The spotlight fell upon networks earlier this year with the news that four firms were the subject of a Financial Services Authority (FSA) investigation. These firms then agreed to stop recruiting appointed representatives (ARs).
This revelation understandably made for unsettling times for all ARs of mortgage networks as the FSA was unable to name the networks. It also raised the question of just how well the networks were serving their ARs, as they had little way of knowing whether the principal they were aligned with had inadequate controls in place and were the subject of investigation.
The FSA has warned mortgage networks over the lack of appropriate controls in place to ensure that ARs are conducting business properly. It has already uncovered evidence of inappropriate behaviour concerning such controls and will be making it a priority area next year.
Weak links
While the network concept has been around for a good while, certainly regulation of the sector is new. So it is only natural that those networks that are ‘weak’ – be it lax in adhering to FSA regulation, or being hamstrung financially, will struggle to survive. The remaining networks will certainly have a role to play in serving their AR communities, especially given the FSA’s move to principles-based regulation, which will result in a need for the network to be able to interpret FSA requirements going forward.
The raison d’etre for the existence of mortgage networks remains the same. They should seek to offer members a one-stop shop, offering access to everything from compliance, access to exclusive deals and enhanced procuration fees. ‘Mortgage Day’ heralded new documentation, new responsibilities and new opportunities for everyone, not to mention greater competition and increased cost what with FSA, Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme fees, compliance consultancy, higher professional indemnity insurance costs and more robust training. The FSA’s primary objectives for the shake up of the mortgage retail sector distribution system centred on the quality of advice available and the fair treatment of consumers. This continues to be the case and now the regulator is baring its teeth.
This is especially the case where directly authorised (DA) brokers are concerned as the FSA trains its eye
on this sector with the same attention to detail it focuses on networks.
Greater scrutiny
There is no doubt that, to date, networks have come in for far greater scrutiny by the FSA than DA brokers, which is probably the way it should have been. After all, by regulating 24 networks, the FSA effectively has control over 2,781 firms (Source: FSA register). However, this uneven playing field may have given some brokers the impression that being a DA broker is an easy option. However, the FSA has made it clear that it intends to analyse the DA market much more closely.
However, in saying that, what is right for one broker will not necessarily be right for all and the key is to find a solution which best suits the individual circumstances of the intermediary. DA status does give brokers complete freedom and control, although networks should be about working as more of a business partner with their members, and not being dictatorial. However, many struggle to juggle the demands of regulation and customer care and rightly see networks as the best way to relieve some of the burden.
There was a belief that following the bedding in of statutory regulation, intermediaries would desert networks once they had become accustomed to the FSA’s demands.
While there has been a small amount of migration from AR to DA status, there is nothing to indicate that any significant changes to the status of brokers are taking place.
The danger is that some advisers may choose to go DA because it appears to be the cheapest option, and not because it is the most appropriate model for them. However most advisers are now clear as to the processes required to be compliant under the new regulatory environment and therefore can weigh up whether they want to spend their time putting the processes in place and monitoring them, or whether they want to pass that responsibility onto a network.
Disconcerting areas
The area that has caused most disconcertion among DA firms especially around ‘Mortgage Day’, revolves around Key Facts Illustrations. The responsibility for the production, delivery and accuracy of the KFI lies with the broker.
Detailed record-keeping has proved burdensome for DA firms, with the FSA warning firms operating in the non-conforming sector that they need to improve the quality of their record-keeping. This can become another drain on resources that prevents brokers devoting time to their clients – however, it is certainly one of the most important parts of the regulatory process. It is imperative that it is absolutely clear from the file why the advice was given and that the documentation supports and proves that.
Interestingly it is not only the small firms but also some of the larger firms that decide to outsource the more demanding tasks associated with regulation or become an AR. They now recognise that regulation and compliance failures can lead to damaging litigation from members of the public. Firms should be aware that complaints against them can now be referred to the Financial Ombudsman, which now has a much wider range of small firms within its remit. Small firms don’t have the luxury of ‘distance’ from their customers, as larger firms with customer care departments and corporate ‘deep pockets’ do.
Lender consequences
As well as the obvious dangers for brokers of failing to comply with the regulator’s demands, specifically the survival of their own business, there is also inherent a serious consequence for providers. They too face an increased risk of falling foul of the FSA if firms move from AR to DA status without having the resources to cope with compliance.
That’s why some feel more comfortable dealing with an AR who is a member of a recognised and trusted network with a good track record, as they take the responsibility for their members, with no come back on the lender unless the lender has genuinely made an error. That’s why networks that want to minimise their own reputational risk look to take on new members that come with a high level of professionalism.
The bigger picture
Networks loan their expertise, at a price, to the broker and in return the broker has the freedom to concentrate on growing their business knowing that many of the demands brought about by regulation are being taken care of. At the same time, the intermediary must recognise that he or she is a member of a bigger team and the way they operate their business reflects upon the whole mortgage network.
The key to making this work is the support the network provides to the AR – the more support, the greater freedom the intermediary has to service clients, target new business, develop innovative marketing campaigns or simply relax without fearing the encroaching FSA shadow of compliance that otherwise could eventually eclipse their business.
Similarly the prospective AR should look for an effective network founded on a basis of financial strength and showing a profit by being well run – the key factor in today’s market. Any network with a long-term strategy has to be looking for profit regardless of the number of DA’s or AR’s a firm has, or it will simply go under. I understand that a network could lose money initially on launch, prior to moving into the black, but only for a finite period as part of a planned long-term strategy.
In terms of adding value, the principal should seek to offer a reliable IT system that helps the broker run their business efficiently and cost-effectively within the network framework. Well-designed and reliable technology is also very important when choosing a principal, especially as we are seeing 80-90 per cent of mortgage transactions through the larger lenders conducted online and some lenders actively discouraging paper applications. Mortgage advisers with a quality network should reasonably expect regular visits from a the networks field staff. The FSA places an obligation on principals to ensure they have appropriately trained staff who operate within a wider Training & Competence framework. Professional indemnity insurance that does not have ridiculous excess should be provided.
At the end of the day, it’s a matter of choice for the adviser and choice must be a good thing. Whichever route an intermediary takes, mortgage networks need to make themselves relevant to their members whether they be ARs or DA’s, if they are to grow prosper.
Sally Laker is managing director of Mortgage Intelligence
