History just has that knack of repeating itself doesn’t it? Already the path is clear for mortgage intermediaries to follow a similar pattern to that of IFAs as they became accustomed to regulation.
A safe prediction is that regulation is going to become more and more of an issue for mortgage intermediaries in 2007. My personal view is that a more tailored approach to compliance services will prove to be more beneficial than the one size fits all approach of an appointed representative offering.
Mortgage intermediaries have been regulated for just over two years now, and just as IFAs used networks as a stepping-stone to direct authorisation in the 1990s I predict that the mortgage distribution market will follow suit.
Following the 1986 Financial Services Act, many investment intermediaries joined networks as part of a mass flight of fear with them unsure about the burden of compliance and the associated financial administrative costs. By 2000, 60% of IFAs had joined networks. Since 2003, however, the number of IFA network members has declined by 20%. With support service providers able to offer compliance, business development and operational support at a considerably lower price, the directly authorised model became the natural next step in the evolution of the IFA market.
Turn the clock forward to 2004 and at M-day there were 78 mortgage networks. There are now some 24, with many predicting this number will decline by 50% in 2007.
Admittedly the number of ARs has not declined. But I believe that this pattern absolutely mirrors that of the investment market 10 years ago, as a period of consolidation among networks was the first step in the IFA transition.
What might accelerate this process is the fact that I expect the FSA to be more focused on mortgage intermediaries in 2007 and with this will come a realisation that compliance needs to be tailored to a firm’s needs. Principals of firms will realise that the most stable operating environment they can create is one where regulation wraps itself around the business rather than the business wrapping itself around regulation.
Also, with the consolidation of mortgage networks, intermediaries will realise it does not matter how compliant they are with their ” You don’t have to be Mystic Meg to see this year firms will need to demonstrate they have adopted a compliance culture”own work – in a network they are always regulated to the lowest common denominator. Networks generally determine the level of compliance for members to achieve, bearing in mind the competence of all members. They simply cannot operate bespoke compliance and stay on top of the requirements of the FSA.
It’s not just compliance support that has made joining a network, on the face of it, so attractive. Many have argued that the scale of their network means they can get the best procuration fees in the market, the best rates of commission on protection products, discounted (or free) access to mortgage sourcing software and back office systems and assistance on business development and training.
But in the last few months of 2006, the FSA fined Regency Mortgage Corporation (56,000) for payment protection insurance mis-selling, loan broker Loans.co.uk (455,000) for failing to treat customers fairly when selling PPI and Capital Mortgage Connections (17,500) for cold calling potential customers and being unable to demonstrate it gave appropriate pricing information on ASU policies. Combine this with the fact that in December the FSA shone a spotlight on the risks of interest-only mortgages and you don’t have to be Mystic Meg to see this year firms will need to demonstrate they have adopted a compliance culture.
This demonstration of regulatory culture can only really be evidenced with a specifically designed level of compliance. Not too much and certainly not too little – an amount that is appropriate to the firm, its circumstances, market, advisers and future aspirations. A cookie cutter approach just won’t do.
I am an advocate of doing your homework on a business partner before putting pen to paper. Know who you are dealing with and be sure they match your level of professionalism. Interestingly, the FSA agrees with this approach. Its website’s small firms section recently includes guidance on choosing a compliance consultant.
The FSA recommends that intermediaries ask about the the consultant’s experience and qualifications, the services it provides and about its professional integrity, reputation, skills and competence. There are 20 questions and I would advise intermediaries to ask a potential compliance services provider all of them and ensure they are happy with the answers they receive before they agree to sign up to any such service.
John Malone, Managing Director, Premiere Mortgage Service