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The day of reckoning

by: By Ben Marquand
  • 15/12/2003
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The final rules have been published and the countdown is progressing in earnest, but the regulation trail is due for more twists and turns before Mortgage Day

Ben Marquand: Should the Financial Services Authority (FSA) have offered more guidance as regards brokers’ options, and could this result in problems further down the line?

Matthew Grayson: The one thing that is worrying is the recent mixed messages that have come out of the FSA in terms of applying for appointed representative (AR) status and applying for direct authorisation simultaneously. There is a danger this could make a mockery of the process in terms of having to take your second choice if the principal cannot get approved in time. And we still don’t know how easy it will be for the broker to transfer from AR status and vice-versa.

Mark Mountney: I’m not sure it’s a mixed message. The FSA is not asking advisers to apply – it is asking them to register so they can digest the questionnaire. Then, if they cannot progress the AR route, they have a backdrop, rather than waiting another month or two and then being panicked into make a decision. That is the issue.

Chris Cummings: The one thing I think the FSA did miss a trick on, was why not register the principals first? This would allow brokers who wish to go down the AR route the certainty of knowing who has received their ‘minded to approve’ documents, because until somebody can wave that in front of you I cannot see too many reasons to decide on a network. If the two things had been done sequentially rather than consecutively it would have cleared up a lot of uncertainty in the market.

Tony Catt: I would say from the information I have seen about registration is that it has all been reasonably clear, or as clear as you are likely to get from the FSA. My experience of the FSA is that it does not quite define everything so as to leave a little flexibility.

Shaun Godfrey: The FSA has consistently said that, given the timescale, it has had to use 95% of existing rules and regulations. Why anyone has chosen to think that suddenly it will invent a brand new rulebook for mortgage and general insurance intermediaries in approximately 24 months is beyond me. I think the FSA is doing a tremendous job and has shifted from a very dictatorial position under the PIA to a position where it wants advisers to do what is ‘appropriate’ for clients. It is trying to be appropriate with regulation dependent on the risk involved.

Stephen Smith: Where there has been an issue has been over timing. I believe the whole programme has been compacted by losing a year at the front end when it changed from CP98 to coming out with CP146. It now feels more rushed than many would have liked, but perhaps it was always going to feel this way. But as it has compacted the timescale we have to make information available to brokers quickly so they can make appropriate choices. The larger firms are used to receiving and analysing some of the documentation, but there is a swathe of people who are not used to this sort of regulation and need our help, especially our reporting requirements.

Ben Marquand: Should the technology providers be helping brokers by providing more in the way of systems to aid reporting requirements?

Mark Lofthouse: I think the reporting requirements are much wider than the systems we produce. What we do is make sure that advisers have got the point of sale process. This is then exported to the FSA or the principal so they can do their own auditing and monitoring, but there is a whole reporting side of the FSA which governs not just what is sold. It is about what training has been done and the qualifications that advisers have. And this has nothing to do with the point of sale process. A lot of the reporting is outside what we do and it is business reporting and company reporting, not just process reporting that is needed.

Ben Marquand: Won’t it be easier to keep track of all this reporting if it is conducted electronically?

Mark Lofthouse: We [sourcing systems] are all dramatically expanding our offerings in terms of the ability to have a point of sale and also to have every piece of documentation that has been seen by the client, and every piece of data that relates available for analysis and quick reference. Because what you can then do is actually make compliance more cost effective so you don’t have to have a compliance officer going out to someone’s office all the time; you can check that what is on their paper records is the same as what is on their systems from a central location. These will be made more readily available over the first few months of next year.

Shaun Godfrey: There is a motive for the software houses to plug this gap, otherwise one will do it and the others will lose market share. My issue is that there is an expectation that if you fix the sales process then you fix the compliance requirements, which is completely untrue. The key issue is to educate advisers. How can a sales process guide them in terms of training? Lessons that have been learnt in another part of financial services are again not being picked up by the industry, and this is worse on the general insurance side.

Ben Marquand: As a training and competence specialist, what is your experience of this?

Simon Edge: I feel that where the time invested is going to reap most benefits is in training and competence, not in the sales process. This will determine the service and quality of advice a client gets, and this is where many companies on the investment side have had problems. The focus is still very much on what fees are going to be, whereas the real cost is going to come from implementing a training and competence regime – this is the real cost of regulation. And this is where the FSA is not getting its point across; it is this that will have most impact, not the periodic fees.

Mark Lofthouse: Do you think it is right then for the FSA to stand up and say it will regulate with a light touch?

Simon Edge: Going back to where it has been astute, it hasn’t really watered down the regulation of investment, yet it is making out that direct authorisation is a fairly simple process.

Nathan Douglas: There is nothing in the application that is going to scare people off. It is moving forward and reporting on an ongoing basis which may cause problems. There will be questions surrounding coping with compliance requirements and whether you then have enough time to go out and sell. It seems the FSA is trying to encourage advisers along the direct authorisation route, but do they really know what it means to have total responsibility for everything they do.

Mark Lofthouse: Is it fair to say they won’t have time to sell? If you look at the sale of mortgages, there are a lot of IFAs who work within the regulatory process who are very capable of selling and making money in this market place. The cost of compliance for a lot of mortgage advisers is already there and it is actually only those guys, who have never had this compliance before, who have got the biggest change.

Stephen Atkins: You wonder whether the emphasis on the date has now changed, because it is almost going to be easier to become authorised up to October, but the really critical period is Spring 2005 when the first reporting goes in. And if people get through the application process, this will be when the shock hits.

Simon Edge: Is it about the ease of the application process or is it about brokers sitting down and looking at their business and asking what the best route to take is? These are the decisions they need to make now – not deferring the big decisions they will have to make.

Mark Mountney: The window of opportunity where you have to sit down and really plot your course is imminent and the reality, from speaking to advisers is frightening. They are not in a position to make this decision. As for whose responsibility it is, ultimately it is theirs because the information is there.

Ben Marquand: Are we surprised about this lack of understanding at this point in the countdown?

Mark Mountney: No, we saw it with IFAs back in 1986 when they were standing in a queue at the eleventh hour waiting to hand their applications in. It is incredible to think that businessmen can leave the decision making process so late.

Chris Cummings: I think the whole industry is fixated with end-dates. All the products we sell have end-dates – it’s what we all focus on.

Anthony Radford: From a lender’s perspective, we have got a job on to make sure that our products are available in an integrated fashion and, while the FSA has been timely in producing the rules and regulations, it is now a leap of faith for an intermediary to pin their colours to the mast when they can’t see the whole proposition. As an industry we need to be really explicit in terms of what help and assistance we are going to give those that are directly regulated, and also what exactly those who are thinking of signing to a principal are joining both contractually and in terms of help for their business. One criticism I would level at the FSA is that we only have a matter of months to get integrated processes together from front to back.

Stephen Atkins: The other time bomb at the moment is that there is no proof that the professional indemnity (PI) insurers have any capacity for the small one and two man mortgage brokers who have never been regulated before. This is the one thing that could blow everything apart. Until we know this is readily available all this is academic.

Mark Mountney: This will drive a lot of potential direct applicants under the principal umbrella. What the adviser is balancing is their independence versus cost and reporting. PI is a massive issue. If this is going to impact on the bottom line under the MCCB it is a worry.

Ben Marquand: Should the FSA be looking further at self-cert mortgages too?

Shaun Godfrey: I am intrigued about self-certification, because the risk is very much the lenders’. They are providing a mortgage based on reduced information so they must have a risk. Out of every 100 mortgages how many are going to get into problems?

Anthony Radford: Halifax does not do self-certification itself, but as an industry we wouldn’t do it if it wasn’t good business and the risk profile associated with this class of business is no worse or better than other sectors. It is a good sector and there is a genuine need in the marketplace for it.

Ben Marquand: How much concern is there that, as it stands, the Financial Ombudsman Service (FOS) won’t have powers to deal with complaints retrospectively?

Shaun Godfrey: It is a fairly significant concern, except that you have to draw a line in the sand at some point. It is a concern because eventually you will get a situation where you have somebody who has a right to complain and somebody who doesn’t purely and simply depending on when the business was transacted. Going back to when everyone needed to be in the MCCB seems a reasonable date to go back to – the point at which the first regulation came in.

Stephen Smith: This matter is still under Treasury consultation anyway, and it may well be that it gets retrospective powers over MCCB period claims. There have been a very small number of complaints about mortgage advice – less than 100 per annum find in favour of the complainant, out of 1.25 million mortgages sold last year by intermediaries.

Stephen Atkins: One of the problems is that firms that become appointed representatives automatically become exempt from this. I think it would be a cheaper option to charge each firm less than £100 at MCCB renewal and state that this money will be passed to the FOS. This would create the £1.5m that the FOS is looking for; it would be cheaper for those who stay directly authorised because they do not have to expect PI run off cover and other additional costs.

Chris Cummings: It will do the industry no harm to be associated with FOS and to come under its authority.

Ben Marquand: Will the multiple principal approach work in practice?

Nathan Douglas: I think it will work in some cases. If you have got an IFA who is an appointed representative for investments and he wants to go to another firm for mortgages and another for general insurance those three or more firms need to have an agreement. The trouble is that one is going to have to step up to the block, take lead principal status and liaise between the parties. I think this will work where there is a limited number of principals but if a broker wants a large number of principals for general insurance then it gets difficult. It will not work for brokers who want numerous principals.

Stephen Smith: You get the impression that the FSA tried to resolve it, couldn’t, called it multiple principals and left it for the market to sort it out. It has passed the buck to the market.

Ben Marquand: The Treasury is now consulting on home reversion plans, but could we get into problems now even if it does decide they should be regulated because there will be a lag?

Tony Catt: I think you have to be very careful about equity release schemes in general, but taking each case as it comes it may be that a home reversion will be the most useful for a client. This is why these schemes are available. I don’t see why one particular type of equity release should be seen as being any different from any of the others. You have got to make sure that you deal with the relatives and do the job properly. I am pleased that all types may well be regulated because I think you can cause so much damage by selling someone the wrong thing and it is good to see that advisers will be allowed to sell the most relevant product at any one time.

Simon Edge: They are actually in the regulations as they stand at the moment, in that if you recommend a lifetime mortgage you have to show that a home reversion plan is less suitable. So you have got to have an understanding and demonstrate this. I would say to brokers incorporate it in your suite of products, don’t ignore it.

Stephen Smith: I thing you will find that the providers of reversion schemes will themselves be proposing a self-regulatory regime in anticipation of a Treasury regime, almost akin to what the MCCB has been in the run up to regulation of mortgages. The providers will take steps to close any loopholes over the next few years.

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