When you mention the words 'mortgage regulation', most people will probably start to think about dinner, going out, or anything else that they can quickly and easily turn their attention to - after all, what could possibly be duller subject to think about? Well, we don't exactly get amazingly passionate about it either, but it is a subject that is going to be in the news quite a lot over the next year, so that must make it fairly important.

The reason that it will be hitting the headlines is that the whole lending environment is about to be subject to a pretty monumental change: The Government announced in January of last year that it intends to introduce statutory regulation of mortgage lending from January of next year, with the Financial Services Authority (FSA) taking responsibility for the regulation. Why are they doing this? Is it a big deal? Will things be any different? Hopefully, this article should answer these questions.

Mortgage lending must meet the following criteria to come under the regulation of the FSA:

First legal charges. These are mortgage loans where the lender holds the property deeds and may take possession of the property if the borrower does not keep up repayments as agreed.

• Loans secured on properties in the UK.
• Loans secured on property where at least 40% is residential.
• Accommodation to be occupied by the borrower or his or her immediate family: that is, his or her spouse, sibling, parent, grandparent, child or grandchild.
• Loans granted for terms planned to run at least five years from when the loan is made.
• Loans made on or after the date on which the FSA assumes responsibility for mortgage regulation.

Additionally:

• Mortgage lenders must be authorised by the FSA.
• Mortgage advice will not be regulated and therefore mortgage intermediaries will not need to be authorised (although they will still need to be registered under the Consumer Credit Act).

Quite a lot, apparently. Some hefty and protracted research conducted on behalf of the FSA uncovered several reasons why the current environment doesn't really work in favour of end-customers all that much.

We don't want to get too bogged down with the detail, but essentially the main area of concern that the research highlighted was the fact that an imbalance of information between lenders and borrowers has led to the widespread sale of unsuitable and uncompetitive products.

It appears that in the world of mortgages, loyalty most definitely does not pay dividends. The research highlighted the fact that some existing borrowers are paying substantially more than the rates offered to new customers and those borrowers re-mortgaging. The problem has been compounded by the wide range of fairly complex products that are available, which are difficult for customers to compare, despite the requirement to quote the annual percentage rate or annual equivalent rate for all products.

Using a sample of 54 fixed rate products available in April 1999, the FSA found that over seven years (the typical life of a mortgage) the present discounted costs to a consumer with a £60,000 loan can differ by over £2,000. When totted up across the 11 million or so households that have a mortgage, it is not surprising that the government has decided that the problem is simply too big to ignore.

Since the government concluded that the main problem was limited product transparency, they decided that the regulatory approach should focus on improving information for consumers. Better information will allow them to shop around, assess the affordability and risk of a particular mortgage and to help avoid arrears.

Four aspects of information provision are considered:

• Firstly, the FSA is going to require the regulation and approval of mortgage promotions across TV, print, radio and Internet marketing activity. This should ensure that all advertising is clear and not misleading.
• Secondly, there are proposals for changing the way information is presented to the customer both before and after the mortgage sale. Lenders and intermediaries will be required to give standardised information about the products and the lenders themselves, before customers complete an application form.
• Thirdly, the FSA is planning to in introduce comparative information tables for mortgages, which will further ease the decision-making process for consumers.
• Finally, the regulator is likely to fund a large-scale public awareness campaign to coincide with the introduction of mortgage regulation.

The new regulation is also likely to make some alterations to the post-sale processes, including:

• No cooling off period or cancellation rule.
• Regulation of the information given to customers once in arrears or facing repossession.
• An assessment of mortgage lenders' internal complaints handling procedures to make sure that they comply with FSA requirements.
• Mortgage customers to be given access to the Financial Ombudsman Service for the purpose of redress.
• Mortgage customers will have access to the new Financial Services Compensation Scheme.

The Financial Services Consumer Panel was set up to provide an independent source of advice and consultation on the activities of the FSA. It has pointed out four main areas of concern with the current proposals for regulation:

• Arrears. The FSCP believes that customers should be given more time to pay off outstanding arrears before repossession proceedings commence.
• Training & competence. The FSCP also called on the FSA to establish specific training and competence requirements for supervisors of administrative staff in authorised firms dealing with mortgages.
• Scope of regulations. Excluded from the current proposals are second charge loans secured on property (second mortgages), loans with a term of less than five years, UK borrowers taking out a loan with a UK lender on a foreign property, and unsecured loans linked to flexible mortgages. The FSCP would like to see all of these loans covered by the regulation.
• Advice. The FSCP feels that the Government made a serious error of judgement by choosing not to regulate mortgage advice.

We would certainly agree that it is pretty odd that giving advice in relation to mortgages is not to be covered by the new regulation. As far as consumers are concerned, the main aim of the FSA is improving the information that they have at their disposal when they make their purchase decision. If the intermediaries who are advising them on the 'best' course of action are not regulated, then there is still considerable scope for people to be misled.

Standardisation of pre and post sale information will be a really beneficial step, that will empower many people to comfortably take a decision that they previously may have felt uncertain in. Similarly, publication of standardised tables will improve consumer information, as well as putting competitive pressure on overpriced loans - one of the other key aims of the regulation.