As the old saying goes, time flies, but when it comes to regulation it surely flies quicker. Can it really be three years since the dawn of statutory regulation? With those three years firmly behind us, this seems a good juncture to do some crystal ball gazing as to how regulation will evolve in the future.
The advent of principles-based regulation moves ever closer. This move has been much discussed but the ramifications of this change will be pretty seismic. MCOB is highly prescriptive and can be found in the Financial Services Authority’s (FSA) handbook, which currently runs to hundreds of pages. The FSA has signaled a wish to move away from highly prescriptive rules to a regulatory regime based on its 11 principles of business. This is now imminent.
Implications for broker firms
The FSA hopes the move to principles will mean firms can move away from a regulatory regime based on process to one based on outcomes. The idea is that firms will have more flexibility to choose how to run their own businesses. Rather than relying on rules put down by the FSA to deliver the process, firms can deliver the process themselves, as long as they achieve the outcomes FSA wants to see. However, the move away from a prescriptive regime has hidden dangers. It may not yet turn out to be a nirvana.
The move to a more principles-based regulatory regime will clearly have implications for intermediary firms, but also the FSA and consumers. Clearly, FSA supervisors will need to be retrained to be able to interpret different firms’ processes and determine whether they meet the FSA’s outcomes or not.
Concerns have been expressed that a gap may develop between the FSA’s high-level principles and detailed rules required by European directives, for example. Many have called for a degree of clarity on what fills such a vacuum. The FSA has expressed a desire that trade bodies should produce ‘industry guidance’ to help firms in this area and has published a discussion paper outlining its proposed definition of industry guidance and such trade bodies who may wish to produce guidance can seek FSA confirmation for this. The intention is that the FSA will take into account whether a firm has used FSA-confirmed industry guidance to meet its regulatory responsibilities. There is much for all parties to do to reach an understanding to avoid ‘regulatory blind spots’ and potential breaches. Of interest will be the affect on those that are directly authorised. Will the principles-based regime drive those that are creaking under the burden of direct authorisation down the appointed representative route?
The importance of TCF
Of high importance to the FSA will be the continuing theme of ‘Treating Customers Fairly’ (TCF). The FSA has expressed dissatisfaction at the speed and penetration of TCF. This element still remains very misunderstood and the FSA is losing patience. The FSA’s TCF agenda has been at the forefront of the move to a more principles-based regulatory regime. Principle six is clear and unambiguous: ‘A firm must pay due regard to the interests of its customers and treat them fairly’.
For the FSA, TCF is not about firms giving good customer service, but about simply being fair in their dealings with clients. The FSA has a four-stage approach for firms dealing with TCF within the business and expects senior management to take ownership in delivering TCF. The four stages of dealing with TCF are: awareness, strategy and planning, implementation, and embedding. Firms that fall behind can expect the full force of the FSA coming down on them. The clock is ticking.
Regulatory creep
Further out into the future there are a number of new areas that regulation may begin to creep into. The buy-to-let (BTL) market has been one the mortgage industry’s success stories of the last decade. This market now accounts for around 11 per cent of the UK’s mortgage market. Controversial I know, but if the overall contribution to the market is that significant then BTL must begin to register on the FSA’s radar as a potential area of future regulation. The eventual outcome will depend on the potential for customer detriment and the level of dissatisfaction with landlords. Right now both these seem to be on the right side of the line, although if the scales tip the other way, the inclusion in the statutory regulatory net will, in honesty, be an easy win.
Sending a clear message
The regulator has sent a clear message to the mortgage industry following a crackdown on mortgage brokers and a speech a few weeks ago which seemed to indicate that the Retail Distribution Review (RDR) may be more related to the mortgage market that previously thought. Recently the FSA has sent a very clear message to the mortgage market. Two weeks ago, it fined two mortgage brokers and banned a third for non-conforming failings. This week it referred seven firms to enforcement, with a further 65 firms being told to undertake costly past business reviews or to employ a specialist to resolve problems. The net is tightening for those who don’t demonstrate good and compliant practice.
Just in the last month the FSA have penalised three firms found failing to meet its non-conforming requirements. All three had inadequate mortgage sales and advice procedures which exposed their customers to the risk of receiving unsuitable advice. Here are just some of the findings that led to the FSA actions.
The finds were far reaching. The firms failed to correct record-keeping failings identified during a previous FSA visit. They also did not gather adequate customer information to assess affordability or support the mortgage recommendations made. They inadequately trained staff, failed to monitor or review client files properly and gave customers inconsistent information about the key features of the product, and could not demonstrate why recommendations were made; and also failed to explain the details or risks of recommended mortgages to customers. One did not ensure that all of its advisers were qualified to give mortgage advice. This leads me to the conclusion that similar enforcement action will become more common. A newer and perhaps a less forgiving regulatory regime is on the cards.
Questions must begin to circle around whether the mortgage qualifications CeMap and CeMA are fit for their purpose. Are these qualifications really a challenge? Maybe they are, but I think the future will see a much more rigorous examination regime. The mortgage side will have to take its lead from the investment side, with a far reaching examination agenda with differing skill levels. This would reflect the growing complexities of mortgage products.
It is always going to be hard to ignore the EU agenda. Those of you that want to know, the Markets in Financial Instruments Directive (MiFID) is a European Union law which provides a harmonised regulatory regime for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union plus Iceland, Norway and Liechtenstein). The main objectives of the directive are to increase competition and consumer protection in investment services. As of the effective date, 1 November 2007, it replaced the Investment Services Directive. Don’t panic, as it does not affect mortgages and the FSA has indicated that it is minded not to extend this to mortgages.
The danger is that many think that regulation is fixed or set in stone. Nothing could be further from the truth. Regulation is, to all intents and purposes, a living, breathing, changing beast. Just look at the major changes from rules-based to principles-based regulation. This is a big change and ably demonstrates the ability of the regulators to respond to feedback and market needs. However, some of the regulatory background will be changed by institutions outside the UK the EU being the obvious candidate. It is entirely correct that regulation morphs with the changing background of the needs of the market. One thing we must get used to is change and lots of it. Regulation is very likely to look very different in five years’ time.
