When the FSA decided not to count packaging as a regulated activity, it forced packagers into making difficult decisions about the structure and future role of their businesses. For some it was a simple decision as they already dealt with and sold to consumers – direct authorisation was the obvious conclusion. However, the majority of packagers operate on a business-to-business basis and so their decision is not as clear-cut.
As a lender that considers packagers as a vital part of its distribution both now and in the future, we were initially concerned about the FSA's decision as it was unclear to us how we should treat those who did not become authorised.
The waters have now become less murky although it is clear that those who opt for pure-packager status outside the FSA regime will find the way they interact and deal with lenders quite different after M-Day.
As a lender, if we deal with a pure packager we are outsourcing the process of packaging a mortgage application to an unregulated company. So, as part of our systems and controls – which we must have in place to comply with FSA regulation – we must ensure we implement measures to check and audit this process. Also, we must satisfy ourselves about the quality of business received and about the general state of the packaging company, which might include its financial status and staff training among other things. This work cannot be done by a sales team so lenders may have to employ teams of compliance officers to conduct audits.
Therefore, pure packagers will have to get used to compliance visits from lenders and face the threat of losing their packager status with lenders if irregularities are found.
Obviously, packagers that decide to be authorised by the FSA will also have to ensure they satisfy its requirements and be prepared for compliance visits. However, the main difference is that the visit will only be from the FSA rather than multiple visits from 10 or 20 lenders, depending on the size of their packaging panel.
It is clear that even though pure packagers are not regulated they will have to adopt many measures similar to those required by the FSA to ensure lenders continue to deal with them after M-Day. In discussions with some of the larger packagers intending to adopt pure packager status, it is apparent that they are ready for this change and we will be working with them to help them manage the changes to our relationship.
Each packager must weigh up the pros and cons of adopting pure packager status or applying to the FSA and decide which is best way forward for their business. At Platform, we will support either decision from our packager partners as we believe both options will be viable in the FSA-regulated environment.
On the face of it this appears to be a regulation issue but it is really about distribution.
At the moment, lenders, packagers and mortgage intermediaries are all trying to gauge how distribution will work once Mortgage Day has come and gone. Packagers do not have to be FSA authorised as they are not carrying out a regulated activity – so long as they have no contact at all with the consumer and offer nothing that could be interpreted as advice on choice of product.
However, a considerable proportion of packagers are also intermediaries and will have to be FSA authorised either directly or as an appointed representative. For example, SPML's packager base is now around half packager-only and half broker/packagers.
However, in a recent survey of our packagers only just under 10% said they were going to opt for pure packager status so obviously many businesses that we currently regard as packager-only believe that they have some contact with the public and/or influence the choice of product under the stricter terms of the FSA rules.
It has been rumoured that the CML is lobbying for the inclusion of all packager firms into the FSA regime and if this happens matters will be simplified. There is nothing to stop lenders from accepting cases from unregulated pure packagers so long as the business has been introduced by authorised intermediaries. SPML will certainly continue to do business with pure packagers.
Underlying the question is the issue of size and scale. It is quite obvious that there is a lot of consolidation going on and large organisations (including principal/networks and the larger packaging firms) will be increasingly important to lenders as means of bulk distribution.
On the other hand the independence of their DA packager base will be valued by lenders. SPML has been giving its full support to its packagers taking this route.
It would be unrealistic to believe that small packager firms have as good a chance of survival and success after M-Day as do larger organisations with their economies of scale when it comes to compliance duties and record-keeping. Ways for smaller packagers to gain the benefits of large volume turnover could include them forming business partnerships and alliances and seeking strong relationships with lenders.
I do not believe that any lender will yet be willing to say for certain which sort of packager they will deal with after M-Day, or make any firm commitment to all packagers, regardless of size.
We know how fast the mortgage market evolves and the best way to stay on top of it is to be flexible, open-minded, and quick to react to change.
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