The FSA publishes cost benefit analaysis on regulation of mortgage advice

Speaking at the HM Treasury Mortgage Regulation seminar today, Michael Foot, FSA Managing Director, said,

"Our conclusions suggest there is potentially a positive role for statutory regulation. If regulation improves disclosure and makes it easier for consumers to understand the all-in cost of what they are buying, it is likely to promote competition and to lead to better decisions by consumers."

The results of the FSA''s analysis show that the extra cost to homeowners is likely to be marginal. In consultation with the mortgage industry, the FSA considered a number of alternatives and found that the annual cost of compliance to the industry if a PIA style regulation regime were introduced would be around 32 million more than the expected cost of the proposed voluntary code with an additional one-off cost of 36 million.

The FSA was asked to prepare the report by HM Treasury in readiness for the Government''s review of mortgage regulation. The report identified that statutory regulation could bring the following consumer benefits:

Greater competition and suitability of mortgage products for homebuyers;

Clearer information for consumers stimulating greater competition and efficiency;

More transparent disclosure of redemption penalties and tied insurance;

Fuller coverage of the mortgage market.

The FSA''s cost benefit analysis of statutory regulation of mortgage focuses on six key areas: compliance costs, effects of competition, suitability, quantity and the variety of mortgages sold and direct costs to the FSA.

Michael Foot went on to say:

"Statutory regulation could bring benefits to the consumer which a voluntary code cannot fully deliver. Innovative mortgage products are already benefiting consumers. It is therefore important that these findings are not considered in isolation but are part of a wider review of how to deliver a balanced system which empowers homebuyers but at the same time enables a competitive market to operate,"

Notes for editors

Almost all lenders and intermediaries subscribe to a voluntary code of practice administered by the Council of Mortgage Lenders (CML). It covers all loans secured on the home unless it is made under the terms of the Consumer Credit Act.

The alternatives considered in the cost benefit analysis include:

PIA style regulation. The report uses this as the standard case scenario for the calculation of costs and assumes a similar scope to the CML code;

An enhanced regime including all loans secured on property such as loans for home extensions;

A lighter regime which would not include training and compliance costs or "best advice" requirements.

The FSA estimates that the total costs of regulation - that is, the compliance costs of the CML''s regime plus the incremental compliance costs of statutory regulation - would be in the region of 130 million annually plus a one-off cost of about 200 million. These figures are equivalent to the cost of statutory regulation if no voluntary code existed. The CML code and its planned enhancement by 2002 will cost in the region of 166 million as a one-off cost and 95 million annually thereafter. Statutory regulation would add an estimated one-off cost of 36 million and 32 million annually to these costs.

HM Treasury is currently consulting on how mortgages should be regulated in future. The consultation ends on 22 October.