FSA reveals sub-prime and lifetime customer experiences

The FSA has published the findings of the second stage of its Mortgage Effectiveness Review, which focused on consumer experiences in the sub-prime and lifetime mortgage sectors of the market.

The Effectiveness Review was designed to measure whether the FSA’s mortgage conduct of business rules are delivering the intended benefits for consumers. The first stage of the review, published in 2006, looked at disclosure and advice and selling practices in the mainstream mortgage market and found that things were generally working well for consumers. This second stage focused on the more specialised sectors of sub prime mortgages and lifetime mortgages. While these sectors are modest in size, together accounting for less than 10% of the regulated mortgage market, they were looked at in detail because the FSA believes the risk of consumer detriment may be greater.

While the two markets are different in nature, there were many similarities in the findings. The research found that both sub prime and lifetime consumers see the Key Facts Illustration (KFI) as an important and useful document for helping them to check points of detail and clarify uncertainties, but not for product comparison and shopping around.

The research also suggested that in neither markets do consumers make a distinction between receiving advice or information-only, and the Initial Disclosure Document (IDD) is not prompting them to think about the level of service they might get.

Also, sub-prime consumers rely to a considerable extent on their broker and accept their broker’s recommendation. Most lifetime consumers also rely on their broker. Both sets of consumers focus heavily on price, with sub-prime consumers concentrating particularly on initial payments.

Research was also carried out into consumer experiences of arrears handling and this indicated areas of non-compliance by firms with the arrears rules.

The FSA is undertaking focused thematic work on the arrears management practices of firms to establish whether such problems are indeed occurring. The results are expected in June and the findings will be published then.

Dan Waters, director of retail policy and themes at the FSA, said: “The Mortgage Effectiveness Review is an integral part of the FSA’s programme of work on mortgages, and will help shape the future of our mortgage conduct of business regime. It sits alongside our thematic work and close supervision of individual firms, and forms part of the balanced and proportionate approach we are taking to ensure the fair treatment of consumers.”

The findings of the review will help to inform the wider review of the mortgage regime, announced in the FSA’s Business Plan 2008/09. This wider review will consider the scope for moving towards greater reliance on principles and other high-level rules, and will reflect issues identified through past and ongoing thematic work that might point to changes in policy.

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Interbank crisis aggravated by Northern Rock

Upward pressure on interbank interest rates has been aggravated by a flow of cash back to Northern Rock, according to New Star economist Simon Ward.

He said: “Other banks benefited from Northern Rock’s woes last autumn, as savers withdrew funds from the troubled lender and redeposited them elsewhere. Now, the reverse flow is occurring, with savers lured back by attractive rates and government guarantees and Rock’s mortgage borrowers encouraged to refinance with other lenders.”

Rather than lend its surplus cash back to other banks in the interbank market, Northern Rock has reduced its borrowing from the Bank of England, according to Ward. He said: “The Bank of England weekly return suggests the Rock loan has fallen from a peak of £27 billion in January to £21 billion currently.”

Ward argues that the Bank of England should increase longer-term lending to the market to offset the liquidity drain from Northern Rock.

Landlords’ ignorance leaves danger of civil action

Almost 12 months on from its introduction, 40% of UK landlords are still unaware of the Tenancy Deposit Scheme (TDS) leaving them at risk of committing a civil offence and being forced to pay tenants three times the deposit amount.

The Tenancy Deposit Scheme was introduced by the Government on April 6 2007 to protect tenancy deposits and provide a fairer system for settling disputes about the return of a deposit at the end of a tenancy.

But nearly a year on, independent research commissioned by buy-to-let mortgage broker The Money Centre, has found that 40% of landlords questioned are still unaware of the scheme. A further 22% of respondents said they were aware but did not fully understand it, leaving only 38% confirming they were aware of the scheme and understood it.

The results show that awareness levels have plateaued since The Money Centre last reported findings on the TDS scheme in October 2007, leaving a large proportion of landlords still in the dark about the legislation. Awareness of the scheme has actually dipped slightly since October, with a 6% drop in the number of respondents who said they were aware of the scheme and fully understood it.

Lynsey Sweales, marketing and PR director of The Money Centre said: “The results of this research are extremely worrying. The scheme has now been in place for nearly a year, yet many landlords are still unaware of the legislation and its implications. The good news is more than half of those surveyed did believe the scheme would benefit both landlords and tenants, as it was designed to do. But until awareness, understanding and participation can be improved the scheme won’t be fully effective.”

Deposits are a big issue for many landlords with half of those surveyed confirming they had withheld all, or part of, a tenant’s deposit to cover property damage and other costs (such as cleaning costs and unpaid utility bills) at some stage. Therefore, it may not be long before problems arise due to a lack of participation in the scheme, and if a landlord or agent does not protect a tenant’s deposit, they can be ordered by the local county court to pay the tenant three times the amount of the deposit.

While the TDS only covers tenancy agreements made on or after 6 April 2007, as time goes on and tenancy agreements are renewed and changed, all landlords will eventually become affected. It is therefore vital that landlords take the time to understand the TDS now and avoid becoming ignorant of the law.

Sweales said: “Once again we are urging landlords who are not up to speed with the TDS to do their research immediately and advise them to join their local landlords’ association. These organisations provide advice to their members on changes in legislation and can act as a forum to share best practice.”

Now banks promise to Treat Customers Fairly

The new Banking Code and Business Banking Code contains an enhanced promise by banks and building societies to treat customers “fairly and reasonably”.

That promise is supported by eight key commitments and the standards of the revised Code. The new Codes take effect today following an independent review. Changes to the codes were made after consultation with consumer groups, HM Treasury, the Financial Services Authority, the Office of Fair Trading and other interested parties.

Additions to the Banking Code include: a new commitment on responsible lending; more help for customers who may be heading towards financial difficulties; strengthened credit assessment practices to enhance responsible lending; clearer information about products, including pre-sale summary boxes for unsecured loans and savings accounts; prohibition of account closure as a result of a customer making a valid complaint; information on how to find your lost account (dormant account); greater clarity of cheque clearance times; and clearer information about credit cards and credit card cheques.

Angela Knight, chief execuitve of the British Bankers’ Association, said: “This new Banking Code gives strong commitments that banks will lend responsibly and will help customers who may be heading towards financial difficulties. The long consultation process, now complete, has shown clearly what customers want and expect from their banks. That has been the driver for these changes.”

Adrian Coles, director general of the Building Societies Association, said: “The FSA is reviewing the longer term interaction between itself and the Banking Codes. This runs alongside the Office of Fair Trading study of the retail banking market and HM Treasury’s consultation on banking regulation generally. We will work closely with the OFT, FSA and the Treasury on these reviews, including bringing about an over-arching application of appropriate fairness principles to all aspects of retail banking as soon as possible.”

Robert Skinner, chief executive of the Banking Code Standards Board, said: “We welcome the improvements in the Code. We look forward to working with the industry and other regulators to ensure equivalent standards of fairness for all banking products.”

There will be further discussions with the BCSB, sponsors, subscribers and consumer experts on how the Banking Codes will look in the future. The aim is to bring the Codes more in line with the FSA’s principles-based regulatory approach. We will also be asking if the Code should include a section devoted to helping customers help themselves, drawing together issues such as guarding PIN numbers and understanding interest rates. This was proposed in our public response to the review in November 2007.

“The FSA is reviewing whether, in areas falling within its remit, the current arrangements for regulating retail banking remain appropriate. This runs alongside the Office of Fair Trading market study into competition for personal current accounts and HM Treasury’s consultation on banking regulation generally. We will engage with these reviews to further explore application of the Treating Customers Fairly principle for retail banking.”

Customer Agreed Remuneration important to most IFAs

Almost all IFAs agree that Customer Agreed Remuneration (CAR) will be important in their business dealings with solicitors and accountants, a Winterthur survey has found.

When asked how important CAR is when working with solicitors and accountants, 95% of IFAs said that it was either ‘very’ or ‘fairly’ important to their business, with 81% stating that it would help to demonstrate their independence from providers, reducing the perception of provider bias.

65% of IFAs said that if CAR was introduced it would help build trust with clients and 69% said it would help promote the value of their advice – all of which will help improve consumers’ perceptions of financial advisers and the industry as a whole.

Additionally, CAR may well increase business for IFAs, as recent research by statistical services company CRA International for the ABIA found that 5% of existing customers would invest more money and 15% would visit their adviser more often.

Emerging as one of the key concepts from the FSA’s Retail Distribution Review, CAR has been widely discussed as a simpler way of determining remuneration for consumers, and will also impact on IFAs and perceptions of the industry.

Nick Lee, head of marketing and value added services, Winterthur says: “With our continuing focus on Treating Customers Fairly (TCF), Winterthur welcomes clear communication and processes for customers to help them make informed decisions. By holding regular educational forums for discussion with the financial community, we can work together to help remove barriers for consumers and improve the professional perception of the industry.”

The survey was conducted at two Winterthur Chambers conferences, which are designed to help advisers build professional partnerships between advisers, lawyers and accountants. The conferences provide an opportunity for discussion on areas of mutual interest including, most recently, gathering opinions on Customer Agreed Remuneration (CAR).

Significant appointments at Connells

Connells Survey & Valuation (S&V) is expanding its management team. It is looking to meet the evolving service needs of clients and also to take a bigger share of the property surveying market. As well as increasing its surveying activity in the traditional lending markets, Connells S&V will also be extending its services into wider property valuation sectors and EPC management across rental and commercial property.

Colin Dorman has been appointed business development director. He brings over 10 years of industry experience to Connells S&V from UCB Home Loans where he was national sales manager.

Lisa Davis has joined the company as business development manager. She joins from Connect Mortgages and her experience working with mortgage packagers and brokers as well as with developers and estate agents will support Connells S&V extending its services more widely across these markets.

Klayre Smith has been appointed as head of client services. She joined Connells six years ago. Since then she has held several key positions within the Connells group including operations director for Conveyancing Direct.

Ross Bowen, managing director of Connells Survey & Valuation, said: “The surveying industry has undergone huge changes in recent years. Connells S&V remains at the forefront of developments and having exceptional professionals on the team is pivotal to this.

“These new appointments will make a huge contribution to our business and enable us to further enhance our service delivery to both existing and new clients.”

Interbank crisis aggravated by Northern Rock

Upward pressure on interbank interest rates has been aggravated by a flow of cash back to Northern Rock, according to New Star economist Simon Ward.

He said: “Other banks benefited from Northern Rock’s woes last autumn, as savers withdrew funds from the troubled lender and redeposited them elsewhere. Now, the reverse flow is occurring, with savers lured back by attractive rates and government guarantees and Rock’s mortgage borrowers encouraged to refinance with other lenders.”

Rather than lend its surplus cash back to other banks in the interbank market, Northern Rock has reduced its borrowing from the Bank of England, according to Ward. He said: “The Bank of England weekly return suggests the Rock loan has fallen from a peak of £27 billion in January to £21 billion currently.”

Ward argues that the Bank of England should increase longer-term lending to the market to offset the liquidity drain from Northern Rock.