12 December 2001

Mortgages and general insurance regulation: Regulatory impact assessment

The issues and objective

1. Issue: The Treasury announced today that it intends to give the Financial Services Authority responsibility for regulating the selling of residential mortgages and general insurance, including the advice associated with the sales process.

2. Objective

This will:

Benefit millions of consumers by regularising standards and providing safeguards and minimum standards of mortgage advice
Simplify the regulatory landscape by introducing a single regulator for mortgage advice, general insurance and other retail investment business (eg pensions
Empower bank customers through implementation of the banking codes review recommendations.

Risk assessment

3. The Julius group report¹ (para 3.17) recommended that only a statutory regulatory regime, covering mortgage advice, including that given by intermediaries, offered sufficient protection to consumers, when it came to taking out the most significant financial transaction in their life.

4. Consumer groups too echoed these sentiments. The bulk of industry, including the Council of Mortgage Lenders, too called for statutory regulation as an:

“opportunity to reinforce consumer confidence by introducing a single statutory regulator covering all secured loans and incorporating the principles of the Mortgage Code." ²

5. The average mortgage is over £70,000, making it easily the largest single financial transaction most people are likely to make. There are over 4,500 mortgage products in the market place for potential borrowers to choose from at any at any one time, and over 1 million new borrowers each year. Though the increase in choice is welcome, it brings in its wake increased complexity.

6. The consequences for borrowers making the wrong choice or getting the decision wrong is that:

a. consumers will either pay more than they would have done if there had been adequate straightforward, clear advice, and effective competition;

b. that they buy products they subsequently find they cannot afford or switch from; that lenders may find ways of picking and choosing which is the least onerous regulatory system (or avoid regulation altogether);

c. and that consumers may lose their homes through lenders pressing for repossession without giving consumers adequate opportunities for dealing with the situation.

Benefits

7. Regulation of the sales process, including rules governing disclosure and suitability of advice is likely to avoid many of these problems for consumers, especially if coupled with other initiatives to raise consumer awareness in this area.

8. It would also help true competition to flourish in this area, because it would help correct the information asymmetry that presently exists against the customer.

9. Businesses too would benefit. At present many firms, including at least 13,000 brokers have to comply with a wide array of requirements if they wish to offer a full range of services to their customers.

10. For example, a High Street broker typically offering personal pensions, general insurance and mortgages might at present have to comply with the requirements respectively of::

a. The FSA

b. The General Insurance Standards Council (GISC) and/ or the Institute of Insurance Brokers Regulatory Council

c. The Mortgage Code Compliance Board.

11. Their customers similarly would have to turn to the mechanisms laid down by each of these bodies in order to seek redress or compliance with standards.

12. Having to deal with the requirements of just one regulator, rather than several “quasi” regulators is likely to have benefits in costs for intermediaries, the majority of which are small businesses.

13. As a result the industry, including at least 13,000 small financial intermediary businesses, will now have only a single set of rules (the FSA’s) to deal with, rather than a motley set of arrangements spanning voluntary codes, industry standard setting bodies as well as statutory regulators.

14. The 1.1 million new mortgage customers, and the vast majority of households who have general insurance policies (paying £ 20 billion in premiums each year) would benefit by having a single point of regulatory contact – the FSA- with standards which will be designed to safeguard the consumer interests in proportion to the risks they are likely to face.

Compliance costs

15. The benefits of the streamlined approach have been discussed above. The Financial Services and Markets Act places a statutory duty on the regulator – the FSA – to act proportionally and the regulator has already announced its intention to act in a proportional way by regulating in a manner where the requirements it imposes are proportionate to the risks.³

16. In addition, the Act obliges the FSA to consult on its proposed rules, to prepare a full cost benefit thereon, have regard to competition issues (which can be challenged by the competition authorities) .

17. All these, combined with the calls for regulation from many parts of the industry itself, do not suggest that the compliance costs will be disproportionate.

18. Supporting this view is the last cost- benefit analysis carried out by the FSA on a full blown statutory regime for mortgages. That concluded that the extra costs to homeowners would be likely to be marginal, with recurring costs of £32 million and one-off costs of £36 million. If the whole incremental cost were to be reflected in higher charges to customers (and in the present competitive market the full extent of costs are not always passed to customers), the analysis showed that the cost of the average mortgage would increase by some 15 pence a month.

19. That costing is some two years old and would need to be revisited. But it is likely that the ratio of costs to benefits for a regime which regulates general insurance sales as well as mortgage advice will be beneficial.
consultation

20. The Treasury has consulted twice on mortgage regulation, in July 1999 and October 2000 respectively. Under those consultations, the Treasury proposed that the FSA regulate in a way which focussed on transparency of mortgage terms. There were no proposals to govern mortgage advice whether given by lenders or intermediaries.

21. It was partly as a feedback from these combined consultations, as well as the benefits of streamlining regulation for intermediaries providing a range of financial services, including general insurance, that persuaded the Treasury of the need to extend the scope of mortgage regulation to cover advice.

22. The Treasury will consult again in the new year on the legal text to give effect to the policy it wishes to achieve. The FSA too will consult on its proposals for new rules to regulate under the new regime, and those rules will, by law, be subjected to a full cost/ benefit analysis.

Enforcement, sanctions, monitoring and review

23. It will be for the FSA to enforce and monitor compliance by lenders. FSA will have a number of sanctions available if lenders fail to comply including fines, and ultimately withdrawal of permission to carry on the business. The Treasury is committed as a result of its response to the Cruickshank Report⁴ to reviewing the operation of the Financial Services and Markets Act two years after it comes into operation.