The Financial Services Authority website all too often demands the patience of a saint when one is trying to locate information. This is a particular concern for the mortgage sector which has had to keep up-to-date with a plethora of regulatory changes, updates and research over the past few years.
The FSA’s research into the relationship between packagers and brokers is a case in point. Those of us who are used to ferreting out information published by the FSA probably spotted the clues and followed the trail to the small firms/mortgage pages of the FSA’s website.
But firms without a dedicated compliance resource could be forgiven for missing this important document. If you look on the FSA’s list of press releases on its website you won’t find one that announces this survey. But a couple of the email mortgage newswires contained a mention of the results within news items announcing the FSA’s latest advisers’ newsletter. Unfortunately this news broke on December 21 when the focus of much of the UK’s workforce was elsewhere but hopefully the subject will gain momentum now.
The survey consisted of visits to nine brokers and six packagers together with a telephone questionnaire conducted with a further 25 brokers. For readers who want to see the full results document, it can be found in the ‘Good Practice’ section of the small firms/mortgage pages, but read on for a summary of the key points and their implications.
The first thing to note is the FSA’s prominent warning: “Brokers who are using a packager should review their procedures in line with the findings of our research. This will help the broker to put adequate risk management systems in place and will help ensure the suitability of advice for any customer who relies on them.”
This warning is backed up by the survey’s main finding which is that brokers must remember that even when using packagers, if they are representing themselves as the provider of advice to customers they are responsible for that advice, not the packager.
On the subject of product recommendations, just over half of brokers interviewed said they always review product suggestions made by packagers to satisfy themselves that a product is the most suitable before recommending it to their customers. This was in cases where a customer’s initial application had been declined and the packager had offered two or three alternative product suggestions from its panel. Therefore, just under half of brokers the interviewed have failed to undertake necessary due diligence.
At the same time, about a quarter of brokers say they only sometimes check for suitability, and a smaller number never check and rely entirely on suggestions made by packagers. Brokers are warned that even if they have put in place a contract with an unregulated packager under which the packager agrees to pay any customer compensation resulting from unsuitable advice, all regulatory obligations remain the responsibility of brokers.
The second point to emerge from the survey, concerning the issuing of Key Facts Illustrations, also concludes with a reminder that irrespective of whether the KFI was produced by the broker or the packager, the responsibility for issuing the KFI at the correct point in the advice and sales process always rests with the authorised firm dealing directly with the customer. Happily, the survey finds that most brokers issue KFIs at the appropriate time using either software systems or lenders’ websites.
The third section of the document is not so much a summary of the survey findings as a clarification of packagers’ position regarding authorisation. Readers are reminded that the FSA’s Perimeter Guidance Manual (PERG 4.15) sets out packager activities and gives a view as to whether these are regulated. It’s a matter of the activity that the packager carries out rather than how it is described. In short, if the packaging activity involves direct contact with potential borrowers it is likely to be a regulated activity – but every firm must look at its business model and decide for itself.
I suggest that there are two big lessons to learn from all this. First, a broker giving advice to customers is wholly responsible for the correct issuance of KFIs and recommendation given. Second, if mortgage firms want to keep on top of all the regulatory information about their sector they must seek it out or it may be missed, and that could have serious consequences for the market.