THE EVOLVING THE EVOLVING REGULATORY FRAMEWORK REGULATORY FRAMEWORK

OF THE UK MORTGAGE OF THE UK MORTGAGE INDUSTRYINDUSTRY

Adrian Coles,Adrian Coles,

Secretary General, International Union Secretary General, International Union for Housing Finance and Director-for Housing Finance and Director-

General, Building Societies Association General, Building Societies Association (UK)(UK)

Global Conference on Housing Global Conference on Housing Finance in Emerging Markets,Finance in Emerging Markets,

Washington, DC, March 2006Washington, DC, March 2006

BUILDING SOCIETIES, the BSA BUILDING SOCIETIES, the BSA and the INTERNATIONAL and the INTERNATIONAL

UNIONUNION Building societies take deposits and make Building societies take deposits and make

mortgage loansmortgage loans They are mutual-owned by their customersThey are mutual-owned by their customers There are 63 building societies in the UK with There are 63 building societies in the UK with

20% of the mortgage market20% of the mortgage market The BSA (The BSA (www.bsa.org.ukwww.bsa.org.uk ) is a trade association ) is a trade association

thatthat Provides information to building societiesProvides information to building societies Lobbies on behalf of societiesLobbies on behalf of societies

The International Union (The International Union (www.housingfinance.orgwww.housingfinance.org )is an information-exchange group of mortgage )is an information-exchange group of mortgage lenders with 150 members in 55 countries. It lenders with 150 members in 55 countries. It publishes two journals and runs a websitepublishes two journals and runs a website

THE UK MORTGAGE THE UK MORTGAGE MARKETMARKET

Banks around 80% of originations, building Banks around 80% of originations, building societies 20%. Integrated balance sheet societies 20%. Integrated balance sheet institutions. One top ten originator is now a institutions. One top ten originator is now a mortgage bank in the US sense – originates, mortgage bank in the US sense – originates, warehouses and sells whole loan portfolioswarehouses and sells whole loan portfolios

About 10% of outstanding loans securitisedAbout 10% of outstanding loans securitised Beginnings of a covered bond - secured borrowing Beginnings of a covered bond - secured borrowing

- market- market Overall about 60-70% deposit fundedOverall about 60-70% deposit funded Mostly variable rate or short fixes. 43% of BS stock Mostly variable rate or short fixes. 43% of BS stock

of loans fixed, with residual maturity of 2.5 - 3 of loans fixed, with residual maturity of 2.5 - 3 yearsyears

Very wide product variety: fixed, variable, sub Very wide product variety: fixed, variable, sub prime, buy to let, offset, discount, cash-back, self-prime, buy to let, offset, discount, cash-back, self-cert own incomecert own income

About 60% intermediary, rather than lender, About 60% intermediary, rather than lender, drivendriven

About 40% of new lending refinancingsAbout 40% of new lending refinancings

COMMERCIAL COMMERCIAL PRESSURESPRESSURES

Income, Expenditure and Surplus 2001-Income, Expenditure and Surplus 2001-20042004

Per cent of mean assetsPer cent of mean assets

Net Net InteresInterest t IncomeIncome

Other Other IncomIncomee

ProvisionProvisions and s and losseslosses

ManagemeManagement nt expensesexpenses

CorporatioCorporation Taxn Tax

RetaineRetained d SurplusSurplus

20012001 1.421.42 0.340.34 (0.00)(0.00) (1.06)(1.06) (0.21)(0.21) 0.500.50

20022002 1.261.26 0.400.40 (0.08)(0.08) (1.04)(1.04) (0.15)(0.15) 0.390.39

20032003 1.241.24 0.370.37 (0.09)(0.09) (1.04)(1.04) (0.14)(0.14) 0.340.34

20042004 1.131.13 0.430.43 (0.05)(0.05) (1.02)(1.02) (0.14)(0.14) 0.360.36

Data describes all UK building societies

THE ROLE OF THE REGULATOR THE ROLE OF THE REGULATOR - PRUDENTIAL- PRUDENTIAL

Safety and soundness of institution – linked to taking Safety and soundness of institution – linked to taking depositsdeposits

Capital (Basel II from 2007/08)Capital (Basel II from 2007/08) LiquidityLiquidity Appropriate analysis of risks, eg Appropriate analysis of risks, eg

CreditCredit Interest rate – fixed rates funded from deposits Interest rate – fixed rates funded from deposits

using swapsusing swaps OperationalOperational ReputationalReputational ConcentrationConcentration

Very limited portfolio regulation - on building societies Very limited portfolio regulation - on building societies only - 75% of their loans must be in residential only - 75% of their loans must be in residential mortgagesmortgages

THE MORTGAGE CODETHE MORTGAGE CODE

Conduct of business regulation of lenders Conduct of business regulation of lenders and intermediariesand intermediaries

In place 1997-2004In place 1997-2004 Self regulation with independent board Self regulation with independent board

overseeing compliance assessmentoverseeing compliance assessment Ultimate loss of confidence in self Ultimate loss of confidence in self

regulatory approach driven by media regulatory approach driven by media hysteria and Parliamentary pressure. hysteria and Parliamentary pressure. Lenders eventually became advocates of Lenders eventually became advocates of statutory regulation to improve statutory regulation to improve reputation of the industry.reputation of the industry.

THE ROLE OF THE REGULATOR THE ROLE OF THE REGULATOR – CONDUCT OF BUSINESS– CONDUCT OF BUSINESS

Self Regulatory Mortgage Code 1997-2004Self Regulatory Mortgage Code 1997-2004 Now Financial Services Authority – already Now Financial Services Authority – already

regulated many other sectorsregulated many other sectors Purpose is to protect mortgage customersPurpose is to protect mortgage customers

FairnessFairness Information disclosure – same framework for all Information disclosure – same framework for all

institutionsinstitutions Selling standardsSelling standards Responsible lendingResponsible lending Managing arrears and possessionsManaging arrears and possessions Does not regulate interest rates Does not regulate interest rates Does not regulate product designDoes not regulate product design

Remains controversial because of cost and Remains controversial because of cost and complexitycomplexity

SINGLE REGULATORY STRUCTURE SINGLE REGULATORY STRUCTURE or SPECIALISED MORTGAGE or SPECIALISED MORTGAGE

AUTHORITY?AUTHORITY? Financial Services Authority is unified Financial Services Authority is unified

prudential and conduct of business regulator prudential and conduct of business regulator in the UKin the UK

Merger, in 2001, of nine regulators for banks, Merger, in 2001, of nine regulators for banks, building societies, insurance companies, fund building societies, insurance companies, fund managers, financial advisers, stockbrokers managers, financial advisers, stockbrokers and othersand others

Sensible move because there are no barriers Sensible move because there are no barriers in the UK financial services market – every in the UK financial services market – every type of institution can offer every type of type of institution can offer every type of product. This produces competitive market, product. This produces competitive market, with wide choicewith wide choice

All institutions offering the same type of All institutions offering the same type of product are regulated in the same wayproduct are regulated in the same way

COMPLAINTS & COMPLAINTS & COMPENSATIONCOMPENSATION

Financial Ombudsman is the single Financial Ombudsman is the single complaints body, dealing with complaints body, dealing with individual complaints not resolved individual complaints not resolved by the institutionby the institution

Financial Services Compensation Financial Services Compensation Scheme is the single compensation Scheme is the single compensation scheme – making limited payments scheme – making limited payments to customers of failed institutionsto customers of failed institutions

PROMOTION OF THE MARKET and PROMOTION OF THE MARKET and MONITORING MARKET CONDUCTMONITORING MARKET CONDUCT

Promotion of the market is the Promotion of the market is the responsibility of the lending industry responsibility of the lending industry (through a trade association), and in some (through a trade association), and in some cases the government. The role of the cases the government. The role of the regulator is to give a sound background to regulator is to give a sound background to this workthis work

The best promoter is a satisfied customer!The best promoter is a satisfied customer! Monitoring market and individual conduct Monitoring market and individual conduct

is the responsibility of the regulator, as is is the responsibility of the regulator, as is enforcement of regulatory standards in enforcement of regulatory standards in general. In the UK the media and general. In the UK the media and consumer bodies also play a huge role.consumer bodies also play a huge role.

Putting right Putting right individualindividual complaints is the complaints is the responsibility of the institution, and the responsibility of the institution, and the OmbudsmanOmbudsman

THE ROLE OF GOVERNMENT THE ROLE OF GOVERNMENT MINISTRIESMINISTRIES

Stable political, economic and regulatory Stable political, economic and regulatory environment. In the UK, government created environment. In the UK, government created the regulator, but does not regulatethe regulator, but does not regulate

Proper title procedures, with land registrationProper title procedures, with land registration Proper court procedures, for possession and Proper court procedures, for possession and

foreclosure actionforeclosure action Appropriate valuation procedures, although in Appropriate valuation procedures, although in

the UK this is by a professional bodythe UK this is by a professional body Housing subsidy and taxation policy. Housing subsidy and taxation policy.

Homeowners in UK face net taxationHomeowners in UK face net taxation Major imminent change in UK is introduction of Major imminent change in UK is introduction of

Home Information PacksHome Information Packs Appropriate consultation procedures. UK Appropriate consultation procedures. UK

Government code on consultationGovernment code on consultation

THE EVOLVING THE EVOLVING REGULATORY FRAMEWORK REGULATORY FRAMEWORK

OF THE UK MORTGAGE OF THE UK MORTGAGE INDUSTRYINDUSTRY

Adrian Coles,Adrian Coles,

Secretary General, International Union Secretary General, International Union for Housing Finance and Director-for Housing Finance and Director-

General, Building Societies AssociationGeneral, Building Societies Association

Global Conference on Housing Global Conference on Housing Finance in Emerging MarketsFinance in Emerging Markets,,

Washington, DC, March 2006Washington, DC, March 2006