Michael Coogan - Council of Mortgage Lenders

Question: What is "mortgage day"?

 

Michael Coogan: "Mortgage day" is the name that has been given to the date when regulation becomes the responsibility of the Financial Services Authority which is taking over from the voluntary Mortgage Code Compliance Board. Since 1997, the Mortgage Code has been the basis of the regulatory structure but from the end of October, on "mortgage day", the FSA will take over and from that time it will be statutory scheme.

 

Question: Can you explain the new mortgage regime coming into place?

 

Michael Coogan: The importantpoint about the new regulatory structure is that it is designed to deliver an appropriate level of consumer protection to ensure that people who take out long-term products, such as mortgages, understand what they are buying, have appropriate protection while they remain mortgage customers and that the lenders have rules on how they undertake their conduct of business which matches what all the existing terms of a prudential approach to their business. So what we have is a mortgage regime which will cover all mortgage lenders, banks, building societies and others.

 

It will cover mortgage intermediaries who sell mortgages to people on behalf of lenders and it will cover everything from the initial advertising of a mortgage in the newspaper or in branches on the high street, through to how you deal with the process in an interview.  What people will get is a standard disclosure document called a Key Facts Illustration, or KFI, which will be given to you before you make a final decision on which product to buy, which application to make to which lender and that will then be confirmed, so there are no surprises in what you are buying, how much it will cost or the implications of the product.

 

It also sets down in a statutory form how you handle arrears cases and how you deal with possession, etc. So it is a revolutionary  regulatory regime which covers all aspects of the relationships from the first time they notice a product in the newspaper to when they turn up or ring an office or go on to a website, to arranging the loan and beyond.

 

Question: What will be the implications of the new regime?

 

Michael Coogan: The implications for the lenders and intermediaries is that instead of a voluntary regime which was not prescriptive they have a detailed rule book overseen by a statutory regulatorthat can fine them, that can take away their livelihood if they act inappropriately. This happens under a voluntary regime, but I think most people have more confidence in the statutory regulator than in a voluntary one.

 

It also extends access for all customers to an ombudsman scheme if they have a complaint. At the moment, those who are not banks or building societies go through an arbitration scheme instead, under a voluntary code, so there will be a single complaints body. There is also access to a compensation scheme if the mortgage lender isno longer around to deal with your complaint and you need to look for compensation centrally.

 

So there are a number of different layers of protection but much of what is happening is really building on what is already in place. The disclosure regime will standardise products and how they are described by lenders and intermediaries, helping customers to shop around and compare produces in a practicalway. For lenders, that means having to change their IT and administrative systems which has been quite expensive, significantly more than the original estimates.For the consumer, the key thing is will they understand the product they are buying, will they avoid any surprises and avoid the need to complain?

 

Question: Will this new regulation affect lending?

 

Michael Coogan: We have been aiming for a seamless transition to to the FSA regime from the current code which is upheld by 150 lenders and 10,500 intermediaries. There will be a large number of intermediaries, maybe 2,000 who are currently independent, registered with MCCB and may want to become appointed representatives of a bigger authorized firm rather than directly authorized by the FSA.  But they will still be bound by the rules.

 

It's unlikely that there will be a reduction in the number of people in the market arranging mortgages and there shouldn't be a problem in anyone finding a lender available to offer them a whole range of products, as now.

 

I think what we are obviously looking at in more general terms is, will there be an increase in complaints with a statutory scheme? Covering everyone under a voluntary code, we have about a 100 cases which don't involve banks and building societies that are referred for arbitration, so we are not expecting a significant difference.

 

Question: Will it make it easier for people to make choices over mortgages?

 

Michael Coogan: I think choice of mortgage is something that depends on your financial capability as a consumer; some are able to make choices themselves, so they go to websites, they look at tables that compare and contrast products and then they apply for a particular loan and just get information about that product. For others that want advice, there will still be a wide range of financial advisors offering access to the whole market who can take you through the process and work out what is best for you and most suitable for you.

 

Individual lenders might well simplify their product range so that their systems can deliver accurate key facts illustrations every time whether it is through their own branches, on a website or through an intermediary. So there may well be a simplification and reduction in the number of mortgage products in the market but I think the overall choices that people can make will remain as wide as they are now.

 

Question: How will you measure this success?

 

Michael Coogan: I think one of the questions when you regulate a market such as this is, have you made proportionate intervention in making  regulation statutory? We support statutory regulation, as it should underpin consumer confidence but, at the same time, regulation should be effective and cost-effective. We think it will be effective with the way in which it has been structured in the rules and cost-effectivein terms of what the benefits are.

 

I think the jury is out at the momenton how far people's attitudes and behaviour will change as a result of KFIs and having standard disclosure. Will people actually shop around differently than they do now? Will they understand a product they are buying better than they do now? Are they actually going to use the tools they are given by the statutory rules, like the KFI, and the opportunity to ask questions before they have made an application and committed themselves etc?

 

I think the jury is out in terms of how it will work in terms of benefits.Costs are higher but, in terms of the overall cost of a mortgage, we estimate it is only around £100 per customer which, looking at the total costs of mortgages over 25 years, may be a price worth paying for the access to an ombudsman scheme, the statutory backing to an advice process and statutory rules which helps people who are in arrears or face repossession.

 

Question: Who will bear the brunt of the costs, the industry or the consumer?

 

Michael Coogan: The costs of regulation can be split between the one-off costs which relate to the last 12 months of implementing IT and administrative systems and training staff to deliver the new rules and that’s estimated to be around £100 per mortgage. There is a lower annual cost which we haven't tried to estimate but clearly is an additional one for the customers.

 

I think the competition in the market means that the extent to which those costs are all passed on to consumers maybe minimized, because people need to remain competitive in the market and they may have to bear the costs rather than passing them on and the costs themselves, as I say - if they are matched by benefits in terms of better decisions and a clear understanding of what you have bought - will be a price worth paying.

 

Question: Will these added costs make it harder for young first-time buyers being able to afford a mortgage?

 

Michael Coogan: I think the cost of regulation isn't going to impact on accessto the market for first-time buyers. What is more likely to be a problem is the cost of housing and house price increases, which is already feeding through into a reduction in first-time buyer numbers and also, of course, the effect of five interest rate rises, with potentially more in coming months.  That makes it more of a strain for people, as interest rates send mortgage costs higher.

 

Question: What is the CML's view on this new regulation?

 

Michael Coogan:We asked for regulation in 1999. We thought it was appropriate for the government to deliver a single regulator for the whole of the industry. Much of the industry was already regulated by the FSA for prudential purposes. We thought it was appropriate to have the protection of an ombudsman scheme and we originally argued that it should be a scheme that covered intermediaries and also lenders,  and covered advice as well as disclosure.

 

The Treasury initially thought that the code should be kept separate and remain in place. We lobbied against that because we did not want two regulatory structures and in 2001 they agreed that the scope of regulation should cover everything, as I have just described. That was the right decision, to give a stable long-term environment for regulation for mortgage lenders. The key thing for the industry and consumers is stability going forward and I hope now that we can have a bit of time when they aren't  tinkering around at the edge  of the rule book.

 

Question: What are you hoping for, for the future of the mortgage industry?

 

Michael Coogan:The industry has doubled in size in the last few years. It is now over £800 billion in mortgages outstanding, we have moved to 70 per cent home-ownership across the country.But there is an aspiration for home-ownership which is nearer 80 per cent, so there is a gap that we should be seeking to fill. But only if it is sustainable, only if we make sure that people who come in as first-time buyers can afford it, can  continue to own their home if there is a problem in their personal circumstances.

 

So we are looking at how good the safety net is for accident, sickness and unemployment and we are talking to the  government about state support in the worst cases. Ultimately, we are expecting the mortgage industry to continue to thrive because we still believe that in the long term people want to live as home-owners. Some of them also see property as an alternative investment to long term savings plans.