While I was never in the Scouts I nevertheless agree with the principle of ‘be prepared’ and all mortgage market practitioners would also do well to adopt this motto in the lead up to statutory mortgage and general insurance regulation.
The self-regulatory world has been reasonably forgiving but under the Financial Services Authority (FSA) it will be a criminal offence for a firm to conduct most mortgage or general insurance business unless either it has been authorised (with its various ongoing requirements) or it is exempt from direct authorisation, such as an appointed representative (AR).
But do not be fooled into believing that becoming an AR will be the painless alternative. While the rulebook will not apply directly to a firm’s AR’s, sections 39(3)/(4) of the Act (see SUP 12) mean that a firm will always be responsible for the acts and omissions of its AR’s (as if they were a staff member). Principals will therefore still impose tight controls and will need to feel adequately rewarded for these significant risks and the operational costs involved.
For those who wish to be directly authorised the immediate challenge is the application deadline date of 1 April 2004. Applying in time and online secures a substantially discounted fee (£500 as against £1,200), so strategic deliberations will need to have been completed well in advance of this date. Miss this and you may have a nervous wait to see if your application will be processed in time. And no authorisation means you stop trading.
FSA costs are based on an estimated 25,000 applications, plus 4,000 variations of permission from firms already authorised, whose forms will be considerably shorter. With the application fee discounted by 50%, an IFA’s fees could be as low as £250. ‘Periodic fees’ starting in the 2005/06 fee year are not expected to be onerous either. Mortgage intermediaries will be also be required to contribute to the Financial Services Compensation Scheme ‘ hopefully, a relatively modest annual contribution, but supplemented in the event of a large draw on the Scheme funds.
Other key areas for research and evaluation and, where required, upgrading IT and operational models include:
Capital requirements ‘ The proposal to hold the greater of £5,000 and 5% of net annual brokerage income may be a problem for a few, but for most, given the alternatives to holding this in cash, this should not be a barrier to direct authorisation.
PI requirements ‘ Handling client money will affect the PI risks and brings some important additional rules into play (see MCOB).
Sales processes ‘ MCOB (see CP186) lays down a number of important (draft) rules for both advised and non-advised sales and it is important to get to know these well in advance of their implementation as your current sales model, particularly with regard to disclosures and other communications with clients, will inevitably need overhauling. You will also need to check out the specific rules covering areas such as affordability assessment and for giving careful and even-handed advice in debt consolidation situations.
Some of the required changes such as the new ‘key facts’ document, client fact finds and much of the regulatory audit trail requirements will no doubt be embraced relatively painlessly through improvements to the generally excellent product ‘sourcing’ and client management systems. However, there will be a number of matters relating to client interactions that require much more than simply reworking the software. For example, the Principles for Businesses (PRIN) within the High Level Standards section of the FSA sourcebook lays down key standards that professional mortgage practitioners will aspire to in their dealings with clients.
Supervisory processes ‘ A firm’s supervisory staff must be adequate for the size of the sales team, and supervisors must have the right technical knowledge and assessment and coaching skills. In ‘non-advised sales’, where scripted questions will be obligatory, good supervision will be essential in order to prevent inadvertent personal recommendations (see MCOB 4.6).
Training and competence (T&C) ‘ Principle three (see SYSC) requires firms to: ‘take reasonable care to establish and maintain such systems and controls as are appropriate to its business’. The Training and Competence Sourcebook makes it clear that these ‘systems and controls’ should allow the company to satisfy itself of the suitability of anyone who acts for it, including ongoing assessment and monitoring of the competence of each individual in a regulated role.
Record keeping ‘ The requirement for firms to be able to demonstrate compliance in every area of the regulatory process means that firms will need to very disciplined in their record keeping routines. For example, you will need to make and retain continuous records of the criteria applied in assessing initial and ongoing competence and how and when the competence decision was arrived at.
The above inevitably only scratches the surface of the information that intermediaries need to consider in their direct versus AR decision process. Clearly, the networks and the larger intermediary firms have the resources to cope with these changes more easily, and will offer a marginally less painful entry route into statutory regulation. However, with the FSA’s encouraging fee scales, and with the growing band of entrepreneurial third party service providers gearing up to help the small intermediary through the regulatory maze, direct authorisation remains a real option for those who are prepared.