My Inside Track article published in Mortgage Introducer on 11 November generated a lot of feedback – far more than I expected.
In it, I said: ‘It has been suggested that directly authorised (DA) status is significantly less onerous than being an apponted representative (AR), because the Financial Services Authority (FSA) has had very little to do with DA’s to date. Although that has been true historically, it is no longer true today. The FSA’s ‘light touch’ in regulating DAs is changing and you only have to look at headlines on the FSA’s website to see it is taking a far more active role and is both fining and closing down DA brokers when it believes it is appropriate to do so. The playing field is being levelled and it would be a bad error for ARs to change to DA simply because they feel it offers a less onerous regime.’
Many industry stalwarts begged to differ and put forward robust arguments in favour of brokers remaining independent and not joining networks. Even small firms, they argued, are better off remaining independent.
Sorry to keep harping on about the subject, but the FSA’s latest review of 252 firms has only served to enforce my conviction that my initial prognosis was right. In a nutshell, the FSA found that although banks, building societies, large networks and adviser firms had robust processes in place, nearly three-quarters of small intermediary firms and small networks did not, which directly led to the risk of unsuitable advice being given.
A different kettle of fish
Before I get inundated with complaints from small firms, I do acknowledge that large networks and lenders were not squeaky clean. The FSA did say that, although large firms had good processes in place, they could not always demonstrate they were using them. This is a different kettle of fish, however, to small firms who pose a far more significant risk of consumers being given bad advice.
This report comes only a few weeks after the FSA had to tell more than 200 mortgage brokers to withdraw or amend misleading advertising, particularly adverts targeting non-conforming borrowers. In that instance Vernon Everitt, FSA retail themes director, said: “We have found that poor advertising is a sign of wider problems in the way mortgage brokers are managed and controlled. We will continue to intervene where this might be the case, including taking further formal disciplinary action. Firms in this sector should be on notice that this is a priority area for us in assessing whether they are genuinely treating their customers fairly.”
For me, these two reports from the FSA build a fairly compelling case that there are still a large number of brokers finding it difficult coming to terms with working in a regulated market – and the firms that appear to be struggling most are the small ones.
Why is that? Is it because they simply don’t care or aren’t up to the job? Could it be argued that if small firms were closed down then the problems associated with poor practices would go away?
I don’t think any of the above points are true. The truth is that working in a regulated market is a very onerous task for small businesses. Keeping up to speed with regulation, and the move towards principles-based regulation, putting robust systems and procedures in place, keeping records up-to-date, completing FSA returns and coming to terms with the increased cost of compliance are all onerous burdens. That’s before you consider the normal burdens of running a business.
Too great a burden
For the majority of very small firms, this burden may prove to be simply too great. However, I don’t believe the only conclusion is for them to shut up shop and find some other form of gainful employment. Small firms of advisers are, and always have been, an important part of the market and they should continue to be in the future. However, they need to consider how best they can come to terms with the requirements of regulation and I suggest the solution to that problem is to join a network.
I can hear the howls of derision as I pen these words. Before I’m accused of having a vested interest and using an FSA report to drum-up business, I’d like to point out that Mortgage Next supports ARs and DAs.
The big issue for many small firms is simply overcoming the mental barrier about joining a network and giving up their ‘freedom’. Within the context of running a business, the concept of ‘freedom’ needs to be considered carefully. As the FSA has demonstrated very clearly in recent weeks, for many it means the freedom to get it wrong, the freedom to incur fines and penalties, the freedom to see compliance costs crank-up at an alarming rate and the freedom to sink under a mountain of paperwork.
Surely it’s far better to let a network take responsibility for these factors and for brokers to focus on what they are good at doing? If freedom is what small brokers are really after, I suggest they are more likely to find it being part of a network rather than struggling by themselves.
One thing is certain: the bad practices must stop or the industry’s reputation will be irreparably damaged.
