When God set about creating the world, the feat was completed in six days. Unfortunately mere mortals do not have such a commendable productivity rate and many of the tasks undertaken in the humdrum of human life infinitely carry the tag ‘work in progress.’
Certainly this is true of the work being carried out by the Financial Services Authority (FSA) and given the evolving nature of the mortgage market, which it oversees, its work will never be done.
As easy as it might be to get depressed about a never-ending labour, the key is surely to focus on the job in hand and steer a straight and steady path forward into the future, delivering progress and improvement with every step.
Mortgage road map
This is the strategy the FSA has chosen in implementing, monitoring and adjusting its regulation of the mortgage world and in recently publishing its mortgage road map, the powers that be at Canary Wharf have clearly communicated the direction in which they are moving and where the focus of firms’ compliance activity should be for the immediate future.
Indeed the road map not only plots the course for the months ahead, but makes reference to where the market has come from, the reviews that have been carried out and how well firms have measured up to their statutory obligations. This gives a clear indication of where improvements are needed and creates a well-publicised benchmark for the industry to work against.
By communicating clearly with the market over the issues that are involved and highlighting the improvements that are required and the deadlines by which they must be in place, there is little doubt that the FSA is trying to engage the mortgage market and draw it into a closer community that works together to meet a high standard of performance.
However since statutory regulation was implemented in 2004, there has been a bedding down period and it has taken everyone a certain amount of time to get to grips with the regime and put it into force. That time now seems to be running out.
In a recent statement, the FSA said: “Based on the material already offered by the FSA – with more to come in December – we believe that firms have had reasonable time as well as opportunity to ensure that they are satisfied with the robustness of their advice giving processes.”
The FSA clearly believes that regulation is a two-way street and although it will to some extent act like a sheep dog rounding up its flock, it is not going to do all of the work and expects firms to be moving in the right direction in the first place. In recent months the FSA has been increasingly nipping at the heels of those straying from the path of compliance and has made clear its intention to bite faster and harder in the future.
The statement continues: “When our mortgage quality of advice processes phase two work is published in June 2008, we are fully expecting to see an improvement in the results when compared to those of January 2007.”
Changing attitude
Perhaps the clearest sign of the regulator’s changing attitude came in September, when a fine was issued to Hadenglen Home Finance Ltd. The firm was fined £133,000 for failures relating to the systems and controls surrounding the sale and monitoring of remortgages and payment protection insurance, senior management arrangements and the training and competence arrangements for its sales advisers. However, alongside the fine handed down to the company, its chief executive, Richard Hayes, was also fined personally to the tune of £49,000.
Only Hayes will know how hard such a financial penalty will hit, but the message from the regulator is clear; senior management and approved persons have to take responsibility for the compliance of their firms and will be held to account if they do not.
Tough times for small firms
There is little doubt that the smaller firms in the mortgage market have found it hardest to comply with the FSA and have repeatedly been highlighted as the worst offenders in the thematic reviews issued over recent months. The question, therefore, is whether the financial services regulator is communicating effectively with its charges, or whether they are simply refusing to listen.
The FSA has said it aims to operate a principles-based regime, but has also issued practical help, including numerous examples of good and bad practice for businesses to consult. For smaller firms there are dedicated web pages offering advice, while there are innumerable consultancy groups and industry bodies available to offer guidance.
Nonetheless it seems this is not enough for everybody and Stephen Atkins, group compliance director at Freedom Finance, comments: “This does not offer the level of handholding that some firms in the market need. The regulator could do more but the question is whether it should do more.”
The FSA is adopting similar standards to those it uses in other financial markets and, as such, why should the mortgage sector be deserving of special treatment? The rules are clear and for those who have problems deciphering them there is plentiful help in the market, while time has been given for firms to get their house in order. Is this not enough?
Certainly there can be no excuse for ignorance in an age of electronic communication and in a market that has a vibrant trade press and is well served by conference events.
However, this does not necessarily mean firms are going to get it right as Rob Clifford, chief executive at Mortgageforce, says: “It takes a long time for firms to engage and then act and a long time for good practice to percolate through.”
He adds: “It is unforgivable for firms to claim they are not aware of their regulatory obligations, but the reality is that the owner-managed businesses are different to corporate entities and being aware does not mean they can comply without pain or cost.”
As such, Clifford says he understands why compliance is not always the number one priority for smaller firms who are struggling to generate new business and service their ongoing clients, although he certainly does not condone it.
Getting the message
There is little doubt that it is difficult for the regulator to get a consistent message out to somewhere in the region of 12,000 firms, employing up to 40,000 individuals and for those firms to then implement compliant procedures as they go about their daily business.
However it has got to the stage where the market is becoming polarised between those who are working hard with the FSA and investing time and money to comply, and those who seem to be ignoring the communications coming out of Canary Wharf and running their businesses along their own guidelines.
This has brought about a significant mood change and Atkins comments: “There is now a large percentage of brokers that are being critical of their peers. Some firms are working hard to comply while others are failing and are damaging the sector.”
It is almost as if statutory regulation is beginning to come together with a brand of self-regulation as support for the work the FSA is doing grows and firms want to drive forward into a more professional era.
Certainly Andy Frankish, managing director of Mortgage Talk, has run out of sympathy with firms who show no willingness to comply and believes they have had more than enough opportunity and time to access the information they need and implement it into their daily processes.
He accepts it is not easy for some firms, and comments: “A lot that comes out is difficult to absorb while doing your day job and the industry is beginning to realise that being directly authorised (DA) requires large resources.”
However Frankish says the FSA has been clear about how it will intervene if firms fail to comply and says the market has had three years to get it right. He adds: “Even though it is difficult, you have to get these things right and if we are doing everything we can be compliant but others are not, then we are not operating on a level playing field.”
Given the time and resource his own firm has invested in compliance this is not a situation that Frankish is happy with, and he adds: “I am not sympathetic and if firms are struggling then perhaps they need to reconsider their status.”
Atkins agrees that being DA may be more difficult than some businesses realised at the outset, and comments: “Many small firms chose to go DA and have been challenged by the complexities of regulation. However it is important that we get more professional rather than dumbing down.”
Following a firmer line
What is going to be important is that the FSA is able to follow through with the firmer line it is now taking, root out the bad practice where it exists and show firms that even though they may be small, it will not be possible for them to slip underneath the radar and operate a badly run business while remaining undetected.
This was the point made specifically by Stephen Bland, director of small firms division at the FSA, when he spoke at a seminar of financial advisers in London earlier in the year. He said: “If we add up the results of our firm-specific work and our thematic work, you will see that small retail firms are more on our radar than the ‘folk lore’ would suggest. To use figures relevant to those in this gathering, when we recently looked at the financial advice sector we found that only a third of you had not had individual contact from us in the previous year.”
Bland highlighted the electronic returns made by individual firms, the mystery shopping exercises carried out and whistle-blowing as some of the ways in which the regulator keeps on top of smaller firms as well as highlighting the information it gets from other parties such as the police, Customs and Excise, and the Department of Trade and Industry. He also said other regulators such as the Financial Ombudsman Service and the Office of Fair Trading were among valuable allies in the fight against non-compliance.
Having made such a song and a dance about being able to monitor the smaller firms in the market and being in a position to deal with those who consistenly fail to meet regulatory standards, Atkins wants to see the industry watchdog take action and clearly demonstrate this in practice.
Of course, a number of smaller firms have been fined, but he believes it is important that the market as a whole is clear that there are no blindspots in which they can operate. He says: “The FSA has to follow through with its own work and make sure that the statements it has made in relation to firms being unable to slip under the radar are fulfilled. The regulator must make clear how it will find and deal with these firms.”
Step in the right direction
Many believe that although the mortgage road map does not deal specifically with how the regulator will find and sanction non-compliant firms, it is another step in the right direction and emphasises the responsibilities that each and every business has. As Bill Warren, associate director at Regulatory Alliance of Mortgage Packagers, comments: “What has been visually produced is very helpful and clearly shows the focus and priorities for the future. I think it should be e-mailed to every compliance contact in the market.”
While there may have been some criticisms over the way the FSA has communicated its requirements to the market, the overwhelming opinion is that it has generally done a good job and those under its watch need to listen harder.
As Warren concludes: “There has not been enough effective listening. Not everyone is sitting up and taking complaince as seriously as they should be and looking at how the statements made and enforcement actions taken affect their own business.”
For firms who have lost their way, getting back onto the right road will be a costly and painful experience once the FSA catches up with them.
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