Select Committee on Treasury Written Evidence

Memorandum submitted by the Council of Mortgage Lenders

  The Council of Mortgage Lenders (CML) is the representative trade association for the mortgage industry. Our 146 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.

  We welcome this opportunity to submit a written Memorandum in advance of the oral evidence session from the Chairman and Chief Executive of the Financial Services Authority on Tuesday 8 November, and attach for information two recent publications:

    —  An article entitled Mortgage regulation . . . one year on which offers some thoughts on the regulatory regime which came into effect on 31 October 2004 and looks at the key issues facing the industry over the next 12 months.

    —  Our Pre-Budget Submission which invites the Government to consider how increasing regulation and legislation impacts on the environment in which home-buyers and lenders operate.

  The main issues which we would invite the Committee to reflect on in preparing its questions to the FSA are set out below.

    —  Throughout the lengthy consultation process which led up to the introduction of statutory mortgage regulation in the UK we emphasised that the process needed to be seen in the wider context of all the regulatory and statutory requirements and initiatives affecting lenders, from within the UK and also from Europe. These include:

—  Implementation of the Insurance Conduct of Business rules (ICOB).

—  Changes to the Consumer Credit Act 1974.

—  Implementation of the Distance Marketing Directive.

—  Preparation for the implementation of Basle 2 (Capital Adequacy Directive).

—  Preparation for the introduction of Sellers' Information Packs.

—  Changes to the Land Registration rules.

—  Changes to the International Accounting Standards.

  The cumulative effect, particularly on smaller lenders, is very significant and will ultimately be borne by consumers.

    —  We note that the FSA has expressed a desire to move away from rules-based regulation to a more principles-based approach. We think it is by no means a given fact that this will have general industry support: although rules take time and resources to put in place, they do afford a degree of certainty and objectivity, which is more difficult to achieve if a regulator is making judgements based on more loosely-expressed principles. A principles-based approach also implies a more "hands-off" regulatory role, which allows firms greater freedom to interpret the principles as they see fit. This may sit uncomfortably with a regime designed to protect consumers and promote their confidence.

    —  The operational transition from the voluntary Mortgage Code to the FSA's Mortgages: Conduct of Business (MCOB) rules was achieved with no major adverse impacts on business levels or market structure.

    —  Although firms made strenuous efforts to implement the new regime, early FSA research revealed weaknesses and there is clearly more to do. We welcome the pragmatic approach adopted so far by the FSA but fully recognise that firmer action will be taken if firms' failure to comply persists.

    —  Costs have significantly exceeded estimates. In May 2003 the FSA estimated that start-up costs would be £83 million for lenders with annual costs of £68 million. We surveyed members shortly before regulation became effective, and believe the start-up costs to have been nearer £180 million. We are not seeking to criticise the methodology which produced the original estimate but we do ask the FSA to recognise the costs which have been incurred and urge them not to consider early changes if these would increase expenditure further.

    —  We support the proposed regulation of home reversion schemes, which are outside the scope of the current regime because they do not fit the legal definition of "regulated mortgage contract". We believe such schemes should be regulated on the same basis as lifetime mortgages and look forward to working with the FSA to achieve this.

    —  We are aware that the FSA intends to conduct a thorough review of the effectiveness of the new regime and look forward to contributing to this. The regulatory system was designed with consumers' interests at the forefront and it is clearly very important that the FSA and the industry should be confident that the new procedures and documentation are achieving the desired benefits. This review will provide an excellent opportunity for the FSA to remind the industry what the new regime was designed to achieve, whether things have worked out as intended and, if not, what action the FSA intends to take.

2 November 2005

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