Memorandum submitted by the Council of
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
The main issues which we would invite the Committee
to reflect on in preparing its questions to the FSA are set out
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
Preparation for the implementation of
Basle 2 (Capital Adequacy Directive).
Preparation for the introduction of Sellers'
Changes to the Land Registration rules.
Changes to the International Accounting
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
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