Witching hour draws near as home loan sales come under the spell of the FSA

Not all providers are ready for the watchdog to start policing the market on 31 October, says Melanie Bien

With less than three months to go until the selling and promoting of mortgages comes under the remit of the Financial Services Authority (FSA), lenders and brokers are still struggling to make the necessary administrative changes.

Mortgage Day has been set for 31 October. On that day, a compulsory regulatory regime administered by the FSA will replace the current non-statutory voluntary agreement managed by the Mortgage Code Compliance Board (MCCB).

However, implementing the new rules calls for a great deal of work on the part of lenders and intermediaries, from training staff to building IT systems capable of delivering the compulsory Key Facts Illustration (KFI) disclosure document. The six-page KFI will enable people to compare the cost of different mortgage offers. It spells out the charges and costs involved, and must be given to all borrowers before they apply for a mortgage.

Under the new rules, lenders and intermediaries must obtain authorisation from the FSA to continue selling and promoting mortgages legally after M-day, unless they are eligible for exemption because they are an appointed representative of another authorised firm.

The scale of the task involved is such that three major lenders are rumoured to be far behind schedule and to have applied to the FSA for an extension to the deadline.

But the FSA is unlikely to be moved; the new rules were set out in full last year in order to give lenders and intermediaries plenty of time to make the necessary changes. And penalties for non-compliance are stiff. Mortgage intermediaries will be committing a criminal offence if they advise clients after M-day without authorisation from the FSA. A spokesman for the FSA says that if this happens, the watchdog will apply for an injunction to stop the lender or intermediary trading. They could also be fined and even face imprisonment.

Implementing the new rules involves staff training and updating computer systems - a costly and time-consuming process. And while lenders are busy with this, other aspects of the business are likely to suffer.

"Some lenders are clearly ahead of the game," says Mark Harris, managing director at mortgage broker Savills Private Finance (SPF). "Others will have to cut volumes back sharply while they concentrate on getting their systems ready.

"Choice may be more limited for customers for a while but once regulation is introduced, those lenders who are well-organised will soon be back with aggressive products."

Abbey, the second-largest supplier of mortgages and savings in the UK, is fairly typical of lenders in that it believes it will be able to meet the deadline. But Angus Porter, executive director responsible for customer propositions at the bank, says the timing is so tight there is no room for glitches.

Nationwide says it is "very comfortable with the process" and that its KFI will be ready ahead of schedule in September, although "whether customers will see it then is not certain".

The FSA has so far received just under 4,000 applications for authorisation from lenders and intermediaries (as of 13 July, the date by which they were advised to apply if they wanted to ensure their application was processed ahead of M-day). While this may seem a low number, given that some 153 lenders and 11,000 intermediary firms are currently signed up to the MCCB's Mortgage Code, the FSA is not overly concerned.

"It's a moving target," says a spokesman. "All those who need to be authorised should have got their bids in by 13 July to give us time to process the applications before the deadline. But we can turn around applications more quickly if we need to."

While the changes are causing headaches for the mortgage industry, borrowers won't notice much difference. "The man in the street won't see much of an impact, apart from the ability to compare products more easily," says a Nationwide spokesman.

The other advantage under the new regime is that the complaints procedure will be much more straightforward. If a lender or intermediary doesn't deal with your complaint to your satisfaction, you will be able to take it to the Financial Ombudsman Service (FOS) if the firm is authorised by the FSA.

Although the FSA's new powers won't come into effect until 31 October, borrowers who are in the process of taking out a mortgage now needn't worry about not being adequately protected. Even if you complete before M-day, the FOS may be prepared to take up the issue if the firm is authorised by the FSA after this date. And the current non-statutory regime, under which virtually all lenders and intermediaries are regulated, will also run right up until 31 October, giving continued protection to borrowers.