I am quite sure that when the Financial Services Authority (FSA) published its findings on the ‘Quality of Mortgage Advice’ many firms were surprised and disappointed by the results. As we now know, the regulator says that ‘over three-quarters of firms in the sample did not have robust processes in all areas of their business associated with giving advice’. It went on to say that it believes ‘this leads to a high risk of unsuitable advice being given’.
But is this fair in an increasingly complex market? And, with additional changes ahead in the form of ‘Treating Customers Fairly’ implementation and principles-based regulation, there are even greater challenges for many firms.
No surprises
I have to admit that I am not surprised by these results. As someone who attends and speaks at various seminars and conferences it has been obvious to me that while most firms are trying extremely hard to be compliant, they are finding the complexity and time required very challenging. I’m sure that many firms do not fully understand what the FSA expects of them.
The sad thing is that this regulatory challenge had always been expected, so it is interesting to consider why many smaller mortgage firms chose direct authorisation. In 2003 industry commentators believed that many firms would prefer the appointed representative (AR) route.
Firms had to apply for FSA direct authorisation six months before ‘Mortgage Day’ but at that time suggestions were circulating that the FSA was encouraging them down the AR route as it would ease their burden of regulating so many new firms. Add to this the size of the general insurance market and it was always possible to believe there was truth in the rumour.
I do not believe that was the case but certainly the regulator did respond by stating there was absolutely no reason why a small firm should not seek to become directly authorised (DA). I also agree with that FSA view but that was when some unfairness crept in. Did the financial services regulator underestimate the regulatory task it was setting so many small intermediary firms?
Serious challenge
Compliance with regulatory requirements is a serious and time-consuming challenge. It requires considerable effort and analysis. Not only is a firm required to study the FSA handbooks, but also to monitor
the FSA’s websites and review the associated documentation and speeches that are made on a regular basis. The Association of Mortgage Intermediaries (AMI) has done a tremendous job in plugging the information gap and its regular monthly bulletins provide firms with a general understanding of what is happening. But this can never be enough. The point of the AMI publications is to encourage AMI members to find out more on the FSA website.
So do I believe that the FSA was unfair?
No. But I do believe the challenge to firms who had never before been subject to statutory regulation was underestimated. I think that we can safely say that is proven because no one, including the FSA, expected to see 75 per cent of firms failing in some way or other. That is serious.
But has there been more customer unfairness?
Shortly after ‘Mortgage Day’ there were indications that the mortgage market was coping well. The FSA was pleased and turned its attention to general insurance. For many months we have heard little other than concerns about the general insurance sector and all that time the mortgage market was left alone. It is unsurprising therefore that many mortgage firms thought they were doing a really good job in complying and must have been extremely surprised when the quality of advice review results were announced.
Was this fair? These firms must now look hard at their future direction and make significant changes to the way in which they do business.
At this point let me state my bias. My employer’s group of companies include Mortgage Next network and I have always considered that many small firms would fare better as ARs.
But, I continue to believe that there is no reason why an intermediary firm should not become directly authorised or remain DA. However the firm must understand the amount of time, complexity and challenge they face in remaining DA and remaining compliant with the FSA’s requirements. The regulator has only, so far, looked at the actions of mortgage firms in the mortgage market which is their specialist sector. It has yet to take a look at the actions of mortgage firms advising on general insurance. I will say no more.
