While everyone’s heads are still buzzing from all the regulatory consultation papers flying around, it seems to me that the key issue here is the need for brokers to exercise normal caution when selecting a business partner.
Whether the broker deals with an authorised principal under the new regime or whether they decide to introduce to an unauthorised packager the normal rules of contract will apply in that if a packager offers to take a case from an introducer and in consideration the packager agrees to pay the introducer part of the procuration fee, then that packager is liable for that payment. This is the case whether or not the packager is regulated by the FSA or not. It follows that if the packager goes bust then the broker may end up out of pocket. While it is clear that the FSA will be looking to regulate mortgage activities in respect of those activities that are the subject of the statutory framework (advice and information to the public), it will not seek to govern any contractual business relationships between introducers and packagers. And although the writ of the FSA is wide ‘ it will not extend to disputes about money between introducers and packagers ‘ that would be getting into very deep water.
The fact that the authorised packager subcontracts with an unauthorised packager needs to be considered in the context of the intention of the parties. If the broker intended to deal with the authorised packager and unknown to the broker that packager then subcontracts the case then the original contract (and obligation to pay the procuration fee) remains with the authorised packager who will remain liable to the introducer.
If on the other hand the broker is told that the subcontracted packager is going to do the case then there could be an argument (depending on the facts) that the contract had been assigned to the second packager with the consent of the broker. My view is that this is unlikely and that the first packager will remain liable.
You raise an interesting scenario of a mortgage industry under statutory regulation. As yet, though, definitive rules have yet to be published so one can only speculate as to how far an unauthorised party would enter into this mortgage ‘chain’.
It does seem likely that the lenders, in a regulated world, would insist that its introducers and packagers be authorised, so that market forces would dictate the market place, in addition to any invoked regulation.
The position you outline reaffirms the general tenet of firstly being clear with whom you are dealing, and secondly ensuring that any terms and conditions of your business relationship are clearly spelt out and understood by all parties. This seems obvious, but it is surprising how often things are taken for granted and, as always, you will only discover the problem when things go wrong.
If it is the packager who has the contractual relationship with you as the introducing broker, then the fact that the packager seeks to sub-contract their work would be unlikely to affect your contractual relationship with the packager, who would thus be still liable to you for any fees due. This would not be any different even if all parties were regulated, as the basic law of contract would still apply.
As in any kind of commercial arrangement you need to know, and be happy with, whoever you are dealing with.
The FSA’s approach to mortgage regulation is becoming clearer but remember that its key role is to carry out the instructions of the Treasury. These instructions are that the FSA authorises only those firms that carry out ‘regulated activities’ in connection with mortgage intermediation. This means that the FSA’s remit does not cover third-party packagers because they are not involved in the advice process. Broker packagers will be authorised only where they give advice.
The first part of this question concerns the safety of client money when passed to an unauthorised firm.
The FSA is now proposing to introduce ‘client money’ rules for broker packagers, involving increased capital adequacy and segregated accounts. But FSA protection for brokers and their clients will not extend to third-party packagers because these firms will be unauthorised. The FSA defines procuration fees in CP186 as ‘the total amount paid by a mortgage lender to a mortgage intermediary’. This mirrors the procedure the FSA uses for investment business. While I am sure that the FSA does not expect lenders to pay procuration fees to unauthorised firms, it does not rule out lenders paying service fees to packagers although these will have to be disclosed by the authorised adviser, along with the procuration fee.
One way round this problem would be for unauthorised packagers to operate under agency agreements with lenders and introducers. Lenders could elect to protect client money held by their appointed packagers, as is the custom for general insurance. A solution will have to be found by Mortgage Day as after that date responsibility for the actions of third party packagers will fall to mortgage brokers and lenders in their new capacity as authorised firms. Whatever arrangements are eventually agreed it seems certain it will be a real test of the lender/packager relationship.