The request for this debate originated in the findings of a mystery shopping exercise carried out by Suffolk county council trading standards officers, published at the beginning of this year. But this is not only a Suffolk issue; it is of widespread interest and national importance and concerns millions of people.
A mortgage is the biggest single financial commitment in most people's lives. For most of the British people, more of their money is wrapped up in mortgages than in anything else. Ours is a country with a high percentage of home ownership. It is essential to have a system that is fair to consumers, providing them with good value for money and protecting them from being misadvised or exploited in any way.
A mortgage today is a complex product that comes in a bewildering range of varieties. As the National Consumer Council says:
Our research shows that the whole business of getting a mortgage is an absolute minefield for consumers".
After the scandal of the mis-selling of financial products under the previous Government—in conditions largely generated by them—people are now delighted and relieved that the new Government's manifesto commitment to clean up the mess and provide protection is being implemented.
The establishment of the Financial Services Authority, the regulation of the sale of investments, and the work done so far on recovery in pensions mis-selling cases, have all been heartening for our people. Yet the question of extending that regulation to mortgages, mortgage lenders and intermediaries, whom I shall call brokers, remains undecided.
In the draft Financial Services and Markets Bill. the Government are taking reserve powers that would enable them to do that, and I welcome that more. However, because the mortgage code was introduced in July 1997, so soon after the Government came to power, it is understandable that they wish to see first whether a voluntary approach can work, so as to avoid the need for legislation and regulation if possible.
However, I find it surprising that mortgages were not automatically included, as many mortgages involve a combination of products, including insurance endowments, personal equity plans and so on—products covered by the FSA—and the broker will be selling such packages.
The key questions are: is the code working, and will it work? The Government will have to decide that later this year. Those who operate the mortgage code register of intermediaries are trying hard. So far, they have registered 20,000 firms and 47,000 brokers, and lenders say that they will not accept business from non-registered brokers.
Copies of the code have been produced, too, with a useful leaflet called "You and your Mortgage", which, by the end of the month, will be given out at the first point of contact. Qualifications have been devised, and many people are registering to take them, but they are not currently mandatory.
An arbitration scheme for handling complaints has also been set up, and compliance monitoring strategy is being developed. Some sanctions will be introduced at the end of the month, including formal warnings, fines and deregistration, plus some naming and shaming. Eight brokers have been deregistered so far.
That is all reasonable and responsible action, but one still has to ask: is it working? Will the code really give the protection that people really need? The only way to find out is to test it, and that is what Suffolk trading standards officers did through their mystery shopping exercise, following an increasing number of complaints.
The county trading standards officers' findings paint a worrying picture. None of the 31 brokers whom they interviewed complied fully with the mortgage code of practice, and more than half of them failed to promote it or even to mention its existence. A similar proportion failed to disclose whether they would receive a fee for arranging the mortgage, and a similar number failed to declare whether they were acting independently or had access to only a restricted number of lenders.
In half the interviews attended, poor-quality information was provided, even including incorrect calculations and questionable assumptions about investment growth for linked endowment policies. Officers found that 12 brokers gave financial advice without first determining the customer's attitude to financial risk. Six advisers made so many misleading statements in favour of endowment mortgages that the officers strongly suspected that the motive for the advice was the commission that the adviser would receive from insurance companies, rather than the best interests of customers.
To be fair, I must tell the House that the officers felt that 58 per cent. of brokers volunteered some good advice in the interviews, but that leaves 42 per cent. who did not. It does not alter the officers' overall findings.
Does my hon. Friend agree that many of the practices discovered in Suffolk are common throughout the country and reflected in almost every independent examination of the industry? Because endowment mortgages are now discredited, they are disguised as flexible mortgages, and many so-called independent brokers are anything but independent. The situation that my hon. Friend describes is a scandal in the making that could be of epic proportions and equivalent to the pension scandals of the 1980s.
My hon. Friend is right. That scandal in the making has been in evidence for some time and is not confined to Suffolk. Indeed, Suffolk is a relatively law-abiding county with some of the lowest crime rates in the country. Sharp practice and failure to observe the code is certainly not confined to Suffolk. The picture revealed by the mystery shopping exercise is replicated around the country.
The Consumers Association has also carried out a mystery shopping exercise and reported it in Which? in October. It, too, found evidence of widespread endowment mis-selling and non-compliance with the code. I have also come across another report from Market Audit Research, published last month. That contains the results of its mystery shopping exercise for 61 mortgage lenders. I tried to find out from the report which lenders failed to comply with the code, but it was easier to find those who were code compliant—only three, according to that report. For example, 91 per cent. failed to inform the consumer of the service levels offered at the outset. Some 54 per cent. did not include mandatory information when providing quotations or illustrations. Some 60 per cent. did not comply when quoting future repayment amounts at standard variable rates outside the initial, incentivised period. The report concluded that, in certain sections, the code of practice appeared to have been written for the convenience of lenders rather than the assistance and protection of consumers. It did not believe that lenders were complying with the spirit of the code. If a voluntary code is to work, those operating under it must comply with its spirit.
Another practice, called bundling, also causes concern. It is the practice of tying home insurance policies to the mortgage product. Allegations of such practices come from competitors, but I have personal experience of taking out such an insurance policy and then finding that it is more expensive than those available on the open market. Many people walk into the trap. Although the code prohibits it, it is still happening.
A report in The Sunday Times on 7 March was headlined:
Salesmen admit to dirty tricks on endowments".
Former staff at several of Britain's leading insurers … have revealed how they were trained to 'frighten' clients into buying endowment mortgages with a variety of slick sales tricks.
One of the salesmen … said: 'On my first day of training I was told, "If you are not frightening your clients you are not doing your job."'
Whoever sold the most would win a day at the races or a champagne dinner.
The selling of endowments is undoubtedly a national scandal with serious implications because home owners rely on a lump sum payment at the end of their mortgage to repay it. If that is not available, home owners could face repossession of their homes. Incentives and fees for brokers have encouraged them, to put it politely, to direct home owners towards a type of mortgage that may be damaging to their future housing prospects and may even lead to homelessness.
My hon. Friend is right. At one time, many people were sold optimistic endowments with monthly payments that anybody advising them should have realised were never likely to generate the amount required when the debt needed to be repaid.
Out of all the evidence, there emerge two main areas of concern. The first is to do with endowment mis-selling. That is now covered by the Financial Services Authority, but it is still clearly going on. I hope that, when my hon. Friend replies, she will say something about what plans there might be to ensure that the FSA considers compliance there.
There is evidence that the code is not working in practice. It has some weaknesses. First, there is nothing to define the competence of an individual broker. Anyone with a consumer credit licence and £95 can register. There is no entry test or qualification, and there is still no mandatory qualification once someone is registered.
The value of registration of the broker depends upon the lender. Lenders have said that they will deal only with registered brokers, but I think that that is questionable, and so do Suffolk county council's trading standards officers, because they found 10 members who made no checks at all.
Market audit research found that most lenders were not following the code. There is also the question of whether all lenders are, or future lenders will be, members of the Council of Mortgage Lenders. It is more and more likely that foreign banks and lenders, particularly in the European dimension, may be providing the money for mortgages. So there are all kinds of questions there.
There is also the question of compliance and monitoring. I have not been able to find out how many people the Mortgage Code Register of Intermediaries has working on compliance and monitoring. I suspect that it is not many. I am not sure what it can do given its resources based on the registration fees about which I have spoken. In addition, it has no local knowledge. It relies on a centralised service.
There are huge question marks over compliance. In December, the MCRI, in its publication, said:
All agreed that it would not be economic for MCRI to endeavour to check all of its 19,000"—
— now 20,000—
registered firms every three or four years and accepted that compliance activity should be focused on areas and firms where the potential risk appeared highest.
There was a suggestion that some of the larger firms had compliance methodologies that could be applied-but again, who decides whether those firms are complying? As I have said, many of them do not comply.
It can be argued that these are early days. To be fair to the MCRI, it was a big job to take us out of a completely unregulated situation, and it has made progress. One could argue that, over time, compliance will develop and improve. On the other hand, one could also say that, as time passes, it is equally likely that some brokers will find more and more ways to sidestep the code as they become used to it.
We then come to the question of sanctions. I asked whether the fines under the voluntary code were enforceable. I asked whether the MCRI would expel large firms on which it depends for income, and what would happen to someone who is deregistered. Will they just continue working—often they can—or could they re-register in another capacity?
What is really alarming about the evidence is the scale of non-compliance in terms of the number of firms and individuals involved and the number of points on which each is not complying. It is not surprising that the National Consumer Council recommends that the regulation of the mortgage business come under the FSA.
Furthermore, the Treasury Select Committee, when it reported, also came out in favour of regulation by the FSA. From following the discussions of the joint committee on the Financial Services and Markets Bill, it appears to me that it is heading in that direction.
It is difficult to see why mortgages should be kept separate from other key parts of the home-buying package, such as endowment PEPs—now ISAs, I think— and so on. Why should we think that the voluntary code will work with mortgage selling when it is now widely accepted that such a code could not be trusted to work with the selling of other financial products and services?
It is not just that similar people are involved. I am not suggesting that all mortgage brokers or financial advisers are at fault; my personal experience of them has been good. Rather, it is that a similar process is involved, in which many customers are unclear, unsure and confused about what they are buying and getting. On the other side, we have the broker or adviser who stands to make various gains depending on the customer's choice or the products sold to him. The test for the broker at each stage of the process must be to ask himself or herself, "Am I acting in the best interests of the customer?" We need to have a system that ensures that the answer is always yes. Statutory regulation focuses minds far better than a voluntary code and, moreover, for longer. My concern is that, over time, a voluntary code would relax.
There is also a question about the European dimension. Can a voluntary code operate in isolation from Europe? I do not know, but we must have in place a system that can link in with Europe.
The Suffolk trading standards officers should be congratulated. Their exercise has reverberated around the country. From the evidence that I have seen, it acted as a stimulus to the MCRI, which has come forward with further ideas on compliance and sanctions. I have learned today that the local authority co-ordinating committee of trading standards officers has agreed to carry out 25 mystery shopping exercises later in the year. I hope that they will be conducted in time to inform the Government's review.
I urge my hon. Friend to use the reserve power in the Bill to regulate mortgage brokers and lenders. I agree with the MCRI that the code should be used as a basis for those regulations and that it has carried out some good work. That work needs the force of law. So much is at stake for individuals that we cannot rely on good intentions and keeping our fingers crossed. People need to have confidence in financial services, including mortgage selling. The code is a worthy step forward, but not enough. People would prefer the protection of law.
I congratulate my hon. Friend the Member for Waveney (Mr. Blizzard) on securing this debate on an extremely important subject. I only regret that there are no Members on the Opposition Benches to debate this issue with us. I thank my hon. Friend for visiting me this afternoon, together with Suffolk county council trading standards officers, to ensure that I have the full picture on the extremely useful survey that they carried out.
As my hon. Friend said, taking out a mortgage and buying a house is one of the biggest financial transactions that most of us ever get involved in. The growing complexity of mortgages means inevitably that there is greater scope for misunderstanding, perhaps for mis-selling and for consumers to get a raw deal. We are determined to ensure that consumers get the protection that they need and deserve in that extraordinarily important financial transaction.
It may help if I summarise the factual position as it stands. There are some 10.5 million mortgages outstanding at the moment. The number of complaints that are made in relation to mortgages are, I am happy to say, small compared with that figure. In 1995, there were 50,000 complaints—about 0.5 per cent. of the total number of outstanding mortgages. Nor is it true to say as some do—I am glad that my hon. Friend did not fall into this trap—that mortgages are wholly unregulated. First of all, more mortgages were brought within the scope of the Consumer Credit Act 1974 when the upper limit was increased to £25,000. All mortgages are subject to the Unfair Terms in Consumer Contracts Regulations 1994, irrespective of the amounts involved. The Office of Fair Trading is considering redemption penalties in relation to compliance with those regulations—
As my hon. Friend said, many of the complaints about mortgages, like many of those which came to light from the Suffolk county council exercise, relate to endowments that are being sold alongside mortgages, which are of course already regulated by the Financial Services Authority. Because that investment business is already regulated, the majority of intermediaries, who are also advising on mortgages and selling mortgage products, must be authorised by the FSA. So, there is already some protection, both from the FSA and in other parts of the law, for consumers who are buying mortgages and products relating to them.
Clearly, such protection is not enough. That is why the Council of Mortgage Lenders decided to introduce its code of practice. As my hon. Friend has acknowledged, we are monitoring extremely closely the performance of that code and looking to the Council of Mortgage Lenders to ensure that the provisions are properly enforced by both lenders and intermediaries. As he also acknowledged, it must be right to give that code a fair trial. It has only been in operation for lenders since July 1997 and for intermediaries since April 1998. However, it is essential that we have good information on whether the code is working before we reach a decision about the draft Financial Services and Markets Bill and the scope of its authority.
I join my hon. Friend in congratulating Suffolk county council trading standards officers on the mystery shopping exercise that they recently conducted. It was an admirable piece of research, and I am extremely grateful to the officers not only for conducting it but for making available to the Council of Mortgage Lenders and, indeed, the Treasury the transcripts of the 31 interviews which were undertaken during it.
My hon. Friend is right to say that that the results of that mystery shopping exercise are disturbing, because they suggest that all the brokers who were visited were, in some respect or another, failing to comply with the provisions of the code. I have no doubt that the Council of Mortgage Lenders and the MCRI will take the findings extremely seriously—we shall certainly do so. Indeed, detailed transcripts of the six cases in which the trading standards officers concluded that there was evidence to suggest that brokers were in danger of mis-selling endowments along with mortgages have already been referred to the FSA. I understand that the FSA is investigating that matter, as, indeed, the MCRI is investigating the general picture that emerged from all 31 brokers who were visited.
There are of course differing views on whether mortgages should be brought fully within the scope of the FSA. I shall monitor extremely closely and carefully the operation of the code, as my predecessor undertook to do. I will expect to hear from consumer groups and, as my hon. Friend has said, from other trading standards officers, as well as from the Council of Mortgage Lenders, brokers, intermediaries and lenders themselves. I will also expect the Council of Mortgage Lenders to come forward if it believes that there is evidence that its members and the intermediaries are delivering what the code requires. The onus of proof, in other words, will be on the Council of Mortgage Lenders. It will need to show me what steps it has taken to ensure that the results that were revealed in the exercise, and may have been replicated in others, will not be found in future.
When we were elected, we inherited a thoroughly unsatisfactory system of financial services regulation. There were nine different regulators, with different ombudsmen and complaints and compensation systems to match. It is not surprising that, as we saw with the personal pensions mis-selling scandal, real threats to the interests of consumers had been allowed to arise in the gaps between the different regulators. Therefore, we announced in May 1997 that we would put financial services regulation on a statutory footing and create a single regulator. We have already begun that process through the Bank of England Act 1998, by transferring banking supervision for the Bank of England to the FSA, thus establishing the authority which has, through a variety of contracts and memorandums of understanding, taken over and absorbed the regulatory functions that previously existed in a variety of other places.
We are now moving forward with the draft Financial Services and Markets Bill to put the FSA on to a proper statutory basis and give it the powers to make and enforce the rules that are required in the increasingly complex and fast-changing financial services industry. We are also putting in place processes that will protect natural justice and the rights of those who are authorised to sell products as well as the rights of consumers. I am happy to say that the joint committee that is undertaking pre-legislative scrutiny of the Bill is making extremely good progress. We expect it to report on 29 April. Mortgages is one of the issues to which the joint committee has paid attention.
Later this year, I will conclude the review of the code of practice on mortgage lending. I certainly hope to have the fruits of the other mystery shopping exercises that trading standards officers in various other parts of the country plan to undertake. I welcome their interest in the matter and their willingness to put time and resources into giving us evidence about whether consumers are getting the protection that they need and deserve from the code.
I will make a decision later this year about whether the scope of the Bill should include all mortgage selling. The Bill provides for mortgages to be brought within its scope and the scope of the powers of the FSA.
My hon. Friend will appreciate the sense of déjà vu that many of us have. There were no complaints in the late 1980s from those who had been mis-sold personal pensions, but the fact that no complaints were registered did not mean that nothing wrong was going on. Can my hon. Friend give us an undertaking that, when she receives the review of the code, she will publish it so that the rest of us can consider it before she takes a decision on it?
I will certainly publish the evidence upon which I base my decision whether to include mortgages within the scope of the Bill. As I have already said, much of the evidence that will be made available to me in that process of monitoring will in any case be published by those who undertake it. Of course I will happily do as my hon. Friend requests.
It is important that we establish a modern system of financial services regulation and that we balance the costs and benefits of regulation. Obviously, there are costs involved in regulation. Clearly, if we decide to bring mortgages fully within the scope of the draft Financial Services and Markets Bill and the FSA, the additional costs of regulation will fall on intermediaries and on lenders, but, in reality, those costs will ultimately fall on consumers. If we bring mortgages within the scope of the Bill, we shall need to be satisfied that the benefits to consumers outweigh the additional costs that regulation will impose on consumers and providers.
I shall return to that matter—as, I am sure, will my hon. Friends—later this year, when we have a better picture and more evidence as to how the code is working and we know whether we can rely on more effective enforcement of the code or need statutory regulation to deliver the objective that we all share—effective protection of consumers.
Once again, I thank my hon. Friend for his concern and interest in this matter. I thank him for drawing the attention of the House to the extremely important survey undertaken by Suffolk's trading standards officers.