FSA may police mortgage lenders

The government is poised to increase its scrutiny of the mortgage market with the publication soon of a consultation paper on whether mortgages should be brought under the remit of the new Financial Services Authority, the City regulator.

The consultation paper, which seems likely to released later this month, will come in the wake of this week's influential Cruickshank report, which is expected to warn mortgage providers that they are not reacting properly to low interest rates and failing to pass on the benefits fully to their customers.

The Cruickshank report into competition in banking - so called because it is headed by the former telecommunications industry regulator, Don Cruickshank - was commissioned by the chancellor, Gordon Brown, last November.

The report is expected to recommend a radical reshaping of the new financial services and markets bill - which will give power to the financial services authority (FSA) and might upset banks' share prices as they begin to report interim results.

The treasury is thought to be searching for ways in which to eradicate hidden charges to consumers and analyse the way mortgage customers are sold more than product, such as insurance and life cover.

The conclusions of the consultation paper will feed into the planned review of the Council of Mortgage Lenders' code, which is expected to be published in the autumn and will help the government decide whether regulation of mortgages should be brought into the new financial services and markets bill.

The mortgage industry is at present resisting attempts to bring its "voluntary" code into the remit of the statutory powers of the FSA.

If the government were eventually to decide to include mortgages in the new financial services and markets bill, the financial services authority would have to recruit hundreds of new staff to police the brokers who give advice on mortgage sales.

The number of mortgage brokers has fallen from over 42,000 to 20,000 since new training and competence requirements were introduced.