Cotton is traditionally the theme for second anniversary gifts, although it will be interesting to see what presents get sent to the Financial Services Authority (FSA) to mark its second year overseeing the mortgage market.
However those sending gifts should be mindful of the FSA’s own Code of Conduct for staff, which insists anything exceeding a value of £25 has to be noted in writing to the recipient’s head of department and surrendered to the regulator’s ethics officer, who will make suitable arrangements for its use within the FSA, for charitable purposes or disposal.
But in return what has the FSA given to the mortgage market? Certainly there has been no shortage of comment expressed prior, during and after regulation as to its impact and effect and there is much work still to do. However the general consensus is that the missives sent down from Canary Wharf have had a positive effect, despite there being room for them to evolve into a tighter fit with the practicalities of everyday business.
The bottom line
In any commercial sphere the bottom line is always key and so when looking at the impact it is perhaps best to begin with the financial implications that regulation has brought. Each firm will have its own set of figures, but for BM Solutions the total cost of regulation runs to millions. For any business this is a substantial burden to take on and certainly it is not one that the market has borne easily or lightly.
The real bugbear for many is that despite the outlay, there is no discernable return on investment and the cost of compliance is simply a one-off hit that must be endured. It has also been difficult to come to terms with the number of opportunities that have been lost while firms have focused on becoming compliant. Not only have they had to bear the implicit costs of regulation, but also the opportunity costs, and most accept that this has held back IT development and product innovation.
Things may not have stagnated and certainly the industry has continued to take forward strides in the processes it uses and the products it offers, but not to anything like the degree that would have been seen had regulation not been taking place in the background.
What will be particularly exciting in the months and years ahead is watching the pace of innovation and progress now that firms are better placed to sign off budgets for research and development and have an understanding of the framework within which they are now operating.
This understanding will take time to develop fully and still there are areas where it can be improved, but certainly over the last two years both the FSA and market practitioners have worked hard to get a feel of what is required.
Getting the facts straight
One particular area where this has been seen is in the issuance of Key Fact Illustrations (KFI). Lenders have been keen to ensure they include every detail of required information and have erred on the side of caution. As discussions with the regulator continue and a better understanding of what is essential and what is not can be found, then KFIs should continue to decrease in size and become an ever more useful and compatible piece of documentation for the end borrower. At the moment they are still getting too much paper, which is simply left unread in many instances and further work most be done by all parties to improve the situation.
However as improvements are made, then lenders should also become better at managing their own KFI production systems, allowing for new mortgages to be assimilated into their product portfolio faster and easier. In turn this should work well with the desire to push forward product development and innovation that many are now focusing on.
In conversations recently with intermediaries, many have also expressed their appetite to begin to spend more time working on their business models, now that much of the work has been done in meeting the FSA’s requirements. This should see firms develop better client contact strategies and put IT to better use in running their administration departments. All of this should in turn feed through to a better service and experience for end borrowers.
Bringing structure
In many ways the most prominent aspect of regulation has been the structure it has brought to the market. Firms now have to detail their Training & Competency (T&C) regimes and document the processes they go through with clients to ensure the best product is found for their circumstances. Where complaints arise there is a set timetable of action, which must be followed to ensure problems are brought to a swift and effective resolution. Advertising and marketing material must hit set benchmarks and product design must be done with the client, not the bottom line profit, in mind.
There is no doubt that when taken as a whole these measures will only improve the operational standards of the market and provide for a more accessible and professional service for borrowers. As time passes they will also help engender a more professional attitude in the industry itself and give clients the confidence of knowing that they are dealing with well managed and monitored firms. Again this has to be in everyone’s interest.
By the same token, the extra requirements that regulation has brought have made client interviews a more timely process and many intermediaries have complained that the need to spend more time with each client is detracting from their ability to handle large volumes of business. However improvements in technology have compensated for this and the online application and decisioning tools that are now available should, in the main, offset the extra time incurred by brokers in their face-to-face dealings with clients.
Small firms
There is no doubt that implementing, paying for and assimilating into the regulated environment has been more difficult for smaller lenders and brokers. The larger players have not had it easy and the amounts of money involved have been huge, but nonetheless they have been better able to provide the finances and resources required.
For smaller firms, and particularly intermediary operations, it has been a difficult task trying to keep everyday business buoyant while dedicating the time to studying the various requirements of regulation and putting them into place. Nonetheless, it has helped eradicate some of the rogue elements from the market and firms now operating must be under no illusion that unless they are prepared to play by the regulator’s rules they will be found out and sanctioned in due course.
Indeed the market can expect over the coming 12 to 18 months to see the FSA take a firmer stance on issues and bare its teeth more readily than it has done over the last two years. To date the FSA has defined itself through its actions as a listening regulator and cajoled and harried firms towards compliance rather than simply beat them with a stick where they have fallen short.
However the atmosphere is changing and although the FSA will no doubt remain open to dialogue, it will be stricter in imposing its will upon firms who fail to move in the right direction or take its missives seriously. This is welcome and will ensure not only that firms get the time and support they need to operate compliantly, but also that those who show no indication of doing so are held to account and prevented from bringing the rest of the market down with them.
Future
Looking to the future, the ‘Treating Customers Fairly’ principles will remain high on the agenda and firms really need to take heed of the warnings recently given by the FSA to improve their procedures in light of this. Mortgage payment protection insurance (MPPI) is also set to be in the headlines for a good few months to come and again both providers and intermediaries must be able to stand up their practices as compliant and fair when the regulator comes to visit.
Further hotspots will come and go as happens in any market. However, so long as both the FSA and the industry can maintain an open dialogue and work with each other there is no reason why future anniversaries should not be a thing to celebrate rather than bemoan. Just make sure any gifts are kept under the £25 mark.
