February sees the publication of new EU plans designed to bring harmonisation to financial services regulation across Europe. The snappily titled Markets in Financial Instruments Directive (MiFID) will put in place common standards for providers and advisers leading, it is hoped, to a more open single market in Europe.
Although the new rules are primarily concerned with investment advice, they will have some impact on the mortgage industry in areas such as the handling of client money and Financial Promotions. The problem is that, at the moment, even the experts at the FSA and HM Treasury are uncertain what changes MiFID will bring about in the UK financial services sector.
The Association of Mortgage Intermediaries (AMI) is already gearing up to work with the FSA to analyse the proposals and input into a short consultation period before the Directive is carved into stone and implemented on 1 November 2007. One thing is for certain; the introduction of MiFID will involve a drastic re-write of the FSA’s rulebook and add to the wealth of rules that all financial advisers face, mortgage intermediaries included.
Just the beginning
It is also just the beginning of a raft of new European legislation over the next few years that will directly affect the British lending market, including the European Commission’s Green Paper on mortgage credit, plus the Credit for Consumers Directive (CCD).
As Stephen Atkins, group compliance director at Freedom Finance, says: “Things are getting more hectic for the mortgage industry, and the regulation burden is getting greater.” But Atkins points out that the aim of the new Directive – to prepare the ground for a more open and fairer single market – also provides opportunities for growth into Europe by British lenders and even mortgage intermediaries.
Atkins continues: “There is a huge amount of uncertainty about MiFID at the moment but in theory it shouldn’t have a direct impact on brokers. It could impact on mortgage business in companies where there is an overlap with areas that MiFID directly addresses. This may include things such as payment of commission or the holding of client money. There is insufficient clarity at the moment so we are awaiting further announcements from the EU Commission.”
Atkins says the Directive could, for example, affect unauthorised packagers because they often hold client money. He explains: “For companies caught on the fringes, MiFID could make life difficult. But we won’t know for sure until we see the detail – and if anyone says that they know what MiFID is all about, they obviously haven’t read it.”
Various cross-industry groups have been set up to look through the current information that has been produced by the Commission on MiFID, formulating their responses and preparing the industry for the consultation period, which should kick off in the next month or so. Atkins says intermediaries should keep up-to-date with developments on the implementation of MiFID by reading the FSA’s guide, ‘Planning for MiFID’, which is available on its website at www.fsa.gov.uk/pubs/international/planning_mifid.pdf and keeping up with announcements from AMI and other organisations.
Cross-border
MiFID replaces the current Investment Services Directive (ISD) and not only allows firms to set up in other EU countries, it also means they can offer a wider range of cross-border services. It should result in a level playing field for financial services providers to trade wherever they want in the EU.
The Directive expands the ‘core’ investment services and activities that can be offered across borders, or ‘passported’ as it is known. The new Directive will implement common standards across all EU member states for issues such as capital requirements, conduct of business, client classification and something called ‘Best Execution’ – a rule that requires firms to obtain the best possible deal for their clients.
Firms that will be directly covered by MiFID include investment banks, portfolio managers, stockbrokers and broker dealers, and corporate finance firms. However, it may be that some retail banks and building societies will be subject to the Directive for some parts of their business, such as selling securities or investment products that contain securities.
The regulatory bodies of individual states, the FSA in the UK for instance, will retain responsibility for monitoring the performance of firms and dealing with complaints and issues with clients and companies in their jurisdiction.
Key elements
According to the FSA, some of the key elements of MiFID include:
- Conduct of business
- Best execution
- Passporting rights
- Client classification
- Non-scope issues
The third consultation paper will have a direct impact on mortgage firms as it will cover the MiFID provisions on marketing communications, particularly how these sit within wider changes from the FSA’s own Financial Promotions review.
As with all the regulatory changes of recent years, intermediaries are well-advised to keep abreast of developments and prepare themselves in advance, rather than leave it to the last minute. The changes that MiFID triggers in UK intermediaries may well be minor in the scheme of things but they are likely to involve changes to the management systems of many firms.
Across the continent?
Commentators have predicted for many years that the UK would see an influx of foreign mortgage finance providers but, with the exception of some US personal lenders and Spanish bank Santander which bought Abbey, this has not happened. Elsewhere on the continent some EU members, notably France, have used their national financial regulations to actively block foreign providers from trading on their soil.
As far as the UK is concerned there is a lingering worry that foreign lenders and advisers may not have to operate under the same exacting standards as British firms because they will be governed by the over-arching EU legislation, which in places is not as strict as UK regulations. However, the FSA and the Treasury have both said this will not be the case, promising to address any such issues in the draft MiFID.
Atkins on the other hand says harmonisation should be seen as an opportunity for British firms to expand on to the continent, with Freedom Finance already eyeing up European possibilities. Atkins says: “I think we will see UK lenders spreading into Europe because ours is one of the most innovative mortgage markets around. Some of the top brokers could also do the same. For the bigger networks with money in their pockets the opportunities are enormous.”
Wider variety
Bill Warren, director of The Complete Network, says intermediaries must also be prepared to take advantage of the wider range of mortgage lenders that a more open European market could deliver to the UK. He explains: “I am sure we will see more European banks and lenders trying to get a foothold in the UK. As part of our long-term strategic thinking we have been looking into how we could develop a strategic relationship with foreign lenders.”
The UK mortgage market is already one of the most competitive home loan industries in the world, with some 6,000 products available. Yet Warren says it is this variety and demand for niche products that could attract specialist European players rather than big mainstream banks. “MiFID will increase the marketplace,” he says. “More products will mean more choice for the consumer and more competition for lenders.”
Thorny issues
The two most likely areas of current UK mortgage regulation to be altered as a result of MiFID are the already thorny issues of Financial Promotions and client money. This last area will impact on mortgage firms that currently use commission received from providers to offset against the fees they charge to their client. The FSA says that although firms currently word agreements to treat this money as being owned by the firm, it does in fact belong to the client and therefore those firms should comply with higher capital requirements.
Ironically, this issue has only just been ironed out under the current regulation regime, with the FSA giving mortgage firms the same temporary concession enjoyed by investment advisers, so that money received by mortgage advisers by way of commission relating to fee-based advice will fall outside of the regulator’s client money rules.
When making the announcement of the concession, the FSA said it was unlikely to be consistent with MiFID and that it would seek a longer-term solution, stating that it expected the Treasury to allow financial advice firms not holding client money, and not wishing to give cross-border advice, to choose to work outside MiFID in the UK.
Simplification
In its summary of upcoming international regulations, addressed to small firms at the end of last year, the FSA said: “The conduct of business obligations prescribed by MiFID will be significantly more detailed in some areas than those currently required and may require firms to make changes to existing customer documentation and to introduce substantial changes to systems. The Directive is likely to require extensive changes to aspects of our Conduct of Business Sourcebook for all firms, including those not within the scope of the Directive. We will consult with you on these, and also use the opportunity to simplify our rules where we can.”
Although the term ‘simplify’ will be good news to most brokers, it is still not clear how much of a re-write the rulebook will have to undergo. Vanessa Moore, policy officer at AMI, says the FSA will wait for the final MiFID proposals to be published before it makes a decision on the extent of changes required.
She explains: “MiFID has no direct impact on mortgage intermediaries as it relates to investment activities, but the FSA may want to equalise the rules that will apply to brokers, such as Financial Promotions and client money. But because of the short timescales the FSA is unlikely to want to take into account anyone not directly impacted by MiFID.”
Moore continues: “The difficulty is that AMI, along with everyone in the industry, is still waiting to see the full detail of MiFID. But obviously we are watching developments closely.”
AMI has warned the industry about the spectre of European legislation on the horizon since before the UK mortgage market was regulated, something AMI/Association of Independent Financial Advisers (AIFA) director-general Chris Cummings has referred to as “regulatory creep”. MiFID is just the first, the result of EU single market policies that bring headaches and opportunities in equal measure.
But until the detailed proposals are unveiled, intermediaries should not worry too much about the impact MiFID will have on them. Regulations will be re-written but that was always on the cards anyway. The important thing for brokers now is to keep tight control of their systems and practices so that when the time comes they are in the best position to handle the changes and carry on trading.
