The Treasury’s announcement that the FSA is to regulate mortgages and general insurance from 2004 was welcomed by all sides of the industry. But how far reaching will these changes be, and what part will electronic trading solutions have to play in the success of the new regime?
Intermediaries, who had previously been coaxed into signing up to various networks, sourcing systems and compliance organisations ‘ often through dubious scare-mongering tactics ‘ can now step back and make a rational choice based on the offerings from these various institutions.
Packagers, whose survival ability post-N3 was looking rather delicate, have earned a reprieve and will continue to thrive ‘ in the short term at least. Meanwhile lenders, with hefty funds set aside to meet the proposed compliance regime, can now relax and channel these funds into other areas. CP98 was based on sound ideas and it is likely that many of its recommendations will form the basis of the new regulatory regime from 2004. However, the paper fell down because it was impractical and unworkable and hopefully the FSA will recognise this in its new paper.
There is a danger that lenders will lose interest in compliance solutions now that they will no longer be responsible for advice given by mortgage advisers.
However, the industry has two years to get compliance right and this time should be used to work towards a successful formula. The issue is not about who has responsibility for intermediaries.
Lenders should in theory be more focused, irrespective of the exact nature of the new regulation.
The principle issue arising from the FSA’s new role is likely to be integrity of information. Whether intermediaries issue documentation to consumers at point of sale or whether this is issued at a lender’s point of sale, it is likely to be down to the lender to ensure that the information provided at mortgage offer is consistent with information previously provided to the consumer.
The FSA has said in much of its output to date that the regulatory regime is part regulation and part information, as well as a means of redress. Just because the FSA will be the regulatory body does not mean that these principles will change. For example, there has been no announcement as yet to indicate that comparative tables for mortgages will not be put into place in 2002, as this can be seen as a separate issue to the regulation of lenders and intermediaries.
The FSA is therefore likely to focus on information integrity through the sales process.
Putting customers first
CP98 gave a ‘fit for purpose’ approach to regulation and although the FSA has moved away from lender responsibility for intermediaries, it is unlikely to allow lenders to abdicate responsibility for information given about their products by intermediaries to prospective customers. You only have to look at the planned changes to advertising mortgages, outlined in CP98, to see evidence of this. It is fair to say that integrity of information, combined with clear and unequivocal records for consumers, is going to feature in the FSA’s approach. So whether the pre-application illustration (PAI) ‘ as defined in CP98 ‘ is going to be required is irrelevant. What matters is that some form of documentation is going to have to be given to consumers at initial decision time by advisers. That document will have to be matched to the final offer document when the lender sends it out.
Audit trails are also going to be necessary so that compliance and prudential control can be demonstrated. The appropriateness of the advice given is also going to have to be considered, and this can only be achieved by controlled data collection, consistent and reliable data storage and ease of access for audit.
Life after CP98
So have we really seen the back of CP98? The regulator has so far demonstrated a fairly consistent methodology in regulation. The FSA has said that it will re-consult with the industry, but perhaps a part of this is to get input from advisers, given the change of tactic. It seems unlikely that we will see a radically different proposition when the new consultation paper comes out. Something prescribed by the FSA will have to be provided to consumers by advisers and this will have to be consistent with the final offer. The only point that is likely to change with respect to CP98 is the responsibility for issue and the data contained therein.
Lenders can now look at information provision more effectively, without the time constraints imposed by N3. Although it is likely they will be held responsible for the data provided, lenders can now take a rational look at this issue and spend time developing a workable solution.
It now looks as if we will see even more emphasis placed on electronic trading, as this is one method whereby the lender can control the product information being used and obtain instant audit trails. The use of websites and sourcing systems gives the lender immediate access to all data being used by the intermediary and ultimately that being provided to the customer.
There is no doubt that the most dangerous method of operation, from a lender’s viewpoint, is the trusty paper-based route. While it is still the most common method of operation in the market, it is unlikely to remain so for long. CP98 was set to impose a regime whereby the lender had to have control.
Having set the wheels in motion, there is no doubt lenders now view this as a good idea. Many of the principles will still remain. For example, the idea of updating one central database with information ‘ which is then accessed by the various sourcing systems and distribution channels ‘ is a solution that most lenders would wholeheartedly welcome. Although this may not happen in the short term, it will be ready for the proposed start of the new regime in 2004.
Over the next two years, much emphasis will be placed on the ability to trade electronically. This will not only come from the main trading platforms but also from the lenders themselves ‘ this has been seen during the past three months.
A number of lenders have been queuing up to establish electronic links with the key platforms in preparation for N3. As opposed to the smoke and mirrors methodology that has been in evident in the past, the proposed electronic links cover everything with online agreements in principle (AIP’s), real-time credit scoring and instant decisions. The whole process of dealing with a mortgage application was finally going to change ‘ and still is.
Recognising the benefits
Over the past six months we have seen some sources spouting the benefits of their supposedly fully CP98 compliant systems. It will be interesting to see if their attention now turns to electronic trading facilities. The Mortgage Code does after all now have a lifespan of two years, meaning future changes to compliance processes will be catered for well in advance.
Developments in electronic trading will undoubtedly see rapid growth in 2002 as the entire industry starts to recognise this as the way forward. This is not just because of speed, ease of use and cost savings, but also because of control, audit trails and compliance. Lenders now recognise the benefits this will bring and have at last started to put some resource behind it.
There are a few lenders which are streets ahead, but the rest of the major players will no doubt catch up very quickly.
In return consumers will be provided with a faster, more efficient service. Instant decisions will remove the stress and hassle of applying for a mortgage. The advice of a sound mortgage adviser will be even more critical, as the buying process is reduced in time.
From the adviser’s point of view, the whole saga of CP98 may prove beneficial in the end. It has forced the industry to take a look at itself and the processes it uses. The new FSA regime may prove costly and may result in fewer players in the market, but that is not necessarily a bad outcome.
One thing we can all thank CP98 for is that it has been a long awaited wake-up call for lenders.
While the FSA will be responsible for mortgage advice, lenders will still be responsible for product details issued by brokers.
Even if PAIs are scrapped, initial product information will still need to match final offer documentation.
A central product database adapted by lenders and accessed by intermediaries may still offer the best compliance solution.