The future shape of mortgage regulation has been thrown into a quandary, following the Treasury’s announcement that mortgage advisers are to be governed by the Financial Services Authority (FSA).
The news means that N3, scheduled for August this year, will now be postponed until at least Spring 2004, allowing time for a lengthy consultation period.
Speculation about what the new rules will include is already mounting. Issues that were under attack from the industry in the FSA’s previous consultation paper ‘ CP98 ‘ including the introduction of lengthy pre-application illustrations, are expected to be reviewed under the new regime.
Although the move has been broadly welcomed by advisers, there are fears that the FSA may be heavy-handed in its regulatory approach to intermediaries.
John Heron, chairman of the Intermediary Mortgage Lenders Association, said that the biggest mistake the FSA could make is to over-regulate advisers. ‘Going forward the challenge will be to establish a regulatory framework for advice that protects consumers without reducing choice. Delivering this will rely on a measured approach to regulation, recognising the important role played by all intermediaries and one that allows firms to do a good job for their clients to thrive, rather than drown in a sea of bureaucracy,’ he said.
Rod Murdison, proprietor of Murdison & Browning, said that there is some confusion among advisers about why regulation is needed at all. ‘The FSA is using a sledge hammer in order to crush a nut,’ he said. ‘I doubt very much whether the new regime will benefit consumers, all it will mean is extra cost ‘ it is very frustrating. If protecting the public is the Government’s ultimate objective, then why not backtrack to see which individuals are ripping the public off instead of enforcing all-encompassing regulation. Advisers need to understand why this regulation is needed and we are being given no answers.’
Stephen Smith, director of housing and marketing at Legal & General, agreed that the FSA needs to make sure that it does not over-regulate advisers. ‘I hope that the regulator keeps issues about mortgage advice in perspective. The major issues, as outlined in CP98, are to do with lending practice rather than advice. The FSA should therefore keep regulation proportionate and make sure a light touch is used when regulating advisers,’ he said.
Predicting a similar regime to that proposed in CP98, with emphasis put on time consuming compliance documentation, Murdison added: ‘What does it matter if our desks are a mess? Advisers are entrepreneurial and do not have the mentality of a computer programmer or an accountant. But this is what the regulator is asking. We now feel powerless to do anything about it as it is in the hands of the legislator and the politicians.’
Joe Bradley, chief executive of Marlborough Stirling Mortgage Services, said the extra burden of administration that is likely to occur with the implementation of the new regime could force more advisers to outsource non-core activities. ‘As well as squeezing lenders’ margins, the increased regulation will also put pressure on intermediaries’ fees. With this in mind, intermediaries need to take the opportunity given by the extension of N3 to identify their key strengths ‘ let’s face it, administration isn’t one of them ‘ and focus on improving their customer relationship management to give them a competitive advantage. To achieve this, non-core activities such as administration could be outsourced to experts such as business services providers,’ he said.
Now that the FSA is set to become the sole regulator for the industry, the future role of the Mortgage Code has been put in doubt.
However, the Mortgage Code Compliance Board (MCCB) has welcomed the move, vowing to work closely with the FSA to ensure there is a stress-free transition to the new regime.
Luke March, chief executive of the MCCB, said: ‘We will whole-heartedly play our part in making the transition period as smooth as possible, and will work closely with the FSA and Treasury in ensuring the statutory regime delivers the right balance of consumer protection and regulation.’
Eddie Smith, director of business development at Verso, said the FSA would be wise to look at the work already done by the MCCB when proposing its new rules. ‘There is a big question mark over whether the MCCB will still be around. Personally, I hope that the Mortgage Code does not get completely thrown out of the window because it made a lot of sense and is still relevant to the market. In my view it should definitely form some part of the proposals.’
Another issue emerging from the announcement is whether electronic trading platforms will still have a role in providing compliance solutions for the revised regime.
After investing so much in technology geared to take on CP98, Smith believes that platforms will still have a vital part to play.
‘Some providers have spent huge amounts of money preparing compliance solutions for CP98 and I wonder whether they are now having second thoughts. However, the major platforms will still undoubtedly have a huge role to play in dealing with compliance for the new regulations when they come into force.’
Richard Hurst, marketing manager at IFonline, welcomed the news and said that trading platforms should be able to adapt their compliance solutions with relative ease no matter what the outcome of the new regulations. ‘We built our system so that lenders would be able to view advisers’ documents without the need for compliance visits. All that has changed is that the FSA will now be looking at it. It will also be useful to broker groups and networks so that they can make sure members remain compliant. Whatever the new regulations have in store, the principle of our compliance solutions will remain the same ‘ we are full steam ahead,’ he said.