Towards the end of 2006, a new topic appeared on the regulatory horizon in the form of “industry guidance”. So far, this concept has failed to make more than a ripple on the surface – but my advice is to watch out for further news on industry guidance as it has the potential to affect the way in which we all remain FSA compliant in the future.
The term “industry guidance” refers to the sort of guidelines on good practice that are supplied to the various financial industry sectors by trade and professional bodies and other stakeholder organisations. Following a review of the issue earlier in the year, the FSA has now confirmed its commitment to recognise industry guidance when assessing whether regulated firms have acted according to its 11 principles for business, and in November the regulator published a discussion paper covering this topic (DP06/05).
In the introduction to DP06/05, industry guidance is defined as “Information created, developed and freely issued by a person or body, other than the FSA, which is intended to provide guidance from the body concerned to the industry about the provision of our Handbook.” The “person or body” can be a trade association, a professional body or other representative organisation, professional adviser, or even groups of firms themselves. A major concern already developing for many within the industry is the seemingly wide range of organisations the FSA appears prepared to accept as providing guidance - which could create a risk for many firms.
Industry guidance must be submitted to the FSA for “FSA confirmation” and, whenever guidance is issued, these bodies must make it very clear whether it is FSA confirmed or not. To achieve FSA confirmed status, draft guidance should explain how it relates to the FSA’s rules and principles; there must be a direct link to FSA requirements; it must not claim to limit the rights of third parties; it must not be anti-competitive; it must be optional and not prescriptive; it must not claim to be exhaustive or definitive abut FSA requirements; it must be publicly available and free; and it must specify its intended audience.
On the penultimate point above, The Association of Mortgage Intermediaries (AMI) has made an initial response to DP06/05, saying “Why should firms who are members of trade bodies and actively involved in drawing up guidance subsidise those who are not?” and it’s easy to sympathise with such a view – especially if one is a fully paid up member of a relevant trade or professional body. On a more positive note, if specific sectors - such as mortgage broker firms - can use well-informed (and FSA confirmed) guidance from experts in their own field, then this will no doubt be helpful in making compliance with the FSA’s principles easier to accomplish.
The regulatory status of industry guidance is not (as yet) set in stone, and we can all make our views known. Four questions are posed at Chapter 1.24 of the discussion paper and responses must be submitted by the closing date of 31 January 07.
Q1. I have noticed that the Intermediary Mortgage Lenders Association (IMLA) have been much more in the news recently. What can you tell me about them and what can they do to help my business as a mortgage broker?
A1. I hope I can do justice to IMLA in such a limited space. They are a collection of like-minded lenders who specialise in generating mortgage business from the intermediary marketplace. IMLA is mainly composed o f non-conforming lenders who are keen to support and grow the profile and size of their intermediary sources. They could be compared to the Council of Mortgage Lenders but currently on a smaller scale. They have recently appointed Peter Williams as their Director General to lead them through another challenging chapter in the mortgage industry’s history. Prior to his IMLA appointment Peter was the CML’s Deputy Director General where he was highly respected for his common sense, vast knowledge of the UK housing market and incisive assessment of major issues impacting lenders especially.
Q2. There have been comments in the trade press recently expressing the view that the FSA are about to come down hard on the smaller mortgage and general insurance brokers due to their lack of systems and controls over their advisers and the quality of advice they have given. Why is it only the broker market that gets visited by the FSA and attacked by them all the time?
A2. By the time you read this I believe the FSA will have reported on their visits, mystery shopping exercises and their thematic work in the mortgage area and every indication is that it will not make good reading for the industry. The FSA have a risk based approach to their responsibilities as you know and the broker sector partly due the number of firms in the sector are assessed as high risk by the FSA it appears so hence their focus. However the FSA have carried out similar work with lenders and it will be interesting to see what is reported back. The worrying aspect is that the lenders tend to have invested in IT, so they can demonstrate how they set out to control their advisers but what perhaps is not clear is how much work is actually done checking the quality of advice given by lender’s advisers .The FSA may have done a lot of this but to date there is no public evidence that they have, but seemingly plenty to hit the intermediary with. Is the FSA biased against the intermediary sector or lacking the resources perhaps to address the lender adviser issue?
Q3. My firm belongs to a small network and training and competence is often mentioned as an issue to be addressed. I have asked a few times for a detailed explanation of the difference(s) between knowledge and competence. Can you tell me please?
A3. A way of describing the differences could be to say that the knowledge and skills are the “inputs” that are needed by the adviser to achieve the “outputs” Knowledge and skills could be for example knowledge of the mortgage market, the skill is being able to sell effectively. Competencies are the outcomes or results that an adviser has to deliver to carry out their role effectively. A simple example of a competency could be to achieve compliance with the firms’ procedures.
