How will new regulation affect the mortgage industry?
There is no doubt that the new regulatory regime, which will be introduced on 31 October 2004 ‘ Mortgage Day ‘ by the Financial Services Authority (FSA), will be the single most significant development in the mortgage industry for many years. The self-regulatory regime managed by the familiar Mortgage Code Compliance Board (MCCB) will be replaced by a statutory regime with stringent penalties when rules are broken.The effects will be far reaching, changing the way products are sold, the structure of the mortgage industry as a whole and the way lenders, packagers, distributors and intermediaries run their businesses.
The FSA has issued numerous Consultation Papers but which are the most important?
The FSA has been charged by the Treasury to introduce a regulatory regime, which fully protects consumers’ interests and reduces the opportunities for financial crime. However, before the FSA introduces any rules or regulations it is required to publish proposals and take all comments into account. This is achieved by publishing Consultation Papers.To date there have been six key papers which mortgage brokers need to be aware of: CP146 The FSA’s approach to regulating mortgage sales; CP159 Appointed Representatives; CP166 Reforming polarisation; CP174 Prudential and other requirements for mortgage firms and insurance intermediaries; CP180 Fees for mortgage firms and insurance intermediaries and CP186 Mortgage regulation ‘ draft conduct of business rules and feedback on CP146. Each Consultation Paper represents an individual piece of a larger ‘jigsaw’. However, the most important of these is, arguably, CP174 as this lays out the systems and controls, which intermediaries will have to develop and operate if they wish to be directly authorised by the FSA.
What regulatory options are open to intermediaries?
Essentially, mortgage brokers have four choices of becoming either: directly authorised by the FSA; an ‘appointed representative’ ‘ letting an authorised ‘principal’ take responsibility for compliance issues; ‘multi-tie’ ‘ offering a range of selected products; or an introducer. Each option has pros and cons and which is right will depend upon each broker’s circumstances and ambitions.
The simplest option is to become an introducer and remain outside the reach of much of the regulation. The benefit would be that brokers need do nothing in preparation and will incur no additional costs. The downside is that they will not be able to give any form of mortgage advice to clients ‘ all they will be able to do is refer their client to someone who can provide advice. If brokers only handle the occasional mortgage case this is a valid option and will at least enable them to help clients rather than turn them away.
The extreme alternative is to become directly authorised by the FSA, taking responsibility for their own compliance. This is not for the faint-hearted, as it will take time, commitment and cost money. There has, however, been a lot of scaremongering about direct authorisation and it should not be dismissed as an option only for firms large enough to justify their own compliance infrastructure. Third party ‘outsourced’ compliance services will be made available so the task may not be as onerous as it at first appears.
The third option is to become an ‘appointed representative’, letting an authorised principal, such as a network, take responsibility for compliance issues. The benefits of this option are fairly obvious: the network will provide a packaged solution to compliance including training, marketing support, provision of sourcing systems and arranging PI cover.
For a large number of mortgage brokers this will be a very attractive option. The downside is that once they have decided to work with a mortgage principal, they must place all of their business with them ‘ at least within the same ‘substitutable’ category: there are two for mortgages. It will be important, therefore, to ensure the chosen network gives access to a wide range of lenders and has a proven track record of providing a high quality service.
The final option is to ‘multi-tie’. This requires a broker to be independently authorised and offer a selected range of mortgages rather than the whole market. This is likely to be of interest to IFAs for whom mortgages are not the main focus of their business.
Will I have to adapt my selling practices?
The FSA has proposed a formalised approach to the way the sale of mortgages should be carried out. At the outset of discussions brokers will be required to provide clients with an Initial Disclosure Document ‘ this replaces the current Terms of Business letter used by intermediaries. All discussions will be undertaken on an advised and non-advised basis.
The FSA has also broken down mortgage products into two categories ‘ standard and high risk. The standard category contains most of the mortgage products sought by clients. The high-risk category relates to so called ‘lifetime’ products such as equity release, which the FSA believes advisers will need to have specialist knowledge of to be able to be make sound recommendations.
Brokers will also be required to provide clients with a thorough Key Facts Illustration ‘ probably a four page document ‘ outlining the details of the products being recommended. Brokers will need to ensure (and have written evidence to support) that their recommendations were ‘suitable’ given their client’s personal and financial circumstances. Any procuration fees, which will be earned, will also have to be disclosed to the client in a similar way to the requirements of the Mortgage Code.
Will I need to study for further mortgage qualifications?
Although the FSA will be consulting further on training and competence it does not propose to introduce a top-up examination for brokers, providing advice is given on standard risk mortgages. However, brokers will be required to pass an additional examination if they wish to advise on the sale of ‘high risk’ mortgages such as equity release.