The honeymoon ended some time ago, but now the tan is well and truly fading for mortgage advisers coming to terms with the implications of regulation. Now they, like other pre-2004 regulated financial advice businesses – pensions, investments and assurance – are learning what it really means to be principled.
In the last few months the Financial Services Authority (FSA) has turned its attention towards making sure the mortgage industry is taking the adoption of its 11 principles of regulation seriously. While these principles have been in existence since the FSA’s inception in 2001, the watchdog has largely insisted on using the rules in its 9,000 page handbook – its legacy from previous reincarnations – to guide regulation of the mortgage sector.
But the rulebook is being phased out. At May’s Mortgage Expo, the FSA’s head of mortgages and credit unions, Michael Lord, said the FSA’s handbook was no longer ‘sustainable’. He added: “The detailed rulebook doesn’t fit with some of our principles, like innovation. There must be a better way of doing it.”
Principles-based ethos
Most advisers agree that the 9,000 page handbook had become a unwieldy leviathan. A principles-based regulatory ethos is a recognition that the industry has moved on. Using principles is most certainly a 21st century way of doing business, claims Chris Blakely, regulatory services association director at Burns Anderson.
He says: “After all, principles have been around since the FSA came into being in 2001. It was part and parcel of having a new regulator in the financial services industry.
“Regulation needed to evolve. We’re all moving away from a product-based model to an advice-based one, and the adoption of principles reflects the more holisitic and professional way we’re doing things. We don’t want so many rules. These principles allow greater flexibility that reflect the many different business models.”
Ray Boulger, senior technical director at John Charcol, says the mortgage industry had been given a period of grace before having to use the principles-based approach.
He says: “Mortgage regulation came in on 31 October 2004 and the first stage was really for the FSA to get people used to the idea of regulation, and that involved using the rules first. We always knew principles would be phased in.”
Boulger, like Blakely, is in favour of principles. “There is an old saying about rules, that they are for the guidance of wise men and obedience of fools. This is in part true – there are always going to be times when rules are unhelpful and as financial advice changes rules can become too prescriptive.”
But a world without rules, or at least not the obvious existence of them, is a scary prospect, admits Blakely.
And with the FSA itself inviting the industry to ‘make up’ its interpretation of principles for themselves (Lord at Mortgage Expo), there are fears that advisers will still turn back to the rulebook.
Indeed, Blakely says Burns Anderson network members will not have to think things up for themselves.
He says: “We’ve adapted our own principles-based process and our members will not be left to interpret the rules themselves. They can focus on their business knowing that if they follow our guidelines they are not at risk from breaking any principles.
His fears are focused on the smaller mortgage-only advisers, who may have only been in the industry for a short time and will not have the regulatory focus that comes with experience.
“I believe this will make it harder for smaller firms to do business – compliance will be a big issue for them. I predict that fears may mean that more of these advisers will be reconsidering their directly authorised status and considering joining a network.”
Going it alone
Blakely says that for larger advisers and those who have been in the industry more than a decade, the experience of being regulated in itself imparts confidence to know just how far they really can ‘go it alone’.
Blakely says: “Principles also place more responsibility on advisers to get it right, and with responsibility comes risk.
“But this means that the industry is growing up. We’re entering an adult phase where people can have opinions on how they are managed. Don’t forget that these principles apply to how we run, not just how we do, business. It could open up debate where senior management might seek the opinion of junior staff.
“It’s true that having rules can mean a lack of clarity but we’ve already been using principles like ‘Treating Customers Fairly’ and making sure Financial Promotions are not misleading. The principles have always been there, just that the FSA has formalised them and allowed them to supercede the rulebook.”
Also, some of the FSA’s principles may not be appropriate for all businesses, he adds. “Businesses can apply for a waiver – of course they have to demonstrate why – but again this is a more adult way of regulating the industry.
Boulger says advisers will have to dump their paternalistic view of the FSA if the principles are to work.
For example, Boulger points out the FSA’s rules stipulate that before the mortgage application can be processed, an adviser has to fill out a Key Facts document (KFI).
“In the rules they have to do this and most of the time it’s not a problem because most of the lenders have an online system and this can be done quite easily.” But this can become a problem for an adviser who has a client wanting to remortgage.
“You may get someone who has found a home, and wants to put an offer on that property, but they will have to go through the remortgage process first.”
“This person may want to port their mortgage to their new property – it makes sense because they’ll probably want to save on charges.” Boulger explains that this is where the problems may start.
“Producing a KFI for someone who may have two mortgage products already can take several days and make all the difference for that client, a delay in getting a KFI out would lose them the property.
“An adviser might, in this case, be porting two mortgages, plus topping it. With remortgaging, lenders may have thousands of different deals on their systems and these might not all be noted online. You may have a remortgage two-year fixed rate deal up but one may have cashback and one may have free legals. So a range of 50 becomes 100, and these deals may only last a year, so you may have over 1,000 separate mortgage products running at any one time.
“The adviser can wait for the KFI, as they should do in the rules, or technically go ahead, which would be in the customers interest.
“You’re going to come up with cases when rules are unhelpful and damaging to the clients best interests and that is what the rules are about – its puts the onus back on advice.”
Reassurance needed
But Boulger is not convinced the FSA has done enough to reassure the industry of its total commitment to principles-based regulation.
He says: “There are obviously some rules that are never meant to be broken. But in the interests of clarity, the FSA needs to give us case studies; for example, anything that would reassure the industry that it can break the rules when needed. We need more guidance and clarity from the FSA.”
Boulger says that if a mortgage adviser feels a rule must be broken, he should have the compliance back-up available and that, in the same way that libel lawyers are on hand to diffuse potentially litigious situations at a newspaper, compliance officers should be on hand to give intermediaries the advice they need to decide on more subjective cases.
“As businesses, we also need more guidance on how the principles will affect data protection, within our own human resources processes. There are lots of inconsistencies.”
Boulger’s fears have already been taken up by the Law Society. Last month, as exclusively revealed in Mortgage Introducer, the Regulatory Law Committee of the City of London Law Society wrote a letter to the regulator, expressing its concern over the principles-based approach.
In a letter to John Tiner, chief executive at the FSA, Margaret Chamberlain, chairman at the City of London Law Society Regulatory Committee, warned that increased reliance on principles rather than rules was ‘leaving firms uncertain how to comply with FSA requirements.’ She added there was a level of ‘unacceptable vagueness for firms as to how to satisfy the FSA’.
Cath Hearnden, a director at My Mortgage Direct, is not convinced that principles will do what ultimately other more detailed regulation has failed to.
She points out the 9,000 page guidebook had failed to stop the splits cap, pensions and endowment scandals. She says: “It’s always been left up to us anyway. Rules or no rules, it’s always a worry that we won’t get a slap on the wrists.
“It seems that in financial service there is a lot of retrospectivity. If you don’t have it written down it’s all well and good, until someone comes along and says it can be interpreted differently.”
Hearnden says the blame culture is still rife enough to make some rules a necessity. “How are really going to know we won’t get caught out? There will always be people who are not so fussy about how they do business.
“Mortgage regulation, which is what the principles are, is a good thing. It gives customers more confidence. But at the end of the day it was always a very well-run self-regulated part of financial services, and I think, compared with other sectors of financial advice, we are pretty good at giving good advice and selling the appropriate products to clients.”
Boulger is less optimistic. He points out that with EU directives still determining 70 per cent of all new FSA regulations advisers will need a lot more back stroking before they are reassured.
Boulger says: “It will take some time before we get to the stage where there’s confidence within the advice community.”
As Lord says: “There is a danger that the old, detailed rulebook will be kept in the bottom drawer. That’s fine in the early days but as things develop these rules will become outdated. Advisers need to up their approach.”
However, Lord admitted the move to being principles-based had its problems. “Moving to a principles-based approach carries risks and broker will wonder about a lack of certainty over what the FSA wants. Interpretation of the guidelines is also an issue, while the role of the Financial Ombudsman has been questioned.”
Hearnden concludes: “We are going back to a principle-based approach that is unclear. A principle approach makes it very difficult to see if you are abiding by the rules and only when the FSA does its checks do you find out if you have been compliant.”
