Eleanor Linton, head of policy, high street firms division, at the FSA
Earlier this month, the Financial Services Authority (FSA) published ‘near final’ rules on two major parts of its regime. These make up a workable package of proposals and firms now have all the information they need to take their key business decisions as regulation approaches. In particular, they will be able to decide whether to become directly authorised by the FSA or to become an appointed representative (AR) of a directly authorised firm.
The recent feedback on CP174 and CP159 set out the standards that firms must meet and the resources they must have to become authorised by the FSA. They also finalise the details for AR status, which is an alternative to becoming directly authorised by the FSA.
Whether a firm chooses to be directly authorised or to seek a principal to take responsibility for their compliance, the measures will ensure that consumers are properly protected in a proportionate way.
The FSA found the consultation process extremely valuable and where the industry has raised issues it has listened and addressed them. As a result it has been able to make its proposals more flexible so that they better reflect current market practice while ensuring that consumers are appropriately protected.
Firms will find that the proposals for CP174 Prudential and other requirements for mortgage firms and insurance intermediaries have been modified in a few key areas. The main point for mortgage intermediaries to note is that the approach to Professional Indemnity Insurance (PII) has been revised. So some firms will find that their PII requirements are reduced and that the conditions have been simplified. These changes recognise both the difficulty some firms may face in buying PII cover in a hard market and further analysis that the FSA has done which found that these lower levels are still proportionate to the risks arising in these markets.
For example, the minimum limits for mortgage intermediaries are either: the higher of 10% of annual income subject to an upper limit of £1m, and £100,000 per claim or £500,000 in aggregate. In addition, firms holding client money must have an allowable excess of £5,000 or 3% of annual income.
Firms not holding client money must have an excess of £2,500 or 1.5% annual income. Finally, firms will now have the flexibility to obtain a comparable guarantee instead of PII. This must come from an authorised firm with net tangible assets of £1m.
Also of interest to mortgage intermediaries will be the simplified regulatory capital requirements which take into account whether a firm holds client money or not. Mortgage intermediaries not holding client money must have net tangible assets the higher of £5,000 or 2.5% of annual income; intermediaries holding client money must have the higher of £10,000 or 5% of annual income.
The rules for ARs doing investment and mortgage business are essentially unchanged. ARs are allowed one principal for all investment business and two for mortgages – one for regulated mortgages other than lifetime mortgages and one for lifetime mortgages. But mortgage intermediaries who also do general insurance business should be aware that the rules for general insurance have been substantially revised.
The FSA appreciates that the latest papers, with the changes that have been made as a result of consultation, contain a great deal for firms to digest. To make it easier the FSA has produced short, user friendly guides highlighting the main details at www.fsa.gov.uk/mgi and it is advisable that even if you do not read anything else, read the short guides.
Patrick Brennan, head of authorisation, high street firms division, at the FSA
The Financial Services Authority (FSA) has now published all of the information mortgage firms need to take their major business decisions in advance of regulation and is expecting large numbers of firms in the mortgage sector to apply for direct authorisation.
Mortgage and general insurance firms should consider carefully whether to become directly authorised by the FSA or be subject to regulation as an appointed representative (AR), possibly through a network. Being an AR does not remove the need to comply with FSA rules. Instead, the principal (such as a network) takes responsibility for their compliance.
Applying for authorisation from the FSA will be straightforward. Firms will be able to apply on-line or complete and return a paper application. There is even a tailor-made application form for firms that want to apply to do mortgage business. Contrary to what you might have heard, the form will not be horribly complicated. The core form is 30 pages long and many of the questions require simple yes/no answers.
The FSA will be ready to accept applications from mid-January 2004 but firms will be able to register for an application pack from the first week of November.
A dedicated contact centre will also be launched in the first week of November so firms can get help when completing their application forms. The FSA will then be accepting applications from mid-January 2004.
Those in the mortgage business need to apply before 1 April 2004 to take advantage of the discount which could be up to 50% for smaller firms.