Any system of regulation is ultimately only as strong as the effectiveness of its sanctions. If those who flout their statutory obligations were to get away with it there would be no reason for others to keep within the rules.Concerns are being voiced that the Financial Services Authority is turning a blind eye to the issue of cold calling for mortgage sales, but the regulator assures us the matter is being dealt with and no doubt we shall see some enforcement action in due course. Mortgage professionals receive regular information about enforcement action being undertaken by the FSA. Much of this is about areas of financial services other than mortgages and general insurance, but not all. Among all the regulatory information they have to absorb, it is tempting for mortgage intermediaries to ignore the enforcement announcements that have little to do with their own sector but we can all learn useful lessons from them and they deserve some attention. Reviewing a few recent enforcement measures gives us some tangible examples of how principles-based regulation works in practice. One recent case concerned the chairman of a credit union. In this case, enforcement took the form of the individual being banned from carrying out regulated activities in respect of credit unions because of his wilful and persistent disregard of FSA rules. The person in question disregarded the rules when he invested the credit union’s money in a non-compliant way, failed to ensure there was adequate security for the loan and failed to disclose to his board and members either the true level of the risk involved or the fact that he would personally make a lot of money from the deal, making it a case involving conflict of interest. Why should this case be of interest to our sector of financial services? The answer lies in the comment subsequently made by Margaret Cole, the FSA’s director of enforcement: “The FSA will not tolerate people in this industry who threaten confidence in the financial system or pose a significant threat to consumers.” This is a reference to two of the FSA’s four statutory objectives, which are themselves underpinned by its 11 principles for business that set out the high level standards that all firms must meet – in short, these are the 11 key elements of principles-based regulation. Another interesting example is the chief executive of an IFA firm who was fined 35,000 for failing to inform the FSA in a timely manner that the 3m worth of directors’ guarantees given during merger negotiations with another firm were not supported by unencumbered assets of the same amount, as had been originally stated to the FSA. The principles involved here were number two, about acting with due care and diligence, and number four, which concerns dealing with the regulator in an open way and disclosing appropriate information. The individual involved in this case has since resigned. The third example goes back to March and is much closer to our territory. Nine small firms – two IFAs, six general insurance firms and one mortgage firm – were barred from carrying out regulated business for failing to provide data to enable the regulator to monitor their activity. In short, they did not file the necessary documentation. The reason cited for this enforcement was that by their failure to provide data these firms hampered the FSA in its objective of ensuring fair and efficient markets. The final example I have room for here is an IFA who was barred from regulated activities because he failed to conduct pensions reviews properly and showed a complete disregard for the regulator. His business was described as a shambles. The principle involved? He “failed to treat his customers fairly”. Mortgage and general insurance firms firms could easily be caught in the same way if complaints are not handled properly. One of the most important lessons we can learn from looking at the FSA’s enforcement actions is that rule-breaking is not so much a punishable offence in its own right as that it leads to the greater offence of transgressing the FSA’s principles. This is a big leap of the imagination for us to make as we are used to a justice system where the punishment fits the crime, not the principle. But it’s a leap we all have to make if we wish to be successful in satisfying a principles-based regulatory regime. Bill Warren – director of compliance, Complete Mortgage & Loan Services
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