The Financial Services Authority (FSA) announced last month that product providers and distributors need to work together in order to treat customers fairly.
The regulator issued a discussion paper which said that providers and distributors of financial products have differing but interlocking responsibilities for ‘Treating Customers Fairly’ (TCF) and need to work together to help avoid potential future detriment for consumers.
So what are the main points that the regulator is aiming to get across? And how have industry bodies and the firms concerned – mortgage intermediaries, lenders, packagers and distributors – reacted?
What is the FSA saying?
In the paper, the regulator encourages providers and distributors to design their products with greater care, to provide higher quality information, to monitor distribution channels more effectively at a high level, and to undertake better post-sale analysis of the performance of products.
The paper has re-ignited the debate about whether lenders and distributors take TCF seriously enough. Some critics hope the FSA paper will encourage lenders and distributors to adapt their business models to fit in with the FSA plans going forward, while others suggest the paper might simply prompt a change in attitude to TCF. Obviously no lender or broker wants to admit that customers are not at the core of their business practises already, but for some firms there is clearly some work to be done.
FSA chief executive, John Tiner says the paper is an important element of the TCF initiative and is designed to help ensure outcomes for consumers that are fair regardless of the route by which they have received a financial product or whether it was provided and distributed by a single institution or by two or more.
“I should emphasise that we are not placing new regulatory responsibilities on either providers or distributors. Nor are we looking for providers to ‘police’ their distribution channels or for distributors to transfer current responsibilities to providers,” he says,
“We know some firms are doing this already, but we do expect providers and distributors to work together to ensure consumers are dealt with in an effective and fair way. Providers should give more support and information to distributors of their products with a corresponding expectation that distributors should use product information effectively with consumers.”
The FSA discussion paper encourages the distributors to scrutinise more closely information they receive from product providers to ensure specific products are suitable for specific consumers. This should result in fewer cases of unfair outcomes for consumers, for example, where a distributor believes on the basis of information from a provider that a product is suitable for a customer, when this might turn out to not be the case.
Industry reaction
Early indications suggest the views in the paper have been welcomed by all concerned, with the Association of Mortgage Intermediaries (AMI) and the Financial Services Practitioner Panel (FSPP) pledging their support.
AMI associate director, Rob Griffiths says: “The message from the regulator is clear: lenders must look to work in co-operation with intermediaries, taking a more open and long-term strategic view of the shared responsibilities that exist to serve the mortgage consumer better.
“The FSA is right to assign product design responsibilities to lenders. We are pleased to see the FSA highlight the role of advice for complex products and consumer needs – especially in such areas as non-conforming. The need for professional advice is even greater in areas such as equity release.”
Griffiths says that while the FSA clearly expects lenders and intermediaries to continue to communicate where it is in the best interest of the consumer, this may require a radical rethink by some lenders as to how they share information with mortgage intermediaries post-completion.
Mortgage networks will need to gather detailed information from lenders about levels of churn and customer satisfaction. This requires an open and strategic relationship. Griffiths says AMI takes comfort from the fact that the FSA has said this will not be a hindsight activity.
The FSPP agrees that consumers have a right to be treated fairly, and says the relationship between providers and distributors is an important element of this. “This is a complex area and one that we think will benefit from an open debate,” says deputy chairman of the panel, Jonathan Bloomer. “The panel has been broadly supportive of that shift in approach, and views this as a good example of how principles-based regulation can – and should – work in practice. The panel hopes regulated firms and trade bodies will review the paper and respond to the regulator on any issues arising.”
Firms have until 29 December 2006 to respond to the paper. Its high-level positioning by the FSA, without the need at this stage for further prescriptive rules or guidance, is in keeping with the well-publicised move towards a more principles-based regulatory regime and greater reliance on market-driven solutions.
Essentially, the document is a helpful attempt by the FSA to provide some general clarity, stimulate discussion and provide encouragement to the industry – providers and distributors – to work together to ensure consumers indeed do get the right deal for themselves.
Reaction from firms
Not surprisingly, many lenders, distributors and brokers claim that TCF is already at the centre of their working ethos, but AMI reckons there is room for improvement in some areas.
Griffiths says: “AMI believes the FSA has rightly identified that intermediaries carry responsibility for advice, but they can only be held to account if lenders provide them with accurate and timely information, both when the product is new and exciting but also on an ongoing basis. There is a clear message here that lenders need to improve their levels of post-sales service.”
His view is backed up by David Hollingworth, mortgage specialist at brokerage London & Country, who says the general note of the announcement is that closer working relationships between providers and distributors is a positive move in ensuring customers are treated fairly and that this relationship centres around the information provision from the provider.
“In terms of the mortgage world, I don’t think there will be anything too frightening about this as a concept for anyone interested in taking TCF seriously. For a lender or to provide more detailed product information to distributors can only be a positive thing, although of course the central document to a mortgage transaction is the Key Facts Illustration (KFI) which should carry all the product and fee information to help the customer make an informed decision.”
Although it does not include new rules, the discussion paper providers the FSA view of what the existing Principles for Business mean in a practical sense.
TCF is a key element of the FSA’s aim to make the retail financial services markets work more effectively and is a core component of its move towards more principles-based regulation.
Melanie Bien, associate director at broker Savills Private Finance, says: “The FSA’s comments all make perfect sense. Products do need to be designed with the end user in mind and lenders should work with providers in ensuring products do what they are required to do.”
Of course, there is an element of this happening already; successful brokers have regular contact with lenders and work on developing products jointly for their client base. Brokers have daily contact with clients so know exactly what they want – whether it is higher loan-to-values (LTVs), better rates – even if it means higher fees – and it is sensible for lenders to take this on board. Otherwise, products won’t hit the mark and their take-up will be muted.
“There is lots of evidence of this happening already but if lenders and brokers adapt their current practices so this happens even more, that would be welcome and the consumer would ultimately benefit,” says Bien. “TCF is extremely important. We have to take notice of it and at Savills we have spent lots of time and effort ensuring the correct processes are in place. This announcement from the FSA may give those brokers and lenders who perhaps haven’t taken TCF fully on board the nudge they need to do so.”
As to whether lenders and packagers will adapt their models to fit more closely with the FSA’s plans, most believe they are following guidelines already.
Ian Giles, marketing director at Kensington Mortgages, says TCF is already embedded in the lender’s corporate strategy and that it is in close dialogue with the FSA to ensure it remains fully aware of the regulator’s future plans in this area. “Customers are at the heart of our business and our objective has always been to design products customers want to buy and our distribution partners want to sell, ever since our establishment of the specialist lending sector 11 years ago.”
“When it comes to the specialist market, the majority of brokers prefer to use the knowledge, experience and service of a packager and so working closely with packagers is something that specialist lenders should be doing as part of good business sense as well as compliant process.”
This relates back to the fact that the principles behind TCF are not purely regulatory issues, but are the principles that need to be embedded in a lender’s business model for it to succeed. An example of how Kensington is demonstrating its commitment to TCF and working closely with its distribution partners is K-link, the large scale connectivity programme, allowing packagers to link into Kensington’s e-commerce system so they can provide their brokers with binding decisions and KFIs direct from the lender, that was launched last month.
“When it comes to e-commerce, many lenders seem to have forgotten what an important role packagers play in the advice process and so with K-link, Kensington is reaffirming its commitment to TCF by making it easier for brokers do business via packagers and source products from the whole market, rather than just one lender’s website,” says Giles.
According to Matt Grayson, head of PR at BM Solutions, the mortgage market is all about linked collaboration across multiple businesses in related sectors. These links have been greatly helped by online technology, which enables businesses to seamlessly share processes and the exchange of data.
“TCF formalises and provides a framework for many of the thought processes, which were already in place between the many distributors in the industry,” Grayson says. “However, there’s no room for complacency and I am sure the FSA’s latest announcement will add fresh impetus to collaboration and smarter working practices, especially with regards to TCF.”
The Mortgage Times Group is the largest network packager and claims it has always embraced and will continue to embrace regulation across the group including its packaging/lending arm. It has a close-knit relationships with its lender partners and participates in open discussion forums and essentially operates an ‘open-door’ policy.
“As a regulated entity we have fully embraced TCF and have undertaken an in-depth analysis and continually look to improve ways of keeping our customers happy. This is an on-going task, not just a one-off piece of work,” says marketing executive, James Smith.
Generally the FSA announcement has called for providers to monitor different distribution channels at a high level and lenders will already have a good idea of how different channels as a whole perform. Elements such as the quality of the business coming through different channels and how that business performs will certainly be something that they are keen to monitor already. It is also worth pointing out the discussion paper is not looking to impose new rules and nor is it requiring lenders to police their distribution. However, if there is a recurring problem it should help to identify where a process could be improved to the customer’s benefit.
“Lenders and intermediaries should certainly be taking TCF seriously and I feel that they will be,” says Hollingworth. “Certainly, any organisation that feels it is not necessary to put effort into that aspect would look to be heading down a very lonely path.”
