THE EVOLVING REGULATORY FRAMEWORK OF THE UK MORTGAGE INDUSTRY

1
THE EVOLVING REGULATORY FRAMEWORK OF THE UK
MORTGAGE INDUSTRY

• Adrian Coles,
• Secretary General, International Union for
  Housing Finance and Director-General, Building
  Societies Association (UK)
• Global Conference on Housing Finance in Emerging
  Markets,
• Washington, DC, March 2006

2
BUILDING SOCIETIES, the BSA and the INTERNATIONAL
UNION

• Building societies take deposits and make
  mortgage loans
• They are mutual-owned by their customers
• There are 63 building societies in the UK with
  20 of the mortgage market
• The BSA (www.bsa.org.uk ) is a trade association
  that
• Provides information to building societies
• Lobbies on behalf of societies
• The International Union (www.housingfinance.org
  )is an information-exchange group of mortgage
  lenders with 150 members in 55 countries. It
  publishes two journals and runs a website

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THE UK MORTGAGE MARKET

• Banks around 80 of originations, building
  societies 20. Integrated balance sheet
  institutions. One top ten originator is now a
  mortgage bank in the US sense originates,
  warehouses and sells whole loan portfolios
• About 10 of outstanding loans securitised
• Beginnings of a covered bond - secured borrowing
  - market
• Overall about 60-70 deposit funded
• Mostly variable rate or short fixes. 43 of BS
  stock of loans fixed, with residual maturity of
  2.5 - 3 years
• Very wide product variety fixed, variable, sub
  prime, buy to let, offset, discount, cash-back,
  self-cert own income
• About 60 intermediary, rather than lender,
  driven
• About 40 of new lending refinancings

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COMMERCIAL PRESSURES
Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Income, Expenditure and Surplus 2001-2004 Per cent of mean assets
Net Interest Income Other Income Provisions and losses Management expenses Corporation Tax Retained Surplus
2001 1.42 0.34 (0.00) (1.06) (0.21) 0.50
2002 1.26 0.40 (0.08) (1.04) (0.15) 0.39
2003 1.24 0.37 (0.09) (1.04) (0.14) 0.34
2004 1.13 0.43 (0.05) (1.02) (0.14) 0.36
Data describes all UK building societies
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THE ROLE OF THE REGULATOR - PRUDENTIAL

• Safety and soundness of institution linked to
  taking deposits
• Capital (Basel II from 2007/08)
• Liquidity
• Appropriate analysis of risks, eg
• Credit
• Interest rate fixed rates funded from deposits
  using swaps
• Operational
• Reputational
• Concentration
• Very limited portfolio regulation - on building
  societies only - 75 of their loans must be in
  residential mortgages

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THE MORTGAGE CODE

• Conduct of business regulation of lenders and
  intermediaries
• In place 1997-2004
• Self regulation with independent board overseeing
  compliance assessment
• Ultimate loss of confidence in self regulatory
  approach driven by media hysteria and
  Parliamentary pressure. Lenders eventually
  became advocates of statutory regulation to
  improve reputation of the industry.

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THE ROLE OF THE REGULATOR CONDUCT OF BUSINESS

• Self Regulatory Mortgage Code 1997-2004
• Now Financial Services Authority already
  regulated many other sectors
• Purpose is to protect mortgage customers
• Fairness
• Information disclosure same framework for all
  institutions
• Selling standards
• Responsible lending
• Managing arrears and possessions
• Does not regulate interest rates
• Does not regulate product design
• Remains controversial because of cost and
  complexity

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SINGLE REGULATORY STRUCTURE or SPECIALISED
MORTGAGE AUTHORITY?

• Financial Services Authority is unified
  prudential and conduct of business regulator in
  the UK
• Merger, in 2001, of nine regulators for banks,
  building societies, insurance companies, fund
  managers, financial advisers, stockbrokers and
  others
• Sensible move because there are no barriers in
  the UK financial services market every type of
  institution can offer every type of product.
  This produces competitive market, with wide
  choice
• All institutions offering the same type of
  product are regulated in the same way

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COMPLAINTS COMPENSATION

• Financial Ombudsman is the single complaints
  body, dealing with individual complaints not
  resolved by the institution
• Financial Services Compensation Scheme is the
  single compensation scheme making limited
  payments to customers of failed institutions

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PROMOTION OF THE MARKET and MONITORING MARKET
CONDUCT

• Promotion of the market is the responsibility of
  the lending industry (through a trade
  association), and in some cases the government.
  The role of the regulator is to give a sound
  background to this work
• The best promoter is a satisfied customer!
• Monitoring market and individual conduct is the
  responsibility of the regulator, as is
  enforcement of regulatory standards in general.
  In the UK the media and consumer bodies also play
  a huge role.
• Putting right individual complaints is the
  responsibility of the institution, and the
  Ombudsman

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THE ROLE OF GOVERNMENT MINISTRIES

• Stable political, economic and regulatory
  environment. In the UK, government created the
  regulator, but does not regulate
• Proper title procedures, with land registration
• Proper court procedures, for possession and
  foreclosure action
• Appropriate valuation procedures, although in the
  UK this is by a professional body
• Housing subsidy and taxation policy. Homeowners
  in UK face net taxation
• Major imminent change in UK is introduction of
  Home Information Packs
• Appropriate consultation procedures. UK
  Government code on consultation

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THE EVOLVING REGULATORY FRAMEWORK OF THE UK
MORTGAGE INDUSTRY

• Adrian Coles,
• Secretary General, International Union for
  Housing Finance and Director-General, Building
  Societies Association
• Global Conference on Housing Finance in Emerging
  Markets,
• Washington, DC, March 2006