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Lord almighty

It has only been six months since Michael Lord was made head of the Financial Services Authority’s small firms division with responsibility for mortgage arrangers but during that time he has made his presence felt in the industry. He has already made speeches at events such as the Manchester Mortgage Business Expo in May and the Mortgage Strategy Summit in Jerez in June.

It’s been an exciting year for regulation so far, with the FSA investigating everything from lifetime mortgages and financial promotions to the sub-prime market and Treating Customers Fairly.

Most recently, Lord was the focus of industry attention following the revelation that four mortgage networks have been forced to stop recruiting appointed representatives while they get their compliance systems in order. Despite calls from the industry for the regulator to name and shame the four, it has kept mum.

Lord previously looked after investment firms ranging from financial advisers to stock brokers, and has been involved in supervising small retail firms for five years. He played a major role in setting up the FSA’s strategy for small firms and is central to its development in this regard.

The small firms division now supervises more than 20,000 firms. Lord became a regulator eight years ago after spells as an accountant and working for an investment bank. He initially joined the Securities and Futures Authority specialising in derivatives and has supervised all types of firms, large and small, since then.

Here, Mortgage Strategy takes Lord to task over Treating Customers Fairly, principle-based regulation and the costs involved, and why the regulator has decided not to name and shame the four networks.

Q: What have been your key achievements during your first six months in this role?

A: So far it’s been about getting to know the market and getting our communications out to firms to help them comply with our requirements.

We’ve revamped our website and now try to send out only one email per month to mortgage firms detailing the changes that have happened, so there’s only one thing for them to look at.

We’ve put information on the website about disclosure, plus case studies and common errors. Now we want to get firms to look at the website and use it, which is sometimes a problem. We want firms to think of us as their first port of call.

Q:What is your general view of the mortgage market?

A: It’s well organised and competitive and firms really try to help their customers. Smaller firms deal with customers as best they can and try to make the most of that relationship by providing good service. Small firms get their business from customers coming back and personal recommendations. That’s one of the things we have to take into account when we’re talking about Treating Customers Fairly.

We know their hearts are in the right place but we must ensure they don’t let errors creep into their business models.

Q: Where have you seen improvements?

A: We’ve seen an improvement in firms that are doing lifetime mortgages regularly, but firms that aren’t doing them so often need to put in extra effort if they want to continue. It’s a complex area and there are several issues to deal with so firms have got to be up to speed if they are going to enter that market.

Q: To what extent does the market still need to improve?

A: Most firms have reacted positively to regulation and are trying their best to get things right but there are still areas where improvements need to be made.

We have seen some improvements in the quality of disclosure but there is still a lot of room for improvement for some firms. If they would take the time to look at our website, they could get all the information they need there.

Across all sectors of the market firms must get disclosure right, make sure individual advisers are competent regarding the products they’re giving advice on and ensure customers get good quality advice.

Q: Why do firms continue to fall down on compliance issues?

A: We don’t see a lot of malice in the market and most firms aren’t deliberately trying to disadvantage customers. We do see a little bit of that – such as the inflation of salaries on self-cert mortgages – but these are isolated incidents.

It’s mainly firms not using the resources we make available to them to improve. We have roadshows and surgery programmes which are free and these could be better used. It is important to get firms to use these opportunities and tools, and use them in a positive way.

Q: The FSA has been accused of favouring directly authorised firms over networks. Is there any truth in this?

A: No. We encourage networks to use the same risk-based approach as we do by monitoring their risk through appointed representatives. Networks are just one project out of many in my department. They are only one aspect of what we are doing. The rest of our work is more focussed on directly authorised firms.

In the second half of this year we’ll be looking at the quality of advice processes in firms, the sub-prime and the self-cert market, and we’ll be looking at all types of firms.

When we’re selecting samples we try to make them representative so the number of networks sampled will be representative of the number of networks in the market.


Q: How does the FSA envisage the four networks forced to stop recruiting will improve their systems and controls?

A: We see networks that are successful business models and apply FSA standards to their ARs so we know it is possible. We are hopeful that the four firms will put things right. That’s why we went down the voluntary route. They are willing to work with us to improve their standards and that’s a positive thing.

Generally firms are willing to work with us to put things right when we give them the help and advice that they need to improve. Senior management have responsibility for systems and controls. This element is essential in the work we’ve done. They must have controls in place.


Q: Wouldn’t naming and shaming the four be better for affected ARs and the industry as a whole?

A: The only time we can talk about a firm under the act that we’re ruled by is when we’ve got to the end of an enforcement case so we can’t name them by law. If they don’t put themselves right and the risks are still there we could take enforcement action – either they correct themselves or we close them down.

But that’s at the end of the process and we are still working with these firms. They have been positive about the recommendations we have made and they are making changes to their processes. If they don’t do it right or don’t do it at all we will have to take further action.

Q: You advocate networks taking a risk-based approach to recruiting ARs – how do you monitor the benefits of this and other regulatory requirements against the cost?

A: There may be some cost to firms in setting up a risk-based approach to recruiting ARs but it’s about using resources to check firms and applying those resources to those ones that need it the most.

Financially, it makes good business sense to mitigate risk so the benefits outweigh any costs. In July we published our cost of regulation study and although mortgages weren’t a focus, it showed a vast diversity in the costs of regulation, with each firm reflecting a different business model. Size isn’t that much of a factor when it comes to the cost of regulation.

Q: Is the FSA concerned about the number of ARs who should have multiple principal agreements in place but don’t, following the discovery of two in your 12-strong network investigation.

A: With small samples you have to be careful about extrapolating the results across the whole of the industry. But this issue was something we needed to point out to firms so they could consider it and put it right. There seem to be problems with multi-principal agreements and companies not being clear who has the lead responsibility.

We have addressed this by putting out a factsheet and a letter for larger firms. We’ll see how this balances against the rest of the risks that we face going forward, to see if it is something we need to revisit. Hopefully when you point these things out to firms they do something about it.

Q: Many brokers complain that the term whole of market is confusing to consumers. What is the FSA’s definition and is it a grey area?

A: In one sense it has to be because it depends upon the type of product you’re selling and how many firms you need to have access to to get a representative sample of the market. The concept is about ensuring there is enough access to enough types of products to reflect what is available.

If a firm is tied, that fact should be part of its disclosure so intelligent consumers will question this. But it’s on a case-by-case basis so it’s difficult to give more explicit guidance in the area of whole of market.

Most firms should be able to work it out – it’s about getting back to a product range and seeing how many firms you need to have access to to get a representative sample of what’s available, given your customers’ needs and requirements.

For those firms that are genuinely whole of market there’s every opportunity for them to talk to their customers about this and use it as a marketing advantage.

Q: Does the FSA plan to make firms with lender panels disclose the numbers of lenders on their panel without being asked?

A: We came to our position regarding representative panels after the consultation process. Representative panels were what the industry said it wanted. At the time it seemed like a good compromise that the industry was asking for, but clearly as we get more into this we will look at whether these panels are truly representative.

A lot of firms with panels are relationship managed so they have a dedicated person at the FSA looking at them. This is part of the work that person does with the firm.

On the part of the smaller firms we deal with, I have to say that most genuinely tap into whole of market by using sourcing systems. A: We welcome technology if it is used in the right way and systems are up to scratch. None of these areas are directly regulated by us but we follow developments in the market.

Brokers have got to be aware of systems that cascade up and down because the revised recommendation may not be the most suitable product available.

Q: What is the FSA’s view on developments in technology such as cascade systems?

A: We welcome technology if it is used in the right way and systems are up to scratch. None of these areas are directly regulated by us but we follow developments in the market.

Brokers have got to be aware of systems that cascade up and down because the revised recommendation may not be the most suitable product available.

Q: Do you think retention fees and special arrangement between brokers and lenders conflict with FSA rules?

A: We monitor special arrangements to see if they have undue influence on brokers but it’s part of senior management’s responsibility to make sure that entering into these deals does not create bias and disadvantage customers.

We’re not a pricing regulator so we don’t like to get into the commercial side but we will do if it damages the interests of customers.

Q: To what extent is the sub-prime sector a concern?

A: We will be looking at sub-prime mainly because of the vulnerability of customers but also because we have seen customers getting sub-prime products when they might have been suitable for prime ones. In these situations the incentive would be the higher commission on sub-prime cases.

There are also questions with customers building up their credit worthiness so they can come off sub-prime and go onto prime. The questions are first, is this being done and second, how is it being done? Are brokers taking the full cost of the transition into account, such as lock-in periods and fees, and do these counteract the lower rate of a prime product?

We expect firms to have some method in place to ensure advisers aren’t influenced by fees and commissions, but it is open to consideration whether we do follow-up work in this area. The sub-prime sample in the quality of advice project will shape what we do as a follow-up.

Q: Why do you think the market has not alweays welcomed principle-based regulation?

A: The lack of certainty can mean people are unclear about what the regulator expects. This is a particular worry for small firms and something we’ve got to address, as we did with TCF.

When Mortgage Conduct of Business was put in place the focus was senior management responsibility. It is up to them to decide how best to meet our requirements because they are best placed to know this.

The problem with detailed rules is that they don’t always fit the situation within a firm and tend to be pushed down a particular route. That makes senior management switch off.

Q: How successful has the Retail Mediations Activities Return initiative been?

A: RMAR is a virtual FSA visit so we can see the general level of compliance in firms and target the ones we have to. It doesn’t ask for information we don’t require firms to have anyway.

But firms are still making common errors and it will be a while until we’ll have enough assurance on the quality of data for us to be able to use it. Common errors include firms saying they are exempt from professional indemnity insurance and capital rules. They are also getting their numbers wrong.

But quality is improving as companies get to grips with RMAR and we are in the process of helping firms to get it right.

Q: What role do small firms play in the mortgage market?

A: Small firms have a role to play in getting mortgage advice to the people that need it. It is important to have a distribution channel to customers that is as effective as possible and that would suggest a variety of sizes of firms and different business models.

Small firms are good at compliance and TCF which shows size isn’t important, it’s what you do with your business. The proportion of small firms is static so that suggests there isn’t a trend showing small firms joining networks in big numbers.

I tend to get the same amount of people telling me the demise of small firms is on the cards as I do predicting the demise of networks. This suggests the market is fairly stable.

Q: What is your long-term objective for the mortgage market?

A: I hope it’s not going to be about going back and looking again at the same things like disclosure, sub-prime, self-cert and lifetime mortgages. Hopefully we, together with the industry, can put those issues to bed and move on to different things. What those will be we don’t yet know – we’ll have to see what comes out of the quality of advice project.

We are looking at affordability and training and competence regimes and those are areas we may need to look at again in the future. There are still brokers who think affordability is not within their remit of responsibility and a lot of firms are not doing enough in that area.

We also put out a guide to training and competence for small firms at the beginning of the year, but that may not have had the effect we hoped it would have on firms.

The quality of advice project finishes at the end of this year so we’ll see what that brings to light in these areas.

We will finally see the risks and how far we need to go to address them. We supervise the market as it is, so there isn’t a particular market structure that we prefer.

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