  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 lenders—the 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 property purchase.

    (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 commented that:

        "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 Approaches—Lessons 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 in practice.

  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, CML, London.

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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 20 March 2006