Borrowing to Live: Consumer and Mortgage Credit Revisited

8. Looking beyond Our Shores: Consumer Protection Regulation Lessons from the United Kingdom

255 Credit regulation in the United Kingdom has been undergoing substantial reform in the past three years. This chapter reviews these reforms and discusses how they take account of criticisms of previous regulatory regimes. It draws out some of the strengths and weaknesses of current regulation from a consumer’s perspective. In doing so, there is a need to distinguish between mortgages and other forms of consumer credit because there are two quite different regulatory regimes for the conduct of business, including consumer protection. The chapter is restricted to retail markets and does not cover prudential regulation. Mortgage Regulation Since October 31, 2004, all mortgage lending has been fully regulated by the Financial Services Authority (FSA) through its mortgage Conduct of Business Rules.1 This includes all subprime as well as prime mortgages and also all intermediaries that sell mortgages to the public. The FSA is a relatively new regulatory body and was set up under the Financial Services and Markets Act 2000 with four statutory objectives covering market confidence, public awareness, consumer protection, and reduction of finanLooking beyond Our Shores: Consumer Protection Regulation Lessons from the United Kingdom elaine kempson 8 1. See www.hm-treasury.gov.uk/documents/financial_services/mortgages/fin_mort_reglend.cfm. 256 elaine kempson cial crime. It now covers all retail and wholesale financial markets, with the single exception of unsecured consumer credit.2 At the time that the FSA was set up, mortgages were still covered by a selfregulatory regime through the Mortgage Code. This had been introduced for prime lenders in 1997 and for intermediaries in 1998. Some 98 percent of lenders and more than 20,000 intermediaries signed up to the code, but there was still evidence of bad practice and noncompliance.3 When the FSA was established as the single regulator, covering all aspects of financial services, consideration was also given to bringing aspects of conduct of business subject to self-regulation within its framework. An independent review for HM Treasury4 recognized that the Mortgage Code had delivered a number of consumer benefits but was not “a sufficiently strong regime for service standards for mortgages” because “mortgages involve a longterm commitment and for many consumers represent their largest financial undertaking.” It therefore recommended that only a statutory regulatory regime for mortgages, including intermediaries as well as lenders, offered sufficient protection to consumers. Consumer groups supported this conclusion as did the bulk of the mortgage industry, including the Council of Mortgage Lenders (their trade body).5 Under the new regime, lenders and intermediaries have to be authorized to carry out business and must comply with the FSA’s Conduct of Business Rules. This rule book is wide-ranging and more than 300 pages in length. It covers sale and advice standards; preapplication disclosure; disclosure at the offer stage, start of contract, and after sale; equity release advising and selling standards; equity release product disclosure; APRs (and total cost of credit); responsible lending; charges (including early settlement and arrears charges); and the handling of arrears and possessions. Some of the important changes it introduced are described in the following paragraphs. Consumers must receive clear presale information about mortgage terms, conditions , and costs in a standard “key facts” format to enable them to shop around more easily. This includes information about the firm itself (its charges and the range of products on which it is authorized to give advice) as well as a document setting out the adviser’s understanding of the borrower’s needs and intentions, full details of the product being recommended, the fees involved (including any redemption fees likely to be incurred by settling an existing mortgage early), and any insurance or investment products being sold alongside the mortgage. 2. In addition, although retail banking is regulated by the FSA, in practice the powers to regulate the conduct of business in this area are currently switched off and devolved to the Banking Code— self-regulation by the industry—which is described in the section on unsecured consumer credit. 3. HM Treasury (1999). 4. HM Treasury (2000); see paragraph 3.17. 5. Council of Mortgage Lenders (2001). consumer protection regulation in the united kingdom 257 Where firms give advice, they must ensure that they offer the consumer a suitable mortgage product. This involves completing a very detailed “fact find” of the consumer’s personal circumstances, income, and financial commitments. Price information (including the APR) in any mortgage advertising and marketing material must...