MORTGAGE CODE

TWO new codes of conduct covering mortgage lending and the banking sector have been launched and will come into operation at the beginning of July. They are a considerable improvement on the draft code proposed by the mortgage lenders last year and the existing banking code, which has been in operation, with various modifications, for the last five years.

Consumer groups are clamouring for mortgage lending to be brought within the scope of the Financial Services Act, and the new code will undoubtedly help the industry if it needs to fight off the threat of further government regulation.

It is up to those involved to make sure that these codes work, and that they become a force to improve standards within the financial services industry rather than merely a sticking plaster.

Mortgage lenders now propose to give their customers two basic levels of service, and you will be told which services are on offer at the outset. You can ask for all of the mortgage options to be explained, so that you can make up your own mind, or you can opt for information about just one, either because this is all that is on offer, or because you have already made up your mind.

From next March, lenders will be able to offer a third level of service giving advice followed by a recommendation. Not all will choose to provide this, but if they do, they will select the mortgage which is right for you and explain why.

In theory, giving people more information and recommending only the most suitable product ought to lead to a major switch back to the old-fashioned repayment mortgage. With this you repay the loan over the period of the mortgage, and it is far and away the most suitable method for most people.

However, if trends in the mortgage market are anything to go by, this seems extremely unlikely. Most of the big lenders are becoming diversified financial services companies and the opportunity for them to sell their customers Peps, endowment policies, pension plans and house insurance is just too good to pass up.

The bad publicity surrounding endowments - with people either cashing them in too early or having to top up their monthly payments to make up for a shortfall caused by lower than expected returns - might have unleashed a repayment revival. But there's no sign of one. Pep mortgages account for around half of those arranged by the Halifax, the UK's biggest mortgage lender.

There is nothing inherently wrong with using a Pep to repay your mortgage, except that they are even easier to cash in than endowments and, even if they are kept going, some will under-perform and have to be topped up. Five years down the line, it is not hard to see Pep mortgages suffering the same fate as endowments.

How, then, will this code of conduct deal with a rush of people complaining that they were given the wrong advice? Will the mortgage lenders step back and admit their mistakes or will they turn round and use the code to justify their behaviour?

The improvements to the banking code include telling customers at least once a year which interest rate applies to them if there have been changes; and from July 2000 all customers will have the right to choose their own personal identification number or PIN. There is action on obsolete accounts, too. The code insists customers are told at least once a year if their account is no longer open to new customers.

The mortgage code is available from the Council of Mortgage Lenders, 3 Savile Row, London S1X 1AF; 0171 440 2255, and the banking code is available from the British Bankers' Association, Pinners Hall, 105-108 Old Broad Street, London EC2N 1EX; 0171 216 8800.

Key pledges of the mortgage code

Mortgage lenders will undertake to:

nAct fairly and reasonably

nEnsure all services and products comply with the code, even if they also have their own terms and conditions

nGive information on services and products in plain language and offer help if there is any aspect the customer does not understand

nUnless the customer has already decided on his or her mortgage, to help them choose one which fits their needs

nHelp customers to understand the financial implications of a mortgage

nHelp them understand how a mortgage account works

nEnsure that all staff follow the procedures reflected in the code

nCorrect errors and handle complaints speedily

nConsider cases of financial difficulty and mortgage arrears sympathetically and positively

nEnsure all services and products comply with relevant laws and and regulations