‘Popular’ consultation and discussion papers from the Financial Services Authority (FSA) (in the eyes of a policy analyst at least) tend to develop ‘popular’ titles both here at the Association of Mortgage Intermediaries (AMI) and in the public forum.
For example, DP07/01 is better known as the Retail Distribution Review (RDR), and CP07/11 and PS07/24 are better known as the Insurance Conduct Of Business Sourcebook (ICOBS).
However, the most creative abbreviation I have heard for CP07/23 ‘Organisational Systems and Controls – Extending the Common Platform’ is ‘Oh, seven-twenty-three’ and that’s about it.
Herein partly lies the problem – this is a consultation that has at best slipped by even the most diligent in the industry and fails to ignite much passionate debate.
In simple terms
So, what exactly is ‘Oh-seven-twenty-three’? Well, in simple terms the document proposes the extension of the systems and controls (SYSC) rules which currently apply to the Markets in Financial Instruments Directive (MiFID) and Article Three CAD-exempt firms to all firms.
That is, in handbook terms, chapters two and three of SYSC rules, which would be turned off for mortgage brokers and replaced by chapters four to 10, which currently only apply to IFAs who have chosen to opt into MiFID.
Firms could be forgiven for overlooking this consultation altogether. Certainly, when considering the policy intention of the FSA it is clear that there is no ambition to raise the bar for firms, and an argument that any firm successfully adhering to SYSC two and three would by definition also adhere to the revised SYSC four to 10 rules and guidance. But is this actually so and does it mean no more work for firms?
Unfortunately, I think not. Any good firm would invest time and effort in considering new rules – regardless of whether they represent any marked increase in regulatory responsibility.
This, combined with current market conditions and two ‘Treating Customers Fairly’ deadlines – which we are repeatedly told are the FSA’s number one priority – will only exasperate the issue when considering ‘Oh-seven-twenty-three’s proposed October introduction date.
A concerning tone
The tone of the document is also of concern to AMI. The draft wording is complex, and relies heavily on the concept of ‘guidance’. Historically firms have benefited from the clarity of rules.
While AMI supports in principle the move to reliance on high-level rules, AMI is beginning to feel ‘nervous’ about the volume of guidance in some FSA draft text, and strongly feels that clarity on the weight of such guidance would be beneficial.
For example, while larger firms may have the ability to consider and challenge guidance, for a smaller firm it may be that guidance is merely rules in disguise.
The other key change in the consultation is the concept of outsourcing. This is a difficult subject, as the rules are themselves not that detailed within the text.
However, MiFID Connect, an industry representative group for MiFID firms, has published industry guidance on outsourcing, on when and how this can represent material outsourcing and how to address it. This was published when MiFID first came into effect in 2007 for some IFAs and larger firms.
A complex situation
The situation is complex, and the industry clearly has to consider their own situations. Because this is guidance it can also be interpreted differently by each and every single firm.
But consider this – I can foresee that for some firms, any of the following could constitute material outsourcing in their current forms: use of compliance consultants, use of support service companies, use of mortgage sourcing software, use of lead generators and even potentially use of packagers.
How would the industry cope if 10,000 firms chose to follow MiFID Connect guidance and insist on site visits and evidence of disaster recovery arrangements for their sourcing software provider? I fear the industry would grind to a halt.
‘Oh-seven-twenty-three’ represents a challenge, both to firms and also to the FSA. While the purist view of one handbook for all may be a laudable ambition, I am yet to be convinced that SYSC isn’t one step too far.
Firms that are so fundamentally diverse could perhaps be better served by more than one handbook, managed through existing technology allowing firms to construct their own tailored handbooks online for certain complex components.
AMI responded comprehensively to the consultation and met with the FSA to raise specific concerns. Supporting AMI allows us one voice to best represent our industry.
