In the press, the Summer months are traditionally referred to as the ‘silly season’, where news is thin and silly stories hit the headlines. In the world of mortgage and general insurance (MGI) regulation, however, there is no slow-down of important news being issued by the Financial Services Authority (FSA) and, over recent weeks, we have seen some major publications and news announcements. In a regulatory climate that is principles-led, the big ideas are arguably more important than the small day-to-day detail, so it’s as important as ever to keep up-to-date.
At the end of June, the FSA published its Annual Report for 2005/6, and a summary for small firms can be found in the small firms section of the FSA’s website. The chief executive’s report provides a good summary of the major issues such as the Better Regulation initiative (including risk and principles-based regulation) ‘Treating Customers Fairly’, cost/benefit considerations, and helping firms achieve compliance.
Perhaps most interestingly for MGI firms, the first year of regulation is summarised as a period of assessment, including ‘policing the perimeter’; a review of disclosure documentation; self-cert and non-conforming mortgages and equity release. In the GI sector, claims-handling came under scrutiny, as did payment protection insurance (PPI) and critical illness cover. Work in these areas continues.
John Tiner, the FSA’s chief executive, announced a review on the future of retail distribution of financial services in the UK, setting out some future scenarios for debate, and inviting feedback. One of these reports is devoted to mortgages and it predicts increased consumer appetite for debt and increased market share for brokers. To download the full report go to www.fsa.gov.uk/pubs/other/future_advice_mortgages.
Recent news items include the good news that mortgage disclosure documentation has improved over the last 12 months, but still more than 25 per cent of the Key Facts Illustrations (KFIs) issued by medium-sized brokers and small lenders still contain material errors relating to fees and charges. Two forthcoming reviews in the mortgage sector have been indicated. First, a follow up thematic work on non-conforming mortgages is expected to start in the third quarter of 2006 and, second, an investigation into interest-only mortgages is expected to be commenced shortly with further details yet to be announced. Some commentators have been predicting interest only mortgages are set to become the next major mis-selling scandal, so this particular topic is one to watch closely.
Finally, at the end of June we saw the first major enforcement action against a mortgage firm, Rainbow Homeloans Limited, which entailed a £35,000 fine and the firm ceasing to conduct regulated business. My view is that more such enforcement action against mortgage firms is highly likely, as the FSA gets increasingly tough on non-compliance within the mortgage sector.
A HIP approach
Q1:
We are a fairly small MGI broking firm, currently directly authorised with three advisers. We are trying to decide how best to plan our business development and client management for the rest of this year and 2007. Home Information Packs (HIPs) keep returning as a challenge and we don’t seem able to work out a suitable approach. What advice would you give us?
A2.
Bill answers: Given the attempted political hype, especially from the Minister for Housing and Planning, HIPs are still dividing those who are directly involved in the housing and mortgage industry.
The first point is that you must plan as if they are going to happen, despite the huge practical challenges that seem to exist, i.e. lenders still requiring a valuation/survey in addition to the HIP. The Minister seems to believe, ‘HIPs will speed up mortgage offers because borrowers will not have to wait for a survey’ – perhaps she knows something the rest of us don’t yet.
I suggest identifying a small number of intended HIP providers and assessing their offerings against your own business and sales processes. This will help understand the issues involved and help you decide how best to start talking to clients now about HIPs.
Reviewing arrangements
Q2: The recent fine and action taken by the FSA against Rainbow Homeloans has resulted in my firm reviewing its compliance consultancy arrangements. I know you have been asked in the past for a view on what firms should look for and, of course, the Association of Mortgage Intermediaries (AMI) and the FSA have produced useful questions to be asked. But are there one or two key areas you personally would look at very closely?
Bill answers: The obvious answer is to try and assess the competence of the individual(s) you will actually be allowing to become part of your business. If you don’t allow them ‘into your business fully’, there will always be difficulties. That said, I would be looking for someone who has ideally worked in mortgage regulation previously, e.g. via MCCB, and/or someone who can evidence that they have spent time studying the rules in depth – teaching CeMAP, for example. It’s likely their detail skills will be finely tuned. Someone like NMSquared, which specialises in CeMAP training, is a good example. Always seek evidence of what the firm has actually done.
Be prepared
Q3: The FSA has announced it is to carry out another review of the non-conforming sector. We have a reasonable mix of business spread between prime buy-to-let and non-conforming, but are seeing the non-conforming area increase, in-line with trends it would seem. We are concerned we will be visited as part of the review – what should we do to be prepared?
Bill answers: Hopefully the answer is do more of what you are doing now. If your record-keeping is detailed and you can easily provide evidence to show why you have recommended certain lenders/products as they meet your clients identified and recorded needs and requirements, you are on the right track. It comes down to the much-commented quality of record-keeping. As has been the subject of comment in the press again in the last week or so, good quality suitability letters add a lot of value.
