As compliance and regulatory demands grow advisers are going to find an increasing amount of their business day spent on non-core activities ‘ specifically compliance paper work. One way of reducing this burden may be to sign up with a network which would do some of the legwork involved in remaining compliant.
In a recent issue of Mortgage Solutions, Rob Clifford, managing director of mortgage franchise mortgageforce, gave his views on the outlook for mortgage brokers.
His view was that the economics of selling mortgages were marginal, and because of this, and in light of massively increasing regulation and competency thresholds, there was no future for small or independent operations. His assessment of the future direction of the industry was that as control tightened, networks and franchises would grow in importance as brokers sought a degree of strength through numbers. A similar path was taken by IFAs during the 90s.
The prevailing view among networks is that lenders are going to be forced to change their intermediary relations by the sheer volume of work that compliance under CP98, as it stands, will entail.
Managing director of network HomeLoan Partnerships (HLP), Steve Hoare, says: ‘If CP98 is ratified as it stands then lenders are only going to be able to deal with networks, franchises or the large mortgage clubs, unless they set up an enormous compliance function, which I do not believe they will do.’
Nick Baxter, director of network Mortgage Promotion, agrees and says lenders will have to act with more caution: ‘I think lenders will look more closely at which intermediaries they will deal with, and which they will not. There will be a great deal more pre-vetting, a large part of which could be done through mortgage networks, like ourselves.’
Meanwhile, IFA network Bankhall has just launched a compliance support service for mortgage brokers called Point One.
Tony Murrell, operations director at Bankhall, says: ‘It would give lenders a great deal of comfort in being sure that there was at least a minimum standard of professionalism adopted by the member firms. It is also cost effective for the lenders.’
These are reasonable conclusions to come to. The issue is not yet set in stone, with lenders unhappy about networks vetting competitors’ products as well as their own. It may be that lenders could, in the future, refuse to deal with advisers, preferring to deal with just a few large networks.
With the situation concerning the exact implementation of CP98 still unclear, lenders are unable to make any definite decisions regarding the direction of future business in the context of compliance, but they are certainly looking towards the networks to aid in compliance.
Eddie Smith, director of business development at Verso, says: ‘As far as Verso is concerned our policy is to wait and see. In theory, the more successful networks with the correct systems are better placed than most of the lenders to do this, so we are sitting back ‘ it is one of the options.’
The head of corporate communications at Skipton Building Society, Mark Smitheringale, has a similar view. ‘The proposals, as they stand certainly make it easier for us to go through networks rather than individuals, but individual brokers supply a high proportion of our business. We would hope to accommodate everyone in some way, with nobody alienated. The key point is how the FSA will respond to the industry’s consultation ‘ the message is that it is an unworkable situation.’
It is not necessary to poll every lender to understand that the prevailing view is ‘wait and see’. It is certainly too early to be proclaiming the end of the totally independent adviser.
Networks offer more than compliance services for their members and may still fulfil a valuable role. But with the situation remaining unclear, it is questionable whether advisers should be panicked into the networks’ arms solely on issues of compliance.
However, what exactly do networks do to ensure compliance standards are met? As far as the compliance environment networks, franchises, or support services offer, it is understood that all services are not alike, offering different levels of compliance service. The network market is beginning to polarise into differing levels of control. For a good example we can look to how the IFA networks which sprang up in the 1990s in the face of industry regulation have defined themselves.
A range of options
Mortgage IFAs have the choice of the traditional networks, such as DBS or Countrywide, which are registered with the FSA and can authorise and take responsibility for the information put out by their members. Then there are the quasi networks, such as Bankhall, where all its members are individually registered with the FSA, with Bankhall providing the support services to enable them to comply. These loose models are increasingly beginning to emerge within the industry.
Hoare says compliance issues are becoming an important part of its business. ‘The compliance side of the business is what we are hanging our hat on. It is mainly software driven. We have added compliance functions to the software system, taking the introducer through every part of the sales process,’ he says.
According to Hoare, each time an adviser goes into a document, or prints, it will be dated and timed. When they update their mortgage sourcing software ‘ a daily task ‘ it automatically uploads everything they have done the previous day. The network can see what has been issued and in what order. If something is wrong at the moment HLP will phone the broker, as the compliance is voluntary to date, but after N3 it will stop the application. ‘The lender’s benefit is that it will know that everything it receives from a HLP member is fully compliant,’ says Hoare.
Other networks allow their clients more freedom to choose the amount of restrictions placed upon them and to decide the amount of work they are willing to do themselves.
Baxter says: ‘We give members a choice, with access to a compliance service. It is a paid service that offers four different levels. The lowest level offers access to a telephone help desk where intermediaries can phone with any compliance questions. The highest service goes right up to an annual audit of their business and an implementation visit. ‘
Dealing with experts
Mortgage Promotions’ compliance is outsourced to a firm called Compliance Consultants. Baxter says: ‘We feel you should outsource these things to experts, and bearing in mind their chairman sits on the Mortgage Code Compliance Board disciplinary panel, we think we have found the right company.’
This is a much looser system, with no ongoing real-time checks as mortgages progress. This arrangement may however tighten in the future.
Baxter says: ‘Where we probably need to evolve to, in a post-CP98 regime, is to talk to some mortgage sourcing software houses in order to provide some technology help.’
Point One is an extension to the range of services and skills established in the last eight years within Bankhall. In effect, this is a rollover of Bankhall’s expertise and experience into the soon to be regulated market.
Murrell explains: ‘We have specialist in-house staff that carry out annual audits of member firms’ businesses. They look at their processes and ensure they are up to speed with any regulations and that they provide the audit trails they need to avoid any future problems, from a litigious point of view.’ Point One has over 100 personnel in compliance, 11 of who are former regulators.
An alternative to networks is signing up with a franchise operation such as mortgageforce. Clifford says: ‘We as franchisers are sometimes accused of being dictatorial, and I make no bones about it. Being with mortgageforce is quite close to being employed as in our case member compliance impacts directly on our organisation’s reputation. This is not necessarily the case with networks or clubs.’
Mortgageforce runs compulsory five-day induction and compliance courses for all new brokers, regardless of prior experience, then regular training days and seminars across the country. The first 25 trades a new broker makes are inspected cover to cover and periodically thereafter. Mortgageforce has software in place, with data warehousing, supplying a document trail of work carried out.
Technology does look like it will play a role in the compliance process and it is worth noting that much of the compliance support available uses software-based tracking, displaying what has been shown to clients. And the large high street lenders have been investing in the main software trading platforms, such as IFonline, Mortgage Brain and The Exchange, and in future these may become the main trading conduit between the lender and borrower. The use of a common trading platforms would not rule out networks, as physical visits to check on advisers may still be carried out, but it is a fair bet that the situation regarding compliance will not remain static.
Compliance pressures on lenders may mean they look more closely at which brokers they deal with.
Networks currently offer differing levels of compliance support to members.
Trading platforms should be able to work alongside networks to give lenders and advisers a range of compliance services.