Mortagae Survey: New rules to protect borrowers

Facing statutory regulations, most lenders have signed up to a voluntary code of conduct. Tony Bonsignore wonders if the industry can put its own house in order

Despite the fact that buying a house is the biggest single investment most of us ever make, mortgage borrowers have historically been afforded relatively little protection from poor advisers. The 1986 Financial Services Act, the cornerstone of investor protection, excludes mortgages.

So while financial advisers have to adhere to very strict rules every time an investment is recommended, when it comes to mortgages they have, in the past, been free to advise clients in anyway they like.

This led to increasing accusations that some people were being sold mortgages they didn't fully understand or were not best suited to their needs. Worse still, there was no independent arbitration service if a mortgage broker was used. All in all, it added up to pretty poor deal for the borrower.

This situation did not escape the Labour Party which, in the run-up to last year's general election, threatened to regulate the industry directly, a move which could seriously eat into lenders' profits.

Faced with this threat, and mounting criticism from consumer organisations, the mortgage industry finally took action with the launch of a new Mortgage Code.

Put together by the Council of Mortgage Lenders (CML), the code has been in operation for just over a year. It attempts to put in place a detailed framework which all lenders must follow.

To begin with, mortgage advice is now split into three types and advisers have to tell you which type you are receiving. An adviser can therefore offer you advice on just one mortgage, information on a particular company's range of mortgages, or full advice on the whole market.

If the latter, it must be backed in writing, and failure to give proper advice can lead to a claim for compensation. The idea is that you will not be fooled into thinking you have received full advice when you haven't, a major criticism of the old system.

The mortgage market is hugely complex. The theory is that under the new code, if you choose not to take advice, then you have no cause for complaint. If, however, you choose to take advice which subsequently turns out to be poor, then you have a legitimate complaint.

Under the code, advisers must give clear information on key aspects of any deal, including the repayment method, the type of interest rate, the costs, any penalties and all other relevant information. Providing this is done properly, the development of the new code is very welcome.

The complaints procedure for borrowers has also been overhauled. Previously, anyone with a grievance who got their mortgage through a bank or building society could go to the bank or building society ombudsmen.

But if they had bought their mortgage elsewhere they had no means of registering of complaint and no chance of any compensation. The CML has responded by setting up the CML Arbitration Service, which is free for borrowers with complaints against any lender.

Last month saw a key part of the code put in place, when it was extended to the 40,000-odd intermediaries who account for about half of all new mortgage business. The result of this is that the vast majority of lenders will now refuse to do business with any intermediary who has not signed up to the code.

So is the code proving a success? So far, the answer is unclear. The code does have a number of serious flaws. For a start, anyone can register themselves as a mortgage broker providing they stump up pounds 50. This compares with other financial advisers who are forced to undertake to a series of demanding exams and training courses. Although mortgage brokers are being encouraged to take formal exams, they are not forced to under the code.

Old habits die hard and many staff at the main lenders know little or nothing about the new code, so they are unable to comply with it.

Some of the old guard treat it as an irrelevance, continuing to do things in exactly the same way as before. And because the code is voluntary, not backed up in law, there is little to stop them doing so.

Of course, it is still early days. The code does appear to be having some positive effects. And lenders have an extra incentive to make the code work. The Treasury minister Helen Liddell recently warned the industry that it had just one year to make it work or face statutory regulation.

Tony Bonsignore writes for `Financial Adviser'.

Council of Mortgage Lenders: 0171-437 0655