Research published by the Financial Services Authority in November last year on mortgage firms working with packagers has once again reminded brokers of their responsibility for the advice they give to customers. But this does not leave packagers entirely free from regulatory implications.
In the run-up to regulation, we tended to think in terms of different functions being included or excluded. Were all firms labelled packagers going to be regulated or not? If they called themselves pure packagers would they be in the clear? In the event, most packager firms realised they played some part in the customer decision-making process, and the majority became FSA authorised.
In those days we thought regulation was a matter of obeying a rule book, but now we have a principles-led regulatory regime, where compliance is more about upholding the spirit than the letter of the law. Packagers cannot afford to just wait and see what develops on this front and it is time to put in place effective strategies to meet the possibility of intensified regulatory focus on packager activities in the future.
I believe the most vital area in which packagers need to make improvements is record keeping and establishing reliable audit trails. The implications for poor packager record keeping systems are serious. Since a packagers main role is to administer the mortgage transaction on behalf of lenders, it should go without saying that all dealings with lenders should be kept on record. These include, for example, the application form, decision-in-principle requests and back-up documentation in the form of references and other paperwork associated with the deal. This is the basic function of packagers.
Packagers may argue that since brokers already keep these records, why duplicate this effort? My answer is that firms within a regulated industry are most at risk of non-compliance where they depend on third parties to perform compliantly, and there is no substitute for having a rigorous in-house system of record keeping. For packagers this entails keeping effective records of their dealings with their brokers as well as their lenders. This aspect of packager systems is currently variable. For instance some packagers record telephone calls with brokers and some do not. No-one can say whether recorded phone calls are reliable for future regulatory needs, but the policy of making such records is sound thinking and certainly on the right track.
The need for packagers to provide good record keeping and audit trail systems will also be increasingly broker-led. In the future packagers must make sure their systems are compatible with their introducer brokers compliance regimes. The question brokers used to ask packagers was: Can you place the mortgage for me?. This is now accepted practice and the question is becoming: Can you ensure your paperwork is robust enough to supply a compliant audit trail between me, my customer, and the lender?
Packagers are intrinsically linked with the product choice, whether or not they consider that they have actually given advice. In the event of any future customer complaint about being wrongly advised on their mortgage choice, no broker will want to deal with a packager that does not have records that constitute a reliable audit trail.
It is impossible to prescribe what systems should be used. The label packager covers a huge variety of businesses all with their own unique service offering. Every business must come up with its own way of abiding by the FSAs principles for business, taking into account its broker, customer and lender base.
Because the choice of the most suitable product lies at the heart of treating mortgage customers fairly, the first port of call for record keeping would be the sourcing systems. Packagers provide the bulk of their services in the niche and sub-prime areas of the market but sourcing systems have yet to provide the technology to effectively compare the multitude of products and lender criteria within this sector in a way that provides a defensible best choice. Trigold ENC and Evaluate are working towards more effective solutions which, when perfected, will be a substantial step forward.
In the future larger packagers with the resources to offer brokers technical support, in addition to their traditional expertise in case placement, will be able to strengthen their business relationships.
On the other hand, smaller packagers without the means to offer automated record keeping and compliance will find it difficult to maintain business levels where the key element in choosing a packager will increasingly be its ability to offer compatible compliance support to the broker. It will also be essential for lenders to support and subscribe to these mutually compatible compliance technology systems.
Jon O’Brien, Operations Director, Professional Mortgage Packagers Alliance