Do small firms that feel swamped by regulation have good reason? Or should they accept that ‘regulators regulate’ and employ more resources?
Scarcely a week passes in which yet another proposal for new regulation does not land in mortgage brokers’ inboxes – at least, that’s how it can feel.
Ever since the announcement of the Mortgage Market Review in 2009, mortgage firms have had a stream of regulatory demands placed on them.
In general, the industry has coped well with this. However, with the pile of fees and regulatory paperwork continuing to mount and no obvious end in sight, are smaller firms at risk of being crushed under the weight of regulation?
In January this year, the Smaller Business Practitioner Panel – an advisory group to the Financial Conduct Authority – warned the regulator that smaller firms were feeling “overwhelmed” by the vast amounts of regulatory information with which they were required to be familiar. Minutes from the panel’s meeting show the SBPP was especially concerned about the “increasing volume of communications released by the FCA”.
In response, the regulator said it was “considering ways to help firms focus on items of particular relevance” to them.
TenetLime managing director Gemma Harle, who is also a member of the SBPP, says keeping up with regulation can be difficult for firms of the size of her own – and TenetLime has a dedicated regulatory policy team.
“The papers come not just from the FCA but also from the Treasury,” she says. “They embrace everything from consultation papers and finalised guidance to market studies, policy statements and thematic reviews. We have already reviewed 30 papers this year – more than 2,000 pages in total – and still have a number to come.”
Paradigm Mortgage Services mortgage technical director Christine Newell says a plethora of regulatory changes is set to hit the intermediary space over the next couple of years.
“These include the general data protection regulations, the senior management and certification regime, the Fourth Anti Money Laundering Directive, payment protection insurance final rules and the Insurance Distribution Directive,” she says.
“This is without the added complications of ad hoc emails from the FCA requesting brokers to check that they have the correct consumer credit permissions for debt counselling.”
Newell thinks it is unrealistic to expect brokers to keep up to date with all regulatory information, and they can struggle under the burden.
“The ongoing daily regulatory obligations – such as file reviews, compliance handling, observations of staff, retail mediation activities return reporting, key performance indicators, risk review meetings, plus training and competence – are really the limit of what can be reasonably managed in most firms,” she says.
For additional regulatory work, Newell thinks small to medium-sized firms should outsource to a third-party compliance provider in order to keep up to date. This is an added cost but something brokers cannot afford to be without.
“Missing important pieces of regulation has an impact on business, particularly when highlighted by a client complaint,” she warns.
An example is a firm’s vulnerable client policy, which must be adhered to especially when advising on debt consolidation.
Newell adds: “These types of client were referred to in the MMR but, if a firm missed this, a complaint received without the relevant policies in place could lead to financial loss.”
Warren Compliance managing director Bill Warren says compliance consultants have never been more needed, or wanted, than they are today. He has recently been deciphering the Anti-Money Laundering Directive on behalf of firms.
“It’s a huge international document,” he says. “To read all of it and work out what covers a mortgage broker is quite difficult because it’s intended to cover every financial business in the world.”
Warren thinks it is inevitable that some firms are non-compliant, while others continue to rely on lenders to check aspects such as customer identification. However, generally “there is a real desire from firms to do well” with compliance, he adds.
In its defence, the FCA has tried hard to communicate better with firms in recent times, Warren believes.
“It has a monthly news update, which it targets at specific brokers,” he says. “Where it gets frustrating is when it issues guidance and puts it out as a press release, or just sticks it on its website and nobody knows about it.”
First Complete and Pink sales operations director Toni Smith thinks new regulation sometimes feels like a case of change for change’s sake, with brokers unclear about how it will benefit customers.
“While it’s important that we react to and implement new processes into sales procedures, the process of completing a mortgage has lengthened considerably and managing a mortgage business is far more complex than it used to be,” she says.
Mortgage Strategy asked the FCA if it had advice for firms that felt overwhelmed by compliance, or if it was working to address the issue, but the regulator declined to comment.
On the other hand, some in the industry argue that regulation is part and parcel of operating in the mortgage market and is non-negotiable.
Riach Financial Advisers principal Bob Riach says he has worked in the industry for so long that he is accustomed to regulatory demands.
“One of the good points of being in a network is that, when regulatory papers come out, it digests them for us and issues us with a shortened version with guidelines on what we should be doing,” he says.
Meanwhile, Stonebridge Group managing director Richard Adams says: “Firms need to ensure they have adequate resources in place to keep up to date and manage the changes that will be demanded by regulation.”
He adds: “It’s been said many times before but ‘regulators regulate’; so this will always be an ongoing, moveable feast.
“If firms don’t believe they have the resources to deal with this, they need to partner with organisations that can support them in this area.”
Value for money?
It is not just the ongoing paperwork that can leave firms feeling submerged. Regulatory costs also take their toll – and these derive not only from the FCA but from the Financial Services Compensation Scheme, the Financial Ombudsman Service and the Money Advice Service too.
According to Building Societies Association chief executive Robin Fieth, although “the cost of regulation is the cost of doing business”, any suggestion that such costs can only rise should never be accepted.
“We have a regulatory environment that sees a large society having to spend £45 per £1m of assets on the compliance staff needed to implement new financial regulation, but a small society having to spend 10 times as much,” he says.
“Regulation should be proportionate to both the size and the complexity of a financial services business.”
Harle says the FSCS levies are having a negative impact on mortgage firms. The broker levy for 2017/18 totals £14m – up from just £6m in 2016/17. In addition, it was revealed in January that home finance brokers would face an extra £15m emergency levy to cover costs related to the failure of mortgage broker and wealth management firm Fuel Investments.
“The lack of predictability, and a constantly rising trend, make it very difficult for firms to plan the finances of their business,” says Harle.
“Brokers find themselves with no option but to pass the ever-increasing costs on to the consumer, or to implement a fee charging model.”
Newell says the way in which FSCS fees are calculated and apportioned needs to be addressed, “particularly where one bad apple is to blame”.
She adds: “This has been firmly put on the FCA agenda with the recent consultation paper on the funding of the FSCS.”
The FCA launched the consultation paper in question in December 2016. Its proposals include product providers contributing to claims caused by intermediary defaults, and a risk-based levy on firms, as well as more comprehensive professional indemnity insurance.
However, the industry would like to see the ‘life and pensions intermediation’ funding class divided in two – which currently is not being proposed. In its response to the FCA’s consultation, the Association of Mortgage Intermediaries says: “With the majority of claims in the life and pensions intermediation class relating to missold Sipps, it is grossly unfair for mortgage firms, as the primary writers of life insurance, to be paying a disproportionate amount of investment advisers’ invoices despite no connection between the two business lines.”
In terms of FCA fees, firms in the A.18 home finance provider category will see their levy decrease by 10.7 per cent in 2017/18. They will pay a total of £16.3m, compared to £18.2m in 2016/17. However, the FCA is proposing a 1 per cent increase to its £1,084 minimum fee.
DA versus AR
What does this mean, then, for firms that are struggling with regulatory overload? Is joining a network the answer?
“The directly authorised model is right for some,” says Harle, “whereas others prefer the helping hand and security that a network provides. When they build a suitable support/admin/compliance infrastructure, ARs may be tempted to move to DA.
“However, as an industry we need to be wary of anyone considering moving to DA because they view it as a less scrutinised option.”
Warren observes that DAs “can increasingly negotiate directly with lenders and get the results they need”, while Newell says: “Firms looking to switch to DA status will need to take into consideration the raft of regulatory obligations and whether their existing structure is able to cope with these financially.
“In our experience, particularly as firms mature, they outgrow their network and frankly don’t need to be shackled by the limitations of what is often a one-size-fits-all compliance framework.”
Price to pay
Regulation may be non-negotiable but the way in which it is delivered is not. The regulator strives for a market that is compliant, efficient and up to date; yet, as it stands, some firms are in danger of either falling short of regulatory requirements or missing them altogether.
Firms may receive value for money from the FCA in terms of paperwork, but brokers and networks perhaps would not begrudge paying a little extra in fees in return for more of a helping hand from the regulator, whether through more focused guidance, roadshows or the provision of telephone helplines.
Regulatory fees are unlikely to deter new firms from entering the sector – but the overall cost of being compliant just might.
The burden of regulatory fees and information
By Robert Sinclair, chief executive, Association of Mortgage Intermediaries
The level of fees created by the FCA, the FOS and the MAS, while challenging, is not the greatest issue. Firms can reasonably predict and budget for these costs, although until this year we have seen an ever-increasing burden placed on them.
Mortgage brokers will see a large fall in their FCA fees this year, with other business areas seeing only modest rises.
It is the scale of fees being levied by the FSCS that continues to make life difficult for firms; for many, this more than doubles their invoice.
As these fees are also unpredictable and announced with short lead-in times, the ability to spread the cost over 12 months is critical. The FSCS levies will not bring firms to their knees but for many it will mean that the family holiday has gone, or is shorter and to a less glamorous destination.
There is also the question of value for money. For too many firms, some of which are quite complex, their only route into the regulator is through the contact centre. Where their annual invoice is a significant six-figure sum, this cannot be fair or proportionate.
For smaller firms as well, the quality of advice or support is not at a level that is helpful, because the FCA is not keen to give a clear opinion, rather encouraging firms to draw their own conclusions having been pointed at the appropriate text or information.
What is perhaps more problematic is the volume of output from the FCA currently. For a small directly authorised firm to keep on top of all the documents, speeches and returns is an onerous task. It requires significant diligence and allocation of time.
For many this may make the network and appointed representative route more attractive. However, for others the use of a compliance support company alongside their DA status may be appropriate, but bring with it significant additional cost. Any firm that does not have some form of compliance or regulatory support, either employed within or acquired from outside, is likely to fail to keep in touch with current and future thinking.
We do not anticipate significant fee increases from the FCA, FOS or FSCS in relation to their core activities. However, the additional burden of other authorisations such as consumer credit is an irritant, particularly if these start to incur FSCS liabilities as well.