Industry Press headlines continue to make depressing reading for those involved in the mortgage sector.  We hear that arrears and repossessions are up; interest rates have continued to rise with more hikes predicted; lenders are cutting back on procuration fees and lending scheme criteria is under scrutiny.  Funny but I am sure I have seen these headlines before.  Oh! yes it was during the early 1990’s when the UK mortgage market almost met its Waterloo.Unfortunately the mortgage industry does have a short memory and what’s more seems disinclined, to put it mildly, to learn from past mistakes.  I have the dubious distinction of having worked for a lender during the late 1980’s and early 1990’s that had to merge due to some creative but ill advised lending resulting in some impressive and financially suicidal losses.  I then spent two very busy years auditing a large number of major lenders on behalf of some very peeved MIG insurers.  ‘Poacher turned game keeping’ was a phrase I seem to remember being mentioned on numerous occasions.  It was without undoubtedly the most illuminating and depressing, yet financially lucrative period of my mortgage career to date.  We often hear today about the problems caused by self cert and non status lending and how the subprime lending sector is out of control.  These were also hot topics of conversation 15 or so years ago.  It would seem that pressures within the industry now are exactly the same as they were in the 1990’s.  Lenders need to lend and the more you lend the bigger you become it would seem.  Or so the theory goes.  Sales staff and underwriters were and probably still are under enormous pressure to lend, lend and lend some more.  Having been a participant, however unwillingly, myself of lending targets I can understand how the industry is starting to slide back again into the mess of the last decade.  We aren’t quite there yet but things need to change if we are to avoid the traumas experienced then.One of the major issues of the 1990’s was the general lack of information available on clients and the transaction.  Credit reference data was available but could be and often was routinely overridden in the interests of hitting targets.   Valuers did adjust valuation results based on the need of branch managers to hit their targets.  I have been guilty myself of using strong arm tactics on valuers who would very much like to continue receiving instructions in the future.  Having waded through hundreds of mortgage files during my auditing days I can attest to the general lack of care and attention applied to loan processing and underwriting in the past.  What was most significant was the general lack and in some cases total absence of information on which to base a sensible lending decision.  We have no excuse today for such a tardy approach to client and transaction assessment.   The information available in this modern electronic age means both those providing client advice and those underwriting loans have the ability to fully understand the basis on which a loan is to be advised upon and ultimately granted.  As a purveyor of client and transactional information in the form of Verifi Solutions I can say categorically that the industry should never reach the depths it has in the past and if it does it has no excuse for doing so.  So, although the headlines make depressing reading as long as those in the driving seat utilise the services and systems available today the current downturn will be temporary with few long lasting effects although hopefully unlike in the past with some long lasting memories and experiences on which to base future decisions.

Another week, another fine. At the end of last week Hadlenglen Home Finance joined the list of those penalised for inadequate systems when recommending re- mortgages and PPI to customers (A £133,000 fine reduced from £170,000 for early payment), bringing the total number of final notices issued by the FSA this year to 103! This one had a personal as well as corporate sting in the tale as the chief executive got personally fined £49,000 (reduced from £70,000 due to early settlement) – the first time the FSA has fined a chief executive for re-mortgage and PPI failings.

Looking through the list of press releases from the FSA the story is pretty consistent – firms are getting fined for not putting in place the procedures to ensure clients are recommend the right product. Forget the FSA though – the fact that firms are still behaving this way is poor customer service and simply bad practice. With tools available to avoid this why does it still persist? Brokers can check clients credit position up front from companies such as Verifi, they can ensure efficient sales processes are in place using point of sale systems from numerous providers in the market including Crystal, Distribution Technology and Focus, and they can employ efficient T&C systems using solutions from the likes of Redland. Mortgage brokers also have a wider choice of sourcing systems than has existed for many years with a number of packager initiatives launched to compete with the established offerings from Mortgage 2000, Trigold and Mortgage Brain.

Some may question the affordability of these systems for the smaller organisations. However, if this is true it calls into question the survival of the smaller firms. If chosen carefully a cost effective solution can be put together – often with a cost that is spread in line with the level of business written – and given the size of the fines – both corporate and personal, can anyone not afford to invest in these systems!

This debate has become somewhat emotionally charged with some industry personalities taking positions in their respective ‘camps’. The regulator has been keen to drive (in some cases ‘drag’) up professional standards in the industry for many years and I believe that it has been pretty successful. They would like advisers to be seen on an equal professional footing as Accountants and Solicitors. As such, they would also like to see their remuneration being obtained in a similar way – namely fees.

The objective has merit; higher professional standards AND standing are good for the industry and the clients. Having been involved in regulating advisers, I also generally support the use of fees. Fees are (or should be) transparent and should remove or reduce the potential for a product bias sale. Whilst, there are advisers who would claim not to be biased by commission remuneration, there is no doubt that it does have an effect.

The problem is what are the most appropriate types of fees? Are percentages of funds, such as seen on Wrap platforms really fees or commission by another name? With CAR (or CARIS), does it matter? The difficulties with funds based fees, are that there is still the possibility that there is a vested interest in the sale of the funds (or associated Wrap/Supermarket service). There is an argument that the percentage approach encourages a degree of active management or advice, though the counter can be that there is‘drag’ on the future fund performance of the adviser’s remuneration.

What about the people who cannot afford fees amounting to hundreds of pounds an hour? There seems to be a recognition that there will be a lower/middle market that could be excluded if commission based remuneration is removed. There is talk that tied provider based sales forces could be the answer. The reality is that the effect of commission on the value of a products benefit are hidden or blurred in the mind of the consumer. Added to which the quality of the advice may also limit choice and long term value too.

Ultimately, I expect that the industry will once again fail to agree on a single approach. However, there will continue to be a gradual move for many truly independent professional advisers to adopt the fees based approach. At the same time, it is likely that some form of commission will continue, not least of all because there will still be members of the public who will only transact business if they do not have to make an explicit up front payment.