Memorandum by the Council of Mortgage
1. The Council of Mortgage Lenders (CML) is
the representative trade association for mortgage lenders in the
UK. Its 118 members hold 98 per cent. of the assets of the residential
mortgage market and comprise banks, building societies, insurance
companies and other specialist mortgage lenders. The CML welcomes
this opportunity to comment on the Joint Committee's inquiry into
the Financial Services and Markets Bill, particularly with reference
to the position of mortgage advice and the scope of the new regime.
2. The main points in this submission are as
The industry believes the regulatory
framework for selling mortgages must deliver sufficient consumer
protection in an effective and cost effective way. The Mortgage
Code provides such a framework and it is a secondary issue whether
regulation should be on a voluntary or statutory basis in the
The decision whether to incorporate
mortgage advice within the scope of the Bill should be undertaken
after an analysis of the perceived additional benefits to consumers
of a statutory approach, balanced against the potential cost implications.
This analysis will be undertaken during the Treasury review later
The reserve power in Schedule 2 of
the Bill does not refer to "mortgage advice", but rather
to "loans secured on land". The Treasury review and
the analysis of costs/benefits should not, therefore, be limited
to consideration of whether mortgage advice should be included
within the scope of the Financial Services Authority. It should
encompass other secured loans currently regulated under the Consumer
Credit Act 1974 and the role of the Office of Fair Trading as
the present licensing authority.
In terms of consumer protection,
there would be no logic in adopting an artificial distinction
under the Bill between different types of loans secured on land
based on the limit of £25,000 in the Consumer Credit Act
1974. A distinction could be drawn, if thought necessary after
a cost/benefit analysis, between the regulation of secured loans
on the basis of the Code framework under the Bill, and regulation
of unsecured loans under the Consumer Credit Act 1974.
The CML is disappointed that the
Government has decided, as announced in its recent Progress Report
on the Bill, to remove the option of giving power to the FSA to
endorse voluntary Codes. This would have been a way to ensure
that the FSA could influence future developments on mortgage market
regulation, and would have underpinned the activity of the independent
mortgage regulators, the Independent Review Body for the Banking
and Mortgage Codes and the Mortgage Code Register of Intermediaries
Limited, without the FSA needing to become the statutory regulator.
The CML believes that the Mortgage
Code has already introduced demonstrable benefits for consumers
taking out mortgages in the UK since July 1997:
improved consumer awareness of benchmark
standards across the industry;
registering all mortgage intermediaries
active in the market for the first time;
an advice and written recommendation
service across the market for the first time;
more transparent product information
on the financial implications of taking out a mortgage;
independently verified training
and competence arrangements specifically designed for mortgage
free, independent redress arrangements
for customers with a mortgage complaint, with universal coverage
for the first time;
enhanced compliance monitoring regimes
by the independent regulators, the MCRI and the IRB, including
prompt responses to compliance concerns raised by recent mystery
shopper exercises on the Code.
3. The CML provided two detailed submissions
to the Treasury Committee on developments in relation to the Code
in 1998. In response to the Treasury Committee's Third Report
on Financial Services Regulation, the CML has reiterated its support
for the Treasury's approach to reviewing the Code in 1999.
4. The CML and members have consistently reinforced
their support for a regulatory framework for selling mortgages
which delivers appropriate consumer protection. In the industry's
view, a voluntary code can achieve this in both an effective and
cost effective way. The decision whether the Code framework should
be on a voluntary or statutory basis in the longer term is a secondary
issue. The case for statutory intervention has not been proven,
in the light of the tangible benefits which the Code framework
has already introduced. A decision to introduce statutory regulation
by the FSA should only be undertaken after an appropriate cost/benefit
analysis as part of the proposed Treasury review.
5. Moreover, the reserve power in the Financial
Services and Markets Bill refers to the FSA potentially being
asked to regulate the sale of "loans secured on lending"
i.e., it is not limited to first mortgages under the Mortgage
Code. The CML therefore believes that the Treasury review and
the cost/benefit analysis should encompass all relevant loans
that might come within the scope of the Billmortgages and
other secured loans currently regulated under the Consumer Credit
Act 1974. It should cover the role of the Office of Fair Trading
as the present licensing authority for secured loans below £25,000.
6. If the objective is to ensure delivery of
sufficient consumer protection to borrowers who might potentially
suffer detriment through taking out a loan secured on land, the
CML suggests that no logical distinction can be drawn between
mortgages outside the scope of the Consumer Credit Act, as they
are above £25,000, and those which are within the scope of
that legislation because they are below £25,000. There would
seem to be little logic in the FSA regulating a loan for £25,001
and the OFT licensing regime applying to a loan for £24,999.
A distinction could be drawn, if thought necessary after a cost/benefit
analysis, between the regulation of all secured loans on the basis
of the Code framework under the Bill, and regulation of unsecured
loans under the Consumer Credit Act 1974.
FSA ENDORSEMENT OF
7. The CML is disappointed that the Government
has decided, as announced in its recent Progress Report on the
Bill, to remove the option of giving power to the FSA to endorse
voluntary Codes under Section 47A of the Financial Services Act
1986. By endorsing the Mortgage Code, this would have been a way
to ensure that the FSA could influence future developments on
mortgage market regulation, and would have underpinned the activity
of the IRB and MCRI, without the FSA needing to become the statutory
8. In other areas, flexible solutions are being
considered, for example the use of local trading standards authorities
to assist the FSA in its monitoring work. There is a case for
the FSA to be given the power to endorse appropriate codes, and
for the recent decision to remove the power from the Bill to be
9. The CML believes that the Code has already
introduced demonstrable benefits for consumers taking out mortgages
in the UK. Firstly, awareness among consumers of the benchmark
standards which they should expect to receive from lenders and
mortgage intermediaries has increased since the Code was first
introduced in July 1997. This is not surprising as over three
million copies of the Code, and an additional three million copies
of the CML's Code leaflet for consumers, have been disseminated.
10. The CML has announced that from the end
of April 1999 a copy of the leaflet describing the key principles
of the Code should be given out by lenders and mortgage intermediaries
at the first point of contact with consumers. 12 million copies
of the Plain English Campaign crystal-marked leaflet You and
your mortgage have been produced for the industry's use. Over
time, this should continue to add to consumers' awareness and
enable prospective borrowers to raise any queries about the mortgage
before they have committed themselves.
11. The Code framework has for the first time
identified every mortgage intermediary in the market, through
a registration process operated by the Mortgage Code Register
of Intermediaries Limited. From its launch in April 1998, the
number of MCRI registered intermediaries has increased steadily
over the last 12 months so that there are now 47,000 individuals
(41,000 April 1998) represented in 20,500 firms (16,000 in April
1998). Lenders have committed not to accept mortgage business
from non-registered intermediaries.
12. The Code has caused all lenders and intermediaries
to review their literature to provide information about the key
issues of concern to consumers, including the financial implications
of taking out a loan. From the end of April, lenders are also
required to make explicit reference to the Code in their product
literature to set out the levels of service available to consumers
under the Code i.e., advice, information or execution only.
13. The CML has introduced a new statistical
return completed by subscribers from which it is clear that the
vast majority of lenders who subscribe to the Code offer an advice
service and take up of advice through lenders direct is over 40
per cent of their new business in 1998. This advice figure is
in addition to advice which would be given by intermediaries,
who typically represent around half of new business introductions.
Therefore, since the Code was introduced, there has been a significant
take up of the advice service by consumers.
14. In advance of launching the Code, in conjunction
with the Chartered Institute of Bankers, the CML and lenders promoted
the introduction of a targeted mortgage advice qualification,
the Certificate for Mortgage Advice and Practice (CeMAP). Already
over 10,000 registrations have been received by the CIB for this
qualification. Recently, the CML, the IRB and the MCRI have indicated
that they would be consulting on whether it should become a mandatory
requirement under the Code to successfully complete an appropriate
training qualification. This consultation exercise is due to take
place later this year.
15. The CML has also introduced, with the assistance
of the Chartered Institute of Arbitrators, a new Mortgage Code
Arbitration Scheme for use by lenders not within the current Ombudsman
arrangements, and mortgage intermediaries registered with MCRI.
The introduction of this Scheme was recognised in the Government's
first annual report as a measure helping to deliver on its manifesto
commitment to increase consumer protection for mortgage buyers.
16. As a result of this new scheme, any individual
who has a complaint about a mortgage has a free, independent redress
scheme available. Once the Financial Services Ombudsman Scheme
arrangements are in place, the CML would wish to investigate the
possibility of all mortgage complaints being dealt with by the
Financial Services Ombudsman in the future. This would ensure
a single point of entry for consumers with a complaint about a
mortgage or related financial service, without necessarily requiring
the sale of mortgages to be regulated by the FSA.
17. The CML has also liaised closely with the
IRB and MCRI, the independent regulators, on plans to strengthen
their compliance monitoring arrangements and enhance their funding
under the Code in 1999. This has already led to a number of initiatives,
including an MCRI report being published on potential concerns
in the area of "accelerator" products sold with a mortgage.
18. Later this year, the IRB and MCRI will be
undertaking their own mystery shopper exercises, the results of
which should be known by the time of the Treasury review. This
is in addition to planned compliance visits to lenders and mortgage
intermediaries, and builds upon the compliance regime which has
been in place for lenders since the Code came into effect in July
19. The CML remains of the view that the objective
should be to deliver a regulatory framework which is effective,
cost effective and delivers robust and appropriate consumer protection.
It believes that through the progress to date it has already demonstrated
improvements in consumer protection. If the Treasury review concludes,
after an appropriate cost/benefit analysis, that the sale of mortgages
and other loans secured on land should be regulated by the Financial
Services Authority, the CML believes that the regulatory framework
which has been put in place under the Code should be adopted.
20. To seek to re-write the current regulatory
framework would be costly, time consuming and, ultimately, would
not add significantly to the consumer protection in place under
the voluntary Code.
31 March 1999