What impact does FSMA regulation have on brokers and lenders?

Paul: [00:00:30] Hello everyone and welcome to the latest edition of mortgage introducer TV brought to you in association with Mint Property Finance and one in which we are daring to delve into territory few would be brave enough to. Yes, we are going to talk regulation and specifically that relating to the Financial Services and Markets Act or FSMA for short. Now, if you're not sure what that is or why it matters, then bear with me. This is not a video to explain every facet of the order. It contains multiple parts and indeed part three alone boasts some 17 chapters. But what we are going to do is explain why the legislation is important for your business, what difficulties you might face, and what risks you might need to overcome and why? Well, because if the industry gets this wrong, then the ultimate sanctions could be far reaching. So who are the brave men ready to join us on this regulatory voyage? Well, they are. Richard Showman, head of lending at Mint Property Finance. Vic Jannels CEO of the ASTL. Ray Cohen, director at Jackson Cohen Associates, and Richard Stock, senior associate at Sirius Property Finance. So, gents, let's dive into this. Talk to us about FSMA legislation, what it means and why the mortgage industry should be paying attention to it. Ray, I'm going to start with you.

Ray: [00:02:01] Well, okay. So there's probably more than just the FSMA to think about. So within that, you've got the structure of the regulatory activities order which defines what regulated mortgages, what consumer buy to let is a buy to let, etc.. You've got the credit broking part, which is within the regulated activities order but is also within the Consumer Credit Act. And then you've also got the mortgage credit directive, which sets out specific rules of it about consumer buy to let and how they are structured and managed. So there's several bits of the legislation there.

Paul: [00:02:40] Yeah. Thanks Ray. Setting the scene for us there. Richard Showman, if I can bring you in as well. I mean, there's got to be some criminal issues to consider as well.

Richard Showman: [00:02:48] Well, absolutely. If we're found to have acted contrary to the order, then the lender directors officers are liable for criminal action. So it's something to be very mindful of.

Paul: [00:03:04] Yeah. Thank you, Richard. And I'll just move across to the other Richard as well. Any broker perspective on this?

Richard Stock: [00:03:10] I suppose the most important thing is outcomes for both parties that we're in the middle of here for both the consumer and indeed our lending partners.

Paul: [00:03:19] Yeah. And Vic, if I can bring you in as well, I mean, any thoughts on this?

Vic: [00:03:23] I think we're looking at a trade association, for example, and the work that we're doing in conjunction with our lenders, it's important that, as Ray said earlier, we we take note of the fact that there are many different sets of rules and regulations that we have to adhere to. And I think this is all part and parcel of identifying and pointing out the ways in which we can all be protected when we're dealing with our consumer and their requirements. 

Paul: [00:03:51] Excellent stuff. So if you don't mind, I want to ask you for some sort of clarification here. What is the difference between regulated loans and regulated activity to that loan, according to the FSMS? Richard Showman, I think you're the man to start us off here. 

Richard Showman: [00:04:07] We always seek to get our cases from approved brokers or approved representatives of brokers. Certainly where that borrower is an individual, where the loan is to a corporate borrower then that isn't particularly necessary. So we're reliant on the broker as as ourselves and knowing properly the full scope of the regulations and what loans we can actually write, we get that wrong. The ramifications are particularly serious.

Paul: [00:04:49] And serious ramifications. Ray, is that how you see things as well? 

Ray: [00:04:53] Yeah, absolutely. Getting it wrong, it can be very painful for particularly for the lender and possibly for the broker as well. So, I mean, the two parts are that you've got to one part defines what a regulated loan is and whether that's a regulated mortgage contract, whether that's a consumer buy to let a regulated credit agreement, which includes an Article 31B loan. And then the other part is the actual regulated activity, which particularly will be for regulated lenders and registered lenders. So those will enter into administer a regulated mortgage contract or consumer buy to let. And then for brokers, it's about their activities being correct, whether that's arranging, bringing about advising, whether it's credit broking, debt counseling or debt adjusting and having the right permissions for all the bits that they're going to do and with the right with the lender. Because sometimes it's easy to think, oh, I've got some permissions, but have you got all the bits you need? So that's the two way bits which sort of interact between one the product and one the activity. 

Paul: [00:05:59] Great points, Ray and Vic, if I can bring you in as well. Talk to us about the journey here and how that's impacted. 

Vic: [00:06:05] I think it's important picking up on what both of my predecessors have said. It's also incumbent upon the seller, the broker, the introducer, to ensure that the customer knows what is required of them in the journey. And if I can pick one point on what Ray actually outlined is the ability to ensure that the consumer knows that, God forbid, in the event of something going wrong and there's a lack of ability to make a repayment, exactly who they should talk to, when they should talk to them, and how they should deal with that. Because generally speaking, lenders will always exercise forbearance where they can. But going full circle back to the beginning, it's important that the consumer is pointed up and understands and knows where those areas are.

Paul: [00:06:56] All right. Well, let me move the conversation along then, and let's talk about the impact that this all has on brokers and lenders. Richard Stock, I'm going to bring you in first for the for the broker perspective here.

Richard Stock: [00:07:08] Ultimately, it's to ensure the outcome is correct for our consumer customer and ensure that they no matter which type of contract they're entering into via us, that they're treated in exactly the same way. The fact that one may be regulated and one may not be shouldn't alter the way that we treat our clients and the way that they are then impacted with the lending that we were there for advice. So it should have a positive impact across the whole market that the client experience an outcome is better.

Paul: [00:07:43] Yeah, Vic, just to to pick up on Richard's point there. I mean, there's a duty of care and responsibility here. 

Vic: [00:07:50] I think, as we said earlier, there is so much legislation which from the consumer's point of view, they're actually not that interested in. Their interest is, can we get our money and when can we have it? But we have that duty of care right from day one. I think I'm becoming a little bit boring in many ways because one of the things I regularly say is that if we don't have customers, we don't have a business, if we don't have a business, we don't have an income, but we have a duty to the consumer, the customer, to make sure that we do it right. But equally, we have that same duty to whatever level of regulation is imposed upon us, wherever the journey is in the mortgage process. So it's crucially important that we're aware and we give them the best possible experience in learning so that they also know what their rights are in the event of things perhaps not working out the way that they might have wished.

Paul: [00:08:50] And I'm interested in the consequences to this as well. Richard Showman, has there been an increase in cases going to court?

Richard Showman: [00:08:57] Well, certainly, given the state of the economy, that is the likelihood of an increase in cases. We've certainly seen recent legal editorials increasing, whether you're talking about cases of repossession and borrowers floating the defense of mis-selling under those circumstances. And if if found in the borrower's favor, then the lender's going to lose out on all of the interest that it deducted from the loan. The loan will be deemed unenforceable, so the lender will will lose out.

Paul: [00:09:43] So just gents as well. Great points there by Richard. Anybody else have anything to add on on the impact this has on brokers and lenders?

Ray: [00:09:52] Yeah. I mean, is the risk of being unenforceable is quite a serious risk. You know, if you've written a loan that should have been regulated and isn't and as Richard said, that is a defense that's coming up a lot more. Now, the solicitors for the other side certainly are saying to people, you should challenge this, whereas perhaps early days of regulation, a lot of them didn't understand the rules. And some lenders seem to take a risk that as long as they get repaid, they'd be okay. But a recent case of [00:10:22] that charity, the Six Holdings Ltd, [00:10:25] showed that actually even six years after repayment of a non-regulated loan going back to court and proving it should have been regulated, the lender can still have to give back the interest and the charges plus all the costs. So don't think just because our loan will get repaid, it will be fine. It's not necessarily the answer. And we could see a bit of ambulance chasing on this at some point in the future.

Paul: [00:10:51] I think that's a great point. And it sort of leads me naturally to my next question, which is what are the difficulties that you'd highlight in adhering to FSMA correctly, and how can those difficulties be overcome as well? Ray, I might stick with you for now.

Ray: [00:11:06] So the major difficulty is that the rules are actually very, very complex. The drafting is quite poor. Government try to implement it with a little change as possible for political reasons at the time. And so it's not as straightforward as it should be. And it's easy to take a simplistic view. I mean, some of the banks, for instance, the mainstream might take the view that somebody moves out of their home and they decide to let it when they buy a new home, don't have another buy to let, but they don't actually worry about it being a consumer buy to let. Whereas actually when you read the regulations, actually you could see it. It is or could potentially be because they can be read in more than one way. So for large lenders, you know, the risk of loss is probably quite small and not too bothered, but smaller lenders are not going to take that chance. And what we're seeing is with these clients coming into court, more and more judges are actually saying, well, actually, no, the rules are or actually, I interpret this even to the extent of a limited company, which everybody thinks of as unregulated. A judge made a comment in passing about agreeing to stop an injunction from a receiver selling that. The facts that the company borrowed, not for its own genuine purposes, but for the benefit of the directors, wasn't a genuine commercial agreement, in his view, and therefore there was a potential to consider that a case could be heard whether this loan is actually regulated. So yeah, it's a it's a tricky area. So understanding this a bit more is going to be quite important. 

Paul: [00:12:41] Definitely a tricky area judging by that example. Vic, are there any issues that you'd highlight? 

Vic: [00:12:47] I think there's just one point that maybe follows up exactly what Ray just said in that there is a case where a lender has found it necessary to take a client to court for repossession of the property. And the client is counter arguing by saying that you knew or didn't ask the question, rather that I had actually occupied this property up till around two years or so ago. And the reason the lender didn't know was because on their application form it didn't ask the question, Have you or any member of your family ever resided in this property? And the the borrower who is being changed to court is arguing that that was a duty of the lender to establish that in the first place. Now, at this early stage, there's no idea of what the outcome of this may or may not be, but it shows the need for everyone to be extremely careful about the level of questions, the depth of questions that they go into with this view in mind. And as Ray has said, even six years later, it is possible that somebody may come back and say you didn't actually do this properly in the first place and cause a problem for lenders.

Paul: [00:14:04] You know, we've had a couple of great examples here. Richard Showman, any cases that you'd highlight?

Richard Showman: [00:14:11] Certainly Vic's points about living in the property. We have seen very, very different views from lenders, brokers alike about that we're very, we take a very, very hard line about. You have never nor will you ever live in the property. We have heard of other organizations where it's. You're just not going to live in it during the term of the loan and after it's redeemed. It's okay. Obviously, we've heard from Ray how that can be an absolute nightmare. The other sets of circumstances is. Lending to by way of second charge to directors of a limited company where one of the proprietors of the property is involved in the business and the other party isn't. So there you've got to have the the situation where the the purpose of the loan or the purpose of the business is, is carried on by both borrowers, not just one of the borrowers. So you have to be absolutely clear and ask the right questions at the right time. Otherwise, the outcome for the borrower who gets down the line, expects the loan to complete is going to be or potentially could be let down or the lender enters into a loan, which is potentially unenforceable.

Paul: [00:15:47] Yeah, I like that message there about asking the right questions at the right time. Richard Stock, is that how you see it as well?

Richard Stock: [00:15:54] Wise. It's a simple answer. One word. It's pertinent to bring us back to KYC. If we don't know our customer, then how can we possibly advise them and how can we match them with the appropriate lender and product? So questioning in an old fashioned way, whether that's hard facts or soft questioning, is ultimately the skill that we need to be on top of, whilst also navigating the ambiguity of this regulation that I mentioned earlier. That will always be the problem for brokers. The ambiguity of of regulation is the biggest issue that we face in terms of understanding. So navigating those two things, KYC and indeed the regulation, knowing that is the only way we can mitigate those circumstances.

Paul: [00:16:49] And of course, if I reflect back on my introduction earlier, I issued a little bit of a stark warning suggesting that there might be some some consequences if all of this isn't interpreted correctly. Could that mean additional regulation? Richard Showman, just elaborate for me on what you think the consequences are here.

Richard Showman: [00:17:09] The FSA have to approach government for additional regulation, and I think the the temperature in the country is very anti that additional regulation. So at this moment in time, I don't believe that that's likely. But if we continue or if we're shown to keep getting this wrong, then it's not impossible.

Paul: [00:17:39] Not likely, but not impossible. Richard Stock, do you agree with that?

Richard Stock: [00:17:43] I do. The ultimate stick, isn't it, that's held held above us. And it's up to us as an industry, as as all parties along the journey to ensure that there is no need for that. And again, at the fear of repeating myself, it's going to come back to the way that we treat our clients and the way that we understand them, to be able to do our job to the best of our abilities and to ensure that their outcome is as good as it possibly can be. And then there is no need for further regulation or forbearance, and the stick that is often wielded could be put away and and we can go on and being as professional and give the outcomes of both clients and lenders.

Paul: [00:18:29] These are yeah, I think it's a message that's worth repeating. And Ray, if you think there could be some some broker consequences here as well.

Ray: [00:18:38] Yeah, potentially. I think the real issue for brokers is not so much extra regulation, but are they going to get hit for not having the right permissions or for encouraging people to do things which they shouldn't do? So when you go to a lender and you're actually saying to them, Oh, yeah, no, this is not a regulated loan, or you're dressing something up to make it, or Yeah, it's a business purpose. But, you know, it's not really, you know, you're leaving yourself exposed and as the regulator potentially does more and more reviews of lenders to see what they're doing in the non-regulated field, they will pick up on stuff they won't say it's the lender, but they may well go back to brokers and say, well actually, you know, you should you shouldn't be encouraging this because at the end of the day it's a criminal offense for a lender to write a regulated loan when they shouldn't if they haven't got permissions. And so they've committed a criminal offense. The broker is encouraging us to do that. The the proxy, the broker gets in there and the money that the lender earns or proceeds of crime. So, you know, the danger of doing these things, you just need to be more careful.

Richard Stock: [00:19:50] If I may. That's the black and white scenario. Right. And clearly, a criminal offense is a criminal offense. What I think we need to mitigate is the gray areas here by doing our jobs appropriately, because you can still arrive at the wrong outcome in a honest, fair and legal fashion. But if you haven't done your job properly, it ends up being illegal. But what you've mentioned there is is diverting a client down the wrong road that's clearly wrong. And nobody would ever look. Nobody would ever. That's a huge statement, but nobody would look to do that. And that's the black and white scenario. But what I feel we're talking about here with the regulators is mitigating that gray area where we end up with a mistake without knowingly doing so. But ultimately, it is still illegal. But there is a difference in my opinion. It's not the same as knowingly pushing somebody down a route that we know is untoward and illegal. There is a difference.

Ray: [00:20:51] Absolutely. I mean, you know, and I'm not suggesting that the regulator would necessarily pursue everybody just because, you know, because they haven't got the resource to do that. And that's not the intent, I don't think. But it's much more where they're doing it knowingly. And, you know, when you look at cases, sometimes you think there's no way that that looks right, you know. So yeah, I don't think the regulator and I think the regulator isn't going to punish people for honest mistakes but where they look to see what systems and controls that people have, what training do they do? Do they understand? To make sure I do try to get it right. Right. And that's there. I think. Yeah, I mean, everybody's going to make mistakes occasionally, you know, it's impossible. We're not all you know, we're not perfect, but it's the deliberate and within that the not actually make an attempt to know would be classed as deliberate.

Paul: [00:21:49] Yeah. Thank you, Ray. Not all perfect. Speak for yourself, if you don't mind. Vic, I'm going to bring you in. If you don't mind. Let's talk to me about the regulators plans here.

Vic: [00:21:59] There were just two points really I wanted to make in support of what's already been said. I was at a meeting this morning which was under Chatham House rules, so I don't say any more about where, where and how, why, except that it's quite apparent that the regulator has enough on its plate at the present time, and therefore I don't see that there will be massive changes or additional responsibilities or requirements in this particular area at this point in time. That's the first point. The second point now, I think, is rather more damning in that historically the regulator does not believe in drawing a line in the sand. So it is quite possible that in the event of any future issues on a case with a lender or a broker, they may well judge that based upon the regulation or their thinking of approach at that time if it is a regulated matter, although in fairness, I don't believe they're looking to do anything other than what they're doing at the moment. Non-regulated for now will stay. Non-regulated and regulated will stay as it is.

Paul: [00:23:13] All right, gents. Well, if you don't mind, then I'm going to ask you for a little bit of insight as to as to how the sector can actually mitigate some of the risks involved here. Richard Stock, I imagine this is a case of going back to basics.

Richard Stock: [00:23:27] Absolutely in an old fashioned sense as well, which which I'm a huge fan of. And and that is truly and again, I think it's the third time I've said these three letters, but KYC, for us to mitigate any mistakes, we have to know our client. We have to be able to question them appropriately. We have to be able to delve beyond the hard facts and look at the soft facts. And we have to be able to put that together to advise appropriately and pair that borrower, that client customer with the appropriate lender and product. And there's nothing wrong with being old fashioned in that sense. I think it's a great skill. It's something that we have to practice daily and that we have to ultimately look out for the greatest outcome that we can achieve for our clients. Again, whilst understanding and this is tricky and but it's just as important a part of my role as a broker to understand the regulation. And if you couple those things together, you're never going to be far wrong. So in terms of mitigation, that would be it would be ensuring that we. Question and understand and know our client and ensure that we understand that the regulations in which we're working within and indeed the permissions that we have and we can and can't do, as I mentioned previously.

Paul: [00:24:53] Great points. And Richard Showman, if I can bring you in as well, I imagine training must have a key role to play.

Richard Showman: [00:25:00] Massive. We we've invested a lot of time in investing training our people on the regulations. We've also partnered with Ray to answer any regulatory question that might arise as the case progresses. We can't stress enough how important and how valuable that has actually been.

Paul: [00:25:30] Training important. Customer important. Vic, what are your thoughts?

Vic: [00:25:35] Well, actually, that leads me really nicely into what might have been my final point a bit later on. We're taking this matter incredibly seriously at the ASTL, and there has been quite a lot of press in recent weeks about the education program that we're working in tandem with FIBA and with the NIBF in order to create an educational structure which will be available to new entrants, to those people who are joining the industry maybe halfway through their working life, and to really old people in the industry like me who still need to keep up to date with all the various additions, changes, amendments to the rules and regulation. So we're not actually doing nothing. We're actually spending a lot of time and a lot of effort in order to put this in place. And what I'm hoping is that for people like Richard And me, Like Richard, in terms of the broking sector, that it's going to provide that back up to what they're already doing in order to ensure that when somebody's involved at whatever level, be it the lender, be it the broker, but we're not we're not ignoring those ancillary services as well. So we're looking at the lawyers, we're looking at the property collection agencies, the property managers and so on in order to try and build this program together in the bridging sector, which will be of benefit once again to the one person to whom it's important. And that is the end user.

Paul: [00:27:11] Thank you, Vic. I can only assume your classification of old people is 21 and above. Ray, anything for you to add here?

Ray: [00:27:20] I don't really think it's been said, really. I mean, at the end of the day, it's still down to training and awareness.

Paul: [00:27:27] Okay. Well, let me just throw one final question at you, gents. Are there any other issues that you think could impact FSMA going forward? Perhaps the cost of living crisis, for example. Vic, I'll come to you.

Vic: [00:27:41] I think it's fair that there is a great deal of concern with the powers that be at the moment in terms of what is happening, particularly in the lower quartiles, as they put it, of the income section. They're very worried that there is going to be a great deal of distress, even allowing for the fact if interest rates weren't to rise any further. Many people are going to fall into some kind of difficulty with their financials. The mortgage is always. 99.999% of the time, the biggest single financial outgoing that a customer has. They're worried that they will shut off everything else first in order to keep their mortgage going. And there was a very telling comment in the meeting this morning in that when interest rates are 3%, a quarter of a percent or a half percent rise in interest rates is a very substantial jump, whereas when interest rates were 8.9%, it wasn't such a large impact on affordability. So I think we've got to watch this space. You've got political instability at the moment as well, and the Bank of England looking to see what they can do in order to assist. But I just think that if we as trade associations, as lenders, as brokers do our job properly and we do it well, nobody can ask any more of us.

Paul: [00:29:13] Thank you very much, Vic. Richard Stock, if you don't mind, I'll bring you in as well. I mentioned there's some some issues with exits to think about here as well.

Richard Stock: [00:29:23] Always mindful of exits. It's it's paramount to any short term loan. In essence, where we're talking here is asset and an exit from a lender's perspective, if I can park the client just for one second. So clearly we have to be aware of it and the cost of living is going to impact upon it. And it brings us back then to the client. So I've gone about this reverse engineered it, if you will allow me to do so by talking about the lender first in that we have to ensure that we can. Take this client on the journey that they deserve and get them on to a longer term solution for whatever needs to be fulfilled with the short term solution. So, yes, affordability. Living costs are going to impact upon that for this particular sector. We're looking more along property investment and therefore rents are a little bit more important to this pertinent conversation. But yes, it has to be taken into consideration and it would have changed. I think the biggest issue we're going to have is over the next 3 to 6 months with loans that are in place and exiting those for loans that are being taken out now, it already be factored in.

Paul: [00:30:35] Great way to wrap things up. I think such an important subject, of course, and brilliantly articulated by all of you. My huge thanks to the two Richards, to Vic and to Ray for sharing their knowledge today and of course, to mint property finance for helping us to host this roundtable. Now, we hope you'll follow our own important piece of legislation, and that's to check back here for more expert knowledge on mortgage introducer TV.