Muted welcome for mortgage reforms

New rules for mortgages announced by the government yesterday risk leaving millions of homebuyers confused and unprotected against bad advice from salespeople, consumer groups claimed yesterday.

The treasury said rip-off home loans will become a thing of the past under its shake-up of the £115bn-a-year industry, which will see mortgages subjected to statutory regulation for the first time.

With banks and building societies coming under fire in recent months for allegedly penalising customers with unfair terms and hidden charges, ministers unveiled rules which will give homebuyers legal protection against bad practices.

But the reforms were attacked by consumer groups for failing to address the problem of poor quality and misleading advice given by salespeople.

Under the rules, which will come in next summer, mortgages will be policed by the financial services authority, the City's new "super-watchdog". All lenders will have to apply to the FSA for authorisation to sell mortgages, and the watch dog will regulate advertising and insist that information lenders give about loans is "clear, comparable and comprehensive".

The FSA is being given a range of new powers for dealing with companies that break the rules. It will be able to impose fines, force firms to pay compensation, and even strip them of the ability to sell mortgages.

The treasury economic secretary Melanie Johnson also announced minimum standards for mortgages aimed at outlawing misleading terms and hidden penalties.

To win the official seal of approval, a mortgage will have to meet a range of conditions covering charges, flexibility and clarity. However, the standards, which take effect from April this year, will be voluntary.

The new regulatory regime means that for the first time mortgages will be subjected to the same level of scrutiny as personal pensions, endowments and other investments. At present, mortgage lending is regulated by a voluntary code of conduct, policed by the industry and viewed by many as easy to sidestep.

While all lenders will be covered by the regime, the government surprised many observers by deciding not directly to regulate mortgage brokers, one of the sectors that has prompted most concern.

The harshest criticism was directed at the decision not to regulate mortgage advice.

The strongest warning came from the financial services consumer panel, which was set up by the FSA in 1998 to advise it on consumer issues. It said the regime "won't touch the most serious problems which involve the advice process and questions of suitability."

The Consumers' Association echoed these comments.

The minimum standards for fixed rate, capped and variable rate home loans received a warmer welcome. To win the mark of quality, a variable rate mortgage must have an interest rate no higher than 2% above the Bank of England base rate, and there must be no penalties for paying it off early. With fixed and capped rate mortgages, early redemption penalties must not extend beyond the end of the offer period.

At the moment, many of Britain's biggest lenders, including Halifax, NatWest and Barclays, would not be able to offer a mortgage that meets the minimum standards. This is because they calculate interest annually. One of the requirements is that interest must be calculated daily.