Business View: Small mortgage lenders face game of trick or treat

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Before esure came along with its Michael Winner adverts, Direct Line had to have had the most irritating commercials on TV. So any withdrawal from any financial markets by Royal Bank of Scotland's phone-based businesses has to be welcomed.

However, its strategic retreat from mortgages is quite troubling, as it may be masking a larger problem. Direct Line has decided its computer systems are not up to the new mortgage regulatory regime that is being brought in by the Financial Services Authority on Hallowe'en. So it is stopping selling new mortgages to have a reboot, and plans to return to the market after All Saints' Day (that's 1 November, for the uninitiated). By then, it will hope to have its systems sorted out for the new regime.

It's a brave decision by Direct Line and one that I understand quite a number of other lenders would like to emulate. Though they have had nearly three years to prepare for the new era, many have struggled with getting their operations and computer systems in place to provide the "key features" statements that the FSA is requiring.

The big lenders - Halifax, Abbey National, Nationwide and the like - have had to spend millions doing this, but for them it was no more than an inconvenience. For smaller lenders, it was money they could ill afford. Those that have been able to sort themselves out will find the cost of doing business is higher as a proportion of their turnover then it is for their bigger rivals. Failing to get things right will lead to big fines. Water off a duck's back for, say, Lloyds TSB. A huge hit for a small building society.

This is the unintended consequence of increased regulation - that it makes it harder for the little guys to compete. The price you pay for certainty is less competition. Mind you, there are those who argue the mortgage market is a pretty busy place and that only having, say, 30 players rather than the current 50 or so might not change the dynamics too much. Letting HBOS buy Abbey would, though.

Spanish stress

It was The Selecter who sang the song "Too Much Pressure" in 1980. It probably wasn't a hit in Spain, but its theme will be reverberating around the walls of Banco Santander Central Hispano's HQ in Madrid.

Without actually bidding itself, HBOS has given the Spaniards a bad case of the jitters about their £8bn agreed offer for Abbey. This has not been helped by the drip, drip, drip of information about Santander's unique corporate governance policies, its unusual political contributions to unlikely politicians and the surprising number of court cases involving the bank's directors. Santander does not want a wilting Abbey to be left in limbo for six months while the UK competition authorities decide on whether to block a bid from a British bank (which surely they will).

Santander's nerves are showing in its decision to try to accelerate its bid process. The shareholder meetings for both itself and Abbey will have to come forward and Santander now hopes to complete the deal by the end of November, not December.

But if the Spanish really want to get HBOS off their backs, they should persuade the Takeover Panel to give James Crosby a deadline to make a bid. That will have him singing a different tune.

Alarming auditors

The report of the Public Company Accounting Oversight Board into the "big four" accounting firms makes unattractive reading. The US body looked at 64 audits and found nearly a third were deficient, particularly so at Deloitte. It said KPMG had invited conflicts of interest by striking contingent-fee arrangements with some clients that gave them incentives to use the firm for tax advice.

Now, it isn't easy to run an accounting firm in the post-Enron and WorldCom world. Not only is greater attention being paid to their work but the risk of being sued for making mistakes is greater too. Meanwhile, the opportunity to make extra money from audit clients, through consultancy, corporate finance or tax work, is being severely limited. But the big accounting firms are doing themselves no favours by failing to do their main jobs properly.