October marked the fourth anniversary of statutory mortgage regulation under the FSA. So how has its approach changed from the day it seized regulation from the jaws of the MCCB on 31 October 2004?
MCOB brought elements of regulation that are now are considered standard practice, but were once alien to everyone, including consumers. The introduction of the Initial Disclosure Document (IDD) might seem like a distant memory, but at one stage MCOB acronyms were muttered in the sleep of every compliance manager in the country.
I can recall the day that I first laid eyes on the sourcebook. Two thoughts quickly ran through my mind: do they have an English version, and do I have enough time left in my life to read it?
The MCOB sourcebook contained a lot of rules. However frustrating, some Association of Mortgage Intermediaries (AMI) members took comfort from having rules to follow. The rules might have occasionally varied in application and clearly they are never perfectly congruent with their purpose, but in most cases they were at least black and white.
In 2007, the FSA announced its sedate but progressive move to a more ‘principles-based regime’. To complement the principles, ‘guidance’ was promoted as allowing firms to create an “innovative and competitive financial services industry”, with the FSA providing enough guidance to assist firms to meet their regulatory obligations. Designed to underpin the FSA’s high-level principles, it was simply advice for firms to consider, or not. The choice, in theory, was their own.
However, with guidance comes the need for interpretation. Each firm has the freedom to interpret guidance, but there is always a concern that others might not have a similar breadth in their interpretation – be that FSA supervisory staff at the sharp end, through to the Financial Ombudsman Service (FOS) in an adjudication 10 years later.
AMI quickly voiced its concerns with this new approach. We warned the FSA that a more principles-based regulatory regime could leave a gap between its high-level principles and the detailed rules as required. Coupled with an estimated £50m additional cost to firms during the next three years, it was clear a thorough cost/benefit analysis was needed to ensure that fair value would be delivered through the approach.
So where does this leave the FSA today? The regulator’s overriding strategy is to help consumers get a fair deal, and rightly so. To achieve this it believes that principles assume more importance and relevance in turbulent times than rules. Hopefully in my lifetime we will not see more turbulent times than we are currently experiencing, so is the principles-based approach actually working? “Principles-based or non principles-based?” is a question closer to the regulators’ minds than we think. We can glean indications of the future by looking at alternative areas of the FSA’s work. For example, this year saw the release of the reviewed Senior Management Arrangements, Systems and Controls (SYSC) rules. AMI successfully campaigned for an extension to the implementation period. However, there were again concerns that non-scope firms would apply what was released as guidance as ‘rule’-based regulation within their practices.
We can also see that we now have more principles-based versions of the ICOBS and COBS rules. The FSA’s business plan highlighted possible work leading to a revision of MCOB – but will this be another demonstration of principles, or will current market turmoil and political will result in additional rules?
Principles-based regulation might be put to one side for a while. While areas of the MCOB could be revised in line with a more principles-based approach, I do not think the current environment will allow the FSA to publicly retreat from rules, regardless of where ‘blame’ lies. Pressure to do something could even result in additional, reactionary regulation, which AMI will strongly contest. AMI is engaging with the industry now on areas where improvements can be made, and will continue to fight the corner of its members. n
Emma Peplow is policy analyst at the Association of Mortgage Intermediaries
