Small firms have been embroiled in their fair share of problems since the inception of Financial Services Authority (FSA) regulation. These problems become even more prominent when you realise that 90 per cent of intermediary firms can be classed as ‘small’.
A recent announcement by the FSA has shown that it has maintained a tough stance towards small firms that failed to meet its minimum standards in 2006/07. It has minimum requirements or threshold conditions that all firms must fulfil in order to become and remain regulated.
Figures published this month show that the FSA cancelled the permissions of 151 small firms in 2006/07. It reported that the majority of small firms that failed to fulfil the threshold conditions did so for not submitting their Retail Mediation Activities Return (RMAR) – part of the FSA’s electronic reporting system – despite issuing reminders.
get the daily news delivered to your inbox
Stephen Bland, director of small firms at the FSA, said: “The action we take against firms who do not comply with our minimum standards and our tough stance on firms’ continued failure to submit the RMAR is working. Ensuring that firms implement and maintain these conditions is a priority for us.
“Most small firms chose to fix any regulatory requirements that they were not fulfilling in order to stay in business. However, some have decided to leave the regulated industry. In other cases we removed firms’ permissions to carry out regulated business as they either could not or would not make the necessary changes to comply.”
Heavy handed?
In some quarters the FSA has been accused of being heavy handed with small firms, with a view to pushing the majority of the smaller directly authorised firms (DA) firms into larger organisations. There is an underlying current that the FSA hasn’t got to grips with the regulation of such a large number of small mortgage intermediary firms, and that by keeping a tight reign of compliance issues and making record-keeping such a time-consuming process it will lead to more firms seeking appointed representative (AR) status under the umbrella of a big network.
catch up on the industry buzz
Rod Murdison, proprietor at Murdison and Browning, says: “I believe the FSA’s ideal would be to round up all the one and two-man firms and push them into large financial institutions so it can control them. I don’t believe it has fully got its head around the way in which to regulate the small firm market as there are so many of us – most of whom have sales processes that the regulator can’t associate with.”
Of course the FSA never has, and never will, admit to this, but what is fair to say is that if the market shifts in this direction then it would ultimately make its life simpler in terms of regulating the industry. Another issue on which to focus is what potential regulatory changes may be lurking to ‘encourage’ the small DA firms to change their status on mass.
The regulator could use the upcoming Retail Distribution Review as an evidence gathering excercise to raise its threshold standards even higher and make fundamental changes in regards to DA firms which may hit smaller firms even harder. The FSA admits its focus has been on the larger firms and networks which has meant a number of small firms have been allowed to slip under the regulatory radar. At the time of ‘Mortgage Day’ the FSA pointed out how easy it was for firms to become DA, and many chose this route. The Quality of Advice findings also seem to suggest that many of those very same firms have had little, or no, regulatory contact since they gained authorisation. We may well be seeing a rethink on this from the regulator.
find the latest industry jobs
Chris Cummings, director-general at the Association of Mortgage Intermediaries (AMI), says: “There are signs that, through its own Retail Distribution Review, the FSA will up the levels needed to gain direct authorisation. Will this produce more compliant smaller firms or is it, as many have argued, simply a way of forcing smaller mortgage intermediary firms down the network route where they will be easier to regulate? We await the Retail Distribution paper this summer with great interest.”
Treating DA’s fairly?
However at this time it is speculation as to what the FSA might and might not do regarding the future, which leads to the question ‘how do small brokers feel they have been treated by the regulator since ‘Mortgage Day’?’
Speaking to a number of brokers has resulted in a mixed response. From an outside perspective, it appears the FSA does attempt to communicate with small firms via e-mails and newsletters. The monthly regulatory round-up newsletter has been praised for its precise information.
Danny Lovey, who operates as The Mortgage Practitioner in Basildon, says: “The FSA is now getting a feel for the usefulness small brokers bring to the market and accept that the vast majority of small brokers really care about their client’s and the market would be poorer without the service they give to the public.
“However, as recent FSA announcements have advised, there are some out there that either do not care or find it impossible to conduct their business in accordance with the regulations and have been stopped from trading. I believe, in the FSA’s, mind, there is a huge difference between recognising those who embrace regulation and genuinely try to stay with the principles and those who are indifferent or just will not accept regulation exists. In a nutshell I do not have a problem with regulation as a small broker, and want to play my part in improving the FSA’s understanding of the market, while also understanding its objectives.”
register for the next forum
While the FSA has been praised for it’s principles in raising the standards of the industry the issue of the support it has given to smaller firms has come under question.
Thomas Reeh, chief executive officer of blackandwhite.co.uk, explains that the FSA should provide increased support resources for small firms and sole traders because the level of complexity required to operate as a broker is beyond the resources many possess.
“Without doubt regulation is geared more towards larger firms with higher compliance resources and this will only be further emphasised by the move towards principles-based regulation. The majority of small firms are genuinely trying to comply with the FSA regulations and are doing their sometimes misguided best. Such firms should be given a bit more latitude and support from the FSA. It is all well and good flagging up what is incorrect but the fact remains that due to these vast levels of complexity firms aren’t even sure what they are doing right, it would be good for the regulator to highlight good practice and recognise where small firms are succeeding,” he adds.
download our news ticker
Lovey agrees: “Our workload has increased with the growing amount of paperwork. Our minds have to be switched into FSA mode, the goalposts keep moving, and we constantly worry about what is going to happen next to threaten our livelihood. Most small brokers work very long hours in order to make a living and it would be nice to hear some praise from the FSA that it really does recognise the contribution that the smaller brokers make. I am sure it must know, but it would be nice to hear Clive Briault or someone come out and say it to raise morale and assure us publicly that its aim is not to destroy the DA market, as many people suspect.”
Compliance concern
Compliance is at the heart of all propositions whether DA or AR status. AR’s, of course, have a compliance umbrella provided for them by their principal, but what options are available for a DA firm? Larger firms may incorporate a compliance department and while smaller firms may also look to keep things in-house, the alternative comes in the way of outsourcing to an external compliance consultant.
However the FSA reports that many small firms employing consultants are not acting on the advice they are given.
The regulator carried out work in late 2006/2007 to see if, and how, consultants were used in small mortgage, general insurance and financial advice firms. The project also looked into whether the firms that did use consultants used them effectively.
In particular the FSA visited 22 small firms employing compliance consultants in early 2007 and found nearly half still had significant weaknesses in respect of their regulatory requirements. The work also showed that over a third of these firms were not acting on recommendations from their consultants that would have improved their regulatory position.
Jonathan Fischel, head of investment in the small firms division of the FSA, said: “Firms need to meet their regulatory responsibilities, and respond to any failures that have already been identified by their consultants. Firms should always take appropriate action to be compliant. They cannot contract out their regulatory responsibilities and they should not assume they are fully compliant just because they employ consultants.
get the latest equity release news here
“We have produced various tools to help small firms comply with our rules, most of which are available to them free of charge. We believe small firms can meet their regulatory responsibilities without the need to use consultants, but we do recognise that small firms can benefit from the use of compliance consultants.”
There have been calls for a qualification and a standards body for compliance consultants.
Bill Warren, director at Complete Mortgage and Loan Services, says: “Firms retaining consultants especially in the mortgage area sometimes do have only themselves to blame. If they are prepared to allow consultants with no mortgage compliance experience and sometimes no mortgage experience at all, into their firms and into a position of influence it is not surprising there are problems. The other side of the coin is that the compliance consultants can really only recommend action and can’t force firms to accept their recommendations. If they are ignored, it is often because firms are either afraid of or unable to afford the implementation of the recommendations.”
This ignorance is causing a false economy within such firms. They are paying for compliance expertise yet not acting upon the recommendations therefore defeating the object of the initial investment.
Mike While, managing director of NM2, says:
“A compliance consultant is there to help guide the firm though the maze of regulation and support its business. Firms should remember they can delegate a task but they cannot delegate the responsibility. A good consultant will work with the broker to understand regulation and any weaknesses they may have and help them to align working practices and procedures to regulatory directives. It is imperative that all firms remember it is the broker at risk if they do not heed sensible advice.”
All intermediary firms have to work at compliance, but for small firms the pressure is even greater. They do not have the luxury of compliance departments and infinite resources, and they must also work on making their businesses profitable. It is to be hoped that the regulator recognises this and ensures its output is firmly focused on the mortgage industry’s smaller firms who need its help the most, but in the meantime the future of such firms remains in the balance.
find out more about this weeks industry news
