Statutory regulation is something that faces everyone in the mortgage industry. It is an unavoidable subject whether we like it or not. However, while market practices and statutory requirements in other countries such as Australia and Canada should make us feel satisfied with the Mortgage Code Compliance Board’s (MCCB) work and the effectiveness of our voluntary mortgage code, we should perhaps await the Financial Services Authority’s (FSA) final mortgage rulebook with even greater trepidation.
It is hoped the Treasury and the FSA will have taken caution from some of the more zealous and often less effective pieces of statutory-backed regulation in the financial markets of these countries.
In Australia, the broking sector did not exist 10 years ago and only after de-regulation did the banks and buildings societies lose their monopoly, giving rise to intermediaries.
A leading Australian consumer journal recently summed up changes to the market: ‘Once upon a time, if you wanted to borrow for the purchase of a house, you approached your building society where you had diligently saved your deposit for finance and organised everything at this institution. As de-regulation of the finance sector proceeded, the requirements to have saved the deposit at the place giving the loan disappeared and it became easier to shop around and find alternatives.’
It continued: ‘Mortgage brokers, whose job it is to know this broader market, became more and more common as many potential borrowers simply did not have the time or inclination to search for their ideal home loan. Now many people use a mortgage broker for all occasions when seeking home finance.’
Consumers in Australia are still fairly new to the role of the broker, so you could argue that their regulatory regime could be expected to lag behind our own ‘ and it does.
Australia’s largest mortgage broker, with over 250 franchised outlets across the country, recently said it regarded its mortgage advice market as, ‘largely unregulated,’ despite recent legislative changes that increase the regulations for most financial advisers.
Directors of mortgage companies must operate through a public company. They must act honestly and diligently, but require no licences or complaints schemes. The directors are free to choose whatever operating systems they like ‘ so long as they obey general company law. By complete contrast, the Financial Planners’ Code of Ethics includes general standards of conduct to be observed. These include integrity, objectivity, competence and fairness.
The Financial Planners’ Rules of Professional Conduct include rules on: disclosure statements to prospective clients, financial plan preparation, explanation of financial plan, client service, complaints, education, competence and supervision.
Important reforms to the financial services industry began on 11 March 2002. They changed how people or companies that provide financial services are licensed and how they give clients information about their services and products.
The financial services reforms introduced an Australian Financial Services (AFS) licence for all people or companies that provide financial services. This affects banks, building societies and credit unions, life and general insurance companies, insurance agents and brokers, managed investment scheme operators, superannuation funds, securities dealers, financial planners and financial advisers, futures brokers and advisers and foreign exchange dealers.
Unlike most UK regulatory changes, the AFS licensing system does not apply to everyone immediately. Those financial services businesses that were licensed, regulated or exempt before 11 March 2002 have until 10 March 2004 to get an AFS licence.
In the meantime, they continue to operate under their existing arrangements. We can safely bet the FSA will not be contemplating a two-year period of transition for brokers in the UK to get used to the idea of statutory regulation.
The Australian regulatory body now regulates the activities of firms that lend money to consumers and small businesses. This covers all forms of lending products such as credit cards, business overdrafts, home loans, hire purchase agreements and guarantees.
In the same way the UK market has developed various voluntary regulatory structures in the past three to five years, the Mortgage Industry Ombudsman was established by the Mortgage Industry Association of Australia (MIAA). The aim of the organisation is to provide an independent dispute resolution service to mortgage originators, providers and their customers and it is funded by participating members of the MIAA.
The Ombudsman assists members of the MIAA and their customers to resolve disputes that have not been resolved through internal dispute resolution processes of participating organisations. This is similar to our own Mortgage Code Arbitration Scheme.
The Ombudsman is overseen by the Mortgage Industry Review Committee, an independent committee made up of representatives of the mortgage industry and a consumer representative appointed by the Commonwealth minister for finance. So while the market is principally self-regulated, there is Government involvement.
Members of the MIAA include mortgage managers, mortgage brokers, mortgage marketeers, banks, credit unions, building societies, legal firms, mortgage insurers, trustees, fund managers, valuers, and estate agency-related industries. As you would expect, all members are bound by a strict code of ethics to ensure, ‘the highest levels of service, integrity and professionalism.’
We can observe a huge and growing market here, which appears to be three or four years behind the UK in the regulatory sense. Investment advisers are facing increasingly onerous regulation ‘ much like the period here during the 1990s ‘ and a mortgage market that is only just developing a self-regulatory regime with only a distant threat of statutory regulation for brokers.
Our Canadian brothers
Canada is another market that is remarkably similar to our own. But like the US, Canada has a significantly different approach to mortgage regulation, depending upon which state or province the adviser is based and operates in.
In contrast to the Australian market, the Canadians appear to be at least as developed as the UK in the regulatory sense and probably have a couple of years’ experience and refinement on us. In British Columbia some very specific legislation exists ‘ the Mortgage Brokers Act.
In the early days of Mortgage Code Register of Intermediaries (MCRI) and MCCB, there was some debate about how to define a mortgage broker. The Canadians make the unusual provision for a part-time mortgage arranger to escape the definition of broker and therefore escape regulation.
They determine a mortgage broker as a person who, ‘lends money secured by mortgages whether the money is the broker’s own, or that of another person and holds himself out as, or by an advertisement, that he or she is, a mortgage broker.’
However, you are only classified as a broker if you generate a minimum number of sales or a certain amount of income. In any year a broker must receive ‘C$1,000 or more in fees for arranging mortgages for other persons,’ or ‘during any year, arrange 10 or more mortgages.’
Another market definition absent in the UK is the ‘sub-mortgage broker,’ which means any person who, in British Columbia, actively engages in the activities referred to in the definition of mortgage broker and ‘is employed by, or is a director or a partner of, a mortgage broker.’ In the UK we would call these people registered mortgage advisers.
The key to their regulatory framework is a broker register, like the UK’s original self-regulatory approach under MCRI. The Government appoints a registrar who maintains the Mortgage Brokers Register, under which the name of every mortgage broker and sub-mortgage broker is registered. So unlike the MCRI approach, the Canadians went straight for individual registration, rather than the firm’s registration only.
Attention to detail
Registered brokers are bound by the regulations to notify the registrar of all changes to its sales staff. The registrar states that brokers must, ‘promptly notify the registrar of the name and address of each new sub-mortgage broker employed, or of each who ceases to be employed.’
In a move far more prescriptive and searching than MCCB requirements, the registrar also requires the reason for employment termination. It says: ‘If a sub-mortgage broker ceases to be employed, the notice must also state the reason why the sub-mortgage broker ceases to be employed by the broker.’
Equally prescriptive is the requirement for new staff to be sanctioned by the regulator. Not unlike the statutory powers of the FSA here, the Canadians take breaches seriously and mortgage brokers can face serious disciplinary sanctions. For example, fines can be handed down of up to C$100,000 for a first offence, rising to C$200,000 for subsequent offences. Where the rule-breaker is an individual rather than a company, these maximum fines apply but additionally a custodial sentence becomes a possibility. The registrar states: ‘A fine of not more than C$100,000 or imprisonment for not more than two years or both.’
The voluntary framework evident in Australia is effectively dead in the UK and it is likely the FSA will be at least as prescriptive as the local government in British Columbia.
Brokers therefore face a culture shock. Under the FSA’s jurisdiction it is likely we will see a Canadian-style tough, prescriptive regime, rather than the guidance-based approach of MCCB we have become used to.
Robert Clifford is chief executive at mortgageforce
Australia has recently introduced a licensing scheme for financial services providers and advisers.
Mortgage regulation in Canada depends upon the state or province the adviser operates in.
Regulation under the FSA is expected to be as prescriptive as the regime in British Columbia.