1. THE EVOLVING REGULATORY FRAMEWORK OF THE UK MORTGAGE INDUSTRY Adrian Coles, Adrian Coles, Secretary General, International Union for Housing Finance and Director-General, Building Societies Association (UK) Global Conference on Housing Finance in Emerging Markets, Washington, DC, March 2006

2. BUILDING SOCIETIES, the BSA and the INTERNATIONAL UNION Building societies take deposits and make mortgage loans Building societies take deposits and make mortgage loans They are mutual-owned by their customers They are mutual-owned by their customers There are 63 building societies in the UK with 20% of the mortgage market There are 63 building societies in the UK with 20% of the mortgage market The BSA (www.bsa.org.uk ) is a trade association that The BSA (www.bsa.org.uk ) is a trade association thatwww.bsa.org.uk Provides information to building societies Provides information to building societies Lobbies on behalf of societies Lobbies on behalf of societies The International Union (www.housingfinance.org )is an information-exchange group of mortgage lenders with 150 members in 55 countries. It publishes two journals and runs a website The International Union (www.housingfinance.org )is an information-exchange group of mortgage lenders with 150 members in 55 countries. It publishes two journals and runs a websitewww.housingfinance.org

3. THE UK MORTGAGE MARKET Banks around 80% of originations, building societies 20%. Integrated balance sheet institutions. One top ten originator is now a mortgage bank in the US sense – originates, warehouses and sells whole loan portfolios Banks around 80% of originations, building societies 20%. Integrated balance sheet institutions. One top ten originator is now a mortgage bank in the US sense – originates, warehouses and sells whole loan portfolios About 10% of outstanding loans securitised About 10% of outstanding loans securitised Beginnings of a covered bond - secured borrowing - market Beginnings of a covered bond - secured borrowing - market Overall about 60-70% deposit funded Overall about 60-70% deposit funded Mostly variable rate or short fixes. 43% of BS stock of loans fixed, with residual maturity of 2.5 - 3 years Mostly variable rate or short fixes. 43% of BS stock of loans fixed, with residual maturity of 2.5 - 3 years Very wide product variety: fixed, variable, sub prime, buy to let, offset, discount, cash-back, self-cert own income Very wide product variety: fixed, variable, sub prime, buy to let, offset, discount, cash-back, self-cert own income About 60% intermediary, rather than lender, driven About 60% intermediary, rather than lender, driven About 40% of new lending refinancings About 40% of new lending refinancings

4. COMMERCIAL PRESSURES Income, Expenditure and Surplus 2001-2004 Per cent of mean assets Net Interest Income Other Income Provisions and losses Management expenses Corporation Tax Retained Surplus 20011.420.34(0.00)(1.06)(0.21)0.50 20021.260.40(0.08)(1.04)(0.15)0.39 20031.240.37(0.09)(1.04)(0.14)0.34 20041.130.43(0.05)(1.02)(0.14)0.36 Data describes all UK building societies

5. THE ROLE OF THE REGULATOR - PRUDENTIAL Safety and soundness of institution – linked to taking deposits Safety and soundness of institution – linked to taking deposits Capital (Basel II from 2007/08) Capital (Basel II from 2007/08) Liquidity Liquidity Appropriate analysis of risks, eg Appropriate analysis of risks, eg Credit Credit Interest rate – fixed rates funded from deposits using swaps Interest rate – fixed rates funded from deposits using swaps Operational Operational Reputational Reputational Concentration Concentration Very limited portfolio regulation - on building societies only - 75% of their loans must be in residential mortgages Very limited portfolio regulation - on building societies only - 75% of their loans must be in residential mortgages

6. THE MORTGAGE CODE Conduct of business regulation of lenders and intermediaries Conduct of business regulation of lenders and intermediaries In place 1997-2004 In place 1997-2004 Self regulation with independent board overseeing compliance assessment Self regulation with independent board overseeing compliance assessment Ultimate loss of confidence in self regulatory approach driven by media hysteria and Parliamentary pressure. Lenders eventually became advocates of statutory regulation to improve reputation of the industry. Ultimate loss of confidence in self regulatory approach driven by media hysteria and Parliamentary pressure. Lenders eventually became advocates of statutory regulation to improve reputation of the industry.

7. THE ROLE OF THE REGULATOR – CONDUCT OF BUSINESS Self Regulatory Mortgage Code 1997-2004 Self Regulatory Mortgage Code 1997-2004 Now Financial Services Authority – already regulated many other sectors Now Financial Services Authority – already regulated many other sectors Purpose is to protect mortgage customers Purpose is to protect mortgage customers Fairness Fairness Information disclosure – same framework for all institutions Information disclosure – same framework for all institutions Selling standards Selling standards Responsible lending Responsible lending Managing arrears and possessions Managing arrears and possessions Does not regulate interest rates Does not regulate interest rates Does not regulate product design Does not regulate product design Remains controversial because of cost and complexity Remains controversial because of cost and complexity

8. SINGLE REGULATORY STRUCTURE or SPECIALISED MORTGAGE AUTHORITY? Financial Services Authority is unified prudential and conduct of business regulator in the UK Financial Services Authority is unified prudential and conduct of business regulator in the UK Merger, in 2001, of nine regulators for banks, building societies, insurance companies, fund managers, financial advisers, stockbrokers and others Merger, in 2001, of nine regulators for banks, building societies, insurance companies, fund managers, financial advisers, stockbrokers and others Sensible move because there are no barriers in the UK financial services market – every type of institution can offer every type of product. This produces competitive market, with wide choice Sensible move because there are no barriers in the UK financial services market – every type of institution can offer every type of product. This produces competitive market, with wide choice All institutions offering the same type of product are regulated in the same way All institutions offering the same type of product are regulated in the same way

9. COMPLAINTS & COMPENSATION Financial Ombudsman is the single complaints body, dealing with individual complaints not resolved by the institution Financial Ombudsman is the single complaints body, dealing with individual complaints not resolved by the institution Financial Services Compensation Scheme is the single compensation scheme – making limited payments to customers of failed institutions Financial Services Compensation Scheme is the single compensation scheme – making limited payments to customers of failed institutions

10. PROMOTION OF THE MARKET and MONITORING MARKET CONDUCT Promotion of the market is the responsibility of the lending industry (through a trade association), and in some cases the government. The role of the regulator is to give a sound background to this work Promotion of the market is the responsibility of the lending industry (through a trade association), and in some cases the government. The role of the regulator is to give a sound background to this work The best promoter is a satisfied customer! The best promoter is a satisfied customer! Monitoring market and individual conduct is the responsibility of the regulator, as is enforcement of regulatory standards in general. In the UK the media and consumer bodies also play a huge role. Monitoring market and individual conduct is the responsibility of the regulator, as is enforcement of regulatory standards in general. In the UK the media and consumer bodies also play a huge role. Putting right individual complaints is the responsibility of the institution, and the Ombudsman Putting right individual complaints is the responsibility of the institution, and the Ombudsman

11. THE ROLE OF GOVERNMENT MINISTRIES Stable political, economic and regulatory environment. In the UK, government created the regulator, but does not regulate Stable political, economic and regulatory environment. In the UK, government created the regulator, but does not regulate Proper title procedures, with land registration Proper title procedures, with land registration Proper court procedures, for possession and foreclosure action Proper court procedures, for possession and foreclosure action Appropriate valuation procedures, although in the UK this is by a professional body Appropriate valuation procedures, although in the UK this is by a professional body Housing subsidy and taxation policy. Homeowners in UK face net taxation Housing subsidy and taxation policy. Homeowners in UK face net taxation Major imminent change in UK is introduction of Home Information Packs Major imminent change in UK is introduction of Home Information Packs Appropriate consultation procedures. UK Government code on consultation Appropriate consultation procedures. UK Government code on consultation

12. THE EVOLVING REGULATORY FRAMEWORK OF THE UK MORTGAGE INDUSTRY Adrian Coles, Secretary General, International Union for Housing Finance and Director-General, Building Societies Association Global Conference on Housing Finance in Emerging Markets, Washington, DC, March 2006