There is now just over one year to go before Mortgage Day and the countdown to statutory regulation has well and truly begun. But while there is still a long way to go, it seems the whole mortgage industry is finally gearing up for the most significant changes it has ever experienced.
It can be easy to overestimate the effect that regulation will have on the industry but ask any business about its future strategy and you will get two types of answer: those whose strategy is completely built around regulation and those trying to ensure their existing strategies can cope with it. Any business that is not currently considering the impacts that regulation will have on it should start doing so as soon as possible.
The story so far
There are still some firms who believe that they should wait until the final rules are published before taking any action – presumably working on the premise that it will all be cancelled. Unfortunately this is not going to happen and any firm burying its head in the sand, needs to have a rethink – and quick. It is understandable that studying each and every consultation paper published by the Financial Services Authority (FSA) is not very enticing and takes a high level of dedication, but when there is so much at stake it is rather short sighted not to have kept up to date with some of the basic proposals.
This year alone there have been six key consultations to date. At the beginning of the year CP159 revealed that the FSA intends to operate an appointed representative regime. This is especially relevant for firms that work across a combination of mortgages, insurance and investment product areas, and for those firms wishing to establish networks. (Feedback from the FSA to this paper has just been published and is discussed on page 14 of this issue.)
Next up was CP166, relating to the outcomes of the FSA’s depolarisation review. The question of independence can be a thorny subject but for many who rely heavily on offering an independent service, this was an important paper in outlining the new rules. CP174 and CP180 quickly followed, and this was the first indication for many firms not currently authorised by the FSA for any permitted activities, as to what they could expect from direct authorisation and equally importantly, what it will cost. (The feedback to CP174 is also discussed on page 14.)
This was followed at at the end of May by CP186. This paper was the follow-up to CP146 and set out the changes made as a result of industry lobbying and all the proposed requirements for the selling of mortgages. So large it came in two volumes, the second volume includes all the draft conduct of business mortgage rules. Of these, three chapters are in ‘near final’ state so there is plenty for the industry to start thinking about and start working on. Finally, for those intermediaries also involved in the selling of general insurances, we had the equivalent of CP186 in CP187.
Too much information can be mind boggling and there are many firms who are struggling to keep up to date with the proposals while trying to run a demanding business. However, ignoring it is not the answer and with the right help it is not an impossible task.
There are a number of key tasks mortgage intermediaries need to address between now and the end of the year:
• Review your own strategy. What are you trying to achieve? What products do you want to sell and what markets will you operate in? What are your growth plans? What are your income restraints? These are questions you need to ask .
• Make time to attend some of the many industry events, exhibitions and road shows ‘coming to a city near you’. These provide a useful source of information and options plus give you the opportunity to talk to industry experts. Unbiased advice can sometimes be difficult to find, so make sure you get enough differing views to consider. You may be surprised by what lenders and packagers can offer you assistance with. Attend more than one of the new networks’ presentations. If you feel that joining a network is the right option for you, make sure you talk to several before committing yourself and your business.
• Join the Association of Mortgage Intermediaries (AMI). The support of a trade body and the provision of clear, concise and unbiased information in the lead up to regulation will be invaluable.
• Visit the FSA website at www.fsa.gov.uk, there is a useful supply of fact sheets and FAQs available to get more information.
• Start looking at the requirements of the FSA handbook. If you are to be directly authorised, complying with elements such as the threshold conditions, approved persons regime, principals and senior management arrangement, and systems and controls is essential. These are actually less frightening than they may look, so start thinking how you would cope with them now before you discount it as an option.
• Review the cost of direct authorisation versus joining a network. And consider what price you put on having flexibility.
• Register for the application packs from the FSA and start preparing for what information will be needed as part of the application form.
• If you are to be directly authorised, consider whether you need external compliance support. Investigate the cost and what you get for your money. Remember, if you are directly authorised you cannot pass on your responsibility to someone else. So even if you get a bad service you cannot pass the buck.
• Make sure your compliance with the Mortgage Code Compliance Board’s (MCCB) requirements are up to date. Moving from the MCCB regime to the FSA regime will be much harder if your procedures and controls are not there in the first place.
• Make sure all your advisers are qualified and you have met the MCCB’s fitness and competence requirements. If not, you will not get the benefit of ‘grandfathering’ your advisers as competent when the FSA takes over.
Time for action
Once all the options have been considered and deliberated, the first four months of next year is when brokers need to take action. You might wonder why when regulation does not come in until October you need to have taken action by the end of April? The answer to this is simple. The FSA only guarantees a time period of six months for processing applications. So if you apply in May or June you will have a nervous wait to see if your application is dealt with in time and if you can continue trading from 1 November 2004. There are also large discounts to application fees if the application is made online by the end of the April 2004. For example, the cost to a firm (with turnover of less than a £1m) would be £500 as opposed to £1,200.
Whether you apply for direct authorisation or join a network, you will need to provide a lot of information about you and your firm. This can take time to put together so do not leave it too late.
It could also prove costly to put off joining a network of your choice beyond April. If it turns out to be limited on numbers and you have left it too late, you might find the door closed. Recruitment by networks will also involve a validation of you and your business, so make sure that your records up to date to present the best picture of yourself.
For firms applying for direct authorisation, the six months between April and October should be a continuation of preparing your business for regulation. Final mortgage rules will be available, procedures can be established, compliance plans written and training and competence schemes commenced. Again you should try and seek as much help as possible – especially when it is free. Talk to other firms in the same position as you – there may for example be opportunities to buy in services more cheaply by sharing costs.
There is no doubt that there is a lot of work to do, but remember you are not alone and there are firms out there that want to help you. So take your time, do your research and choose from your options wisely.
Advisers should start by reviewing company strategy – how do you want the firm to grow and in which markets?
Networks are beginning to post their costs which should be checked against other networks and what they offer.
Those intending to be directly authorised should remember the FSA needs up to six months to process applications.