Justine Tomlinson is Marketing Director at Mortgage Next
FSA regulation of the mortgage industry is no longer new. We’re now two years down the line and everyone in the industry is getting used to living with the FSA on a regular basis.
Well, almost everyone.
The truth is that networks have received more than their fair share of attention, with most having been on the receiving end of ARROW visits, thematic visits and regular audits. I’m not complaining – it is the way it should be, as networks control a large number of mortgage intermediaries. By ensuring networks maintain high standards, the FSA has effective control over thousands of appointed representatives (ARs).
However, ARs are only half the story. The remainder of the market is made up of directly authorised (DA) brokers and there is no doubt that DAs have only felt a light touch from the FSA to date. In fact it would be more accurate to say that some have felt no touch at all; most DAs deal with the FSA on a self-cert basis. DA brokers have to complete Retail Mediation Activities Reports once a year but they are no more than self-completion questionnaires and the vast majority of DAs have not yet been visited by the FSA.
Rigorous vetting
Compare the DA light touch to the far more rigorous vetting to which ARs are subjected. Every AR is visited at least once a year by their network, even if they only deal in prime mortgages and their business is squeaky clean. Network supervision of ARs has to be proportionate, so brokers that are perceived to represent a greater risk have to receive supervisory visits on a more regular basis. Networks also have to carry out due diligence checks on ARs every year. Their accounts have to be vetted and the network has to confirm that the business remains in good order.
Any broker who joined a network in order to avoid dealing with the FSA may be feeling they have been sold a pup. The harsh reality is that ARs are under far greater regulatory scrutiny than their DA colleagues. However, before I start a stampede of brokers wishing to switch status from AR to DA, let me focus on this imbalance a bit further.
DA time will come
From an FSA point of view, it makes good sense to lavish greater attention on networks. As I’ve already said, it’s a very effective way to manage the activities of a large number of advisers. It is a pity that, in undertaking network audits over the Summer months, the FSA unearthed the unnamed ‘famous four’, whose procedures haven’t yet hit the required standard. The media interest generated by this story has created the impression that all networks are struggling, but nothing could be further from the truth. The majority of networks are doing an excellent job; a fact the regulator is well aware of.
The time will come when the FSA has to start focussing greater attention on DA brokers. This process may even have started, as we have seen the first big fines being awarded against DAs during recent weeks. The problem the FSA faces, however, is scaling up its operations to be able to give every DA broker the attention they deserve. Unfortunately, the FSA doesn’t have the resources to put DA brokers under the same sort of scrutiny as networks, which gives the FSA a real problem. In my opinion, the FSA will have no option but to make it more attractive for DA brokers to become ARs, rather than remain directly regulated by the FSA. In an ideal world, the FSA would inevitably prefer to deal with a small number of networks over which it can exercise control, rather than thousands of DA brokers, over which it effectively has no control at all.
The FSA cannot afford to have high profile examples of rogue DAs hitting the headlines over the coming months, in which a lack of regulatory supervision has led to consumer detriment. Such an episode would not only cause the FSA great embarrassment, but may even lead the government to review the way in which the FSA operates.
The FSA therefore has no option but to make life a lot tougher for DA brokers in the future. Networks have invested millions in systems, staff, training, process re-engineering and building professional regulatory control systems. Networks are the police force of the FSA and the FSA can no longer afford to leave half the broker community un-policed. My recommendation is, therefore, that ARs hold fire if they are considering jumping ship. To mix my metaphors, it could be a case of jumping out of the pan and into the fire.
Interestingly, research undertaken by the Association of Mortgage Intermediaries (AMI) recently, asked brokers to consider what impact a move towards principles-based regulation would have on their regulatory status. 44 per cent said networks would be the main beneficiaries. Perhaps this is the catalyst the FSA is seeking?
No holding back
The media coverage about the un-named ‘famous four’ networks has given some brokers the impression that all networks are holding back their recruitment programmes. Nothing could be further from the truth. We, in common with most networks, are eager to talk to potential new ARs and ARs who may be reviewing their existing arrangements. There is certainly not a recruitment freeze across the entire sector.
The only thaw that needs to take place to help ARs move from one network to another, is to the terms of some network’s contracts. Examples still exist of contract clauses that are far too onerous and unnecessarily lock-in ARs for unreasonable periods of time. They cause real financial difficulties for brokers and make moving networks almost impossible. Indeed, we have started paying a disturbance allowance to new ARs to help them get through this financially turbulent period.
Networks should be prepared to live or die by the quality of service and support they provide for ARs. If they provide a good service, ARs will remain loyal. If they don’t, ARs should be free to move elsewhere. Agreed, networks need to be able to recover all monies due and ensure they are not financially exposed when an AR leaves, but that doesn’t mean locking them in and then throwing away the keys.
