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DA could be an expensive option

Hooray, we have passed the March 31 date and are within 10 working days of the April 30 date now being widely touted around the industry as the &#39real&#39 deadline for mortgage firms that wish to become directly authorised.

The FSA has already issued reminders that applications need to be submitted by that date to fall within the six-month timescale (before October 31) during which the FSA is legally bound to process an application.

The FSA is – or perhaps I should say was – expecting around 20,000 applications from mortgage and insurance firms for authorisation in 2004.

With the huge build-up in general awareness over the past 12 months, including MCCB and other roadshows trundling around the country since the beginning of the year, it is pretty much inconceivable that any but a handful of brokers who live in the Outer Hebrides and communicate by boat-borne packet post, are not aware of incoming FSA regulation.

Since November 3 last year, firms have been able to register their interest in receiving an application form and to date 13,210 have done so, says the FSA. Of these 5,945 were from firms in the mortgage industry and 7,265 from general insurance firms. But registering an interest is not the same thing as actually applying.

The FSA has released figures that show 4,229 applications were in by March 31 of which around 70% – 2,960 – were from mortgage firms, leaving 1,269 from insurance firms.

These numbers represent 50% and 17.5% respectively of the FSA numbers quoted above as originally requesting application forms. The low figure of 17.5% no doubt reflects the fact that the May 31 date early discount deadline for insurance only firms is still six weeks away.

If that 17.5% rises to 50% in the same way as did mortgage applications, this will make a total of 3,633 on the insurance side to add to the 2,960 on the mortgage side which gives a grand total of 6,593 applications for direct authorisation.

The FSA has already expressed its concern over the elusive secondary insurance firms that have yet to appear in anything like the numbers it had expected.

These are firms whose primary sales are not in the financial services industry but in add-on insurance protection such as travel and extended warranty cover.

I suspect the insurance number will be higher than the estimated figure above, with total mortgage and insurance applications adding up to around the10,000 mark – far lower than the 20,000 number around which the FSA has calculated its fee structure.

Hopefully the full truth of the matter will emerge from the FSA by about July.

Does this mean the majority of brokers are applying for AR status? Certainly not yet. I know from our experience at Network Data and talking to my counterparts at other mortgage networks that few ARs are signing up at the moment.

There is little incentive for prospective ARs to sign up now rather than wait a few months to see if any of the networks touting for their business are prepared to offer better terms or if new, more tempting contenders appear on the scene.

The consensus of opinion is that the AR recruiting season is going to be compressed into a relatively short time period stretching between May and September, with some brokers leaving it as late as October to choose a network.

So what is the good news and what is the bad news about the low number of applications to the FSA?

Of course, this rather depends on whether you are a lender, network or directly regulated firm.

But the bad news all round is that the immediate consequence of any serious shortfall in directly authorised firms is that the relatively fixed cost base of the FSA will have to be spread across a smaller number of firms, thus increasing the FSA annual fees by a significant amount.

If the eventual number of new authorisations for mortgages and insurance activities is closer to 10,000 rather than the expected 20,000, annual fees will double.

And this may cause the smaller regulated firms to question whether they made the right decision in the first place.

The apparent winners will be the networks that will mop up the larger than expected number of brokers who opt for AR status.

From the lenders&#39 perspective it is evident from the marketing activities of some over the past few months that they would prefer intermediaries to become directly regulated and maintain the fragmented nature of the distribution channel rather than see it fuse into a smaller number of bigger players.

On the other hand, some lenders are taking a more pragmatic view and seeking to work more closely with the larger distribution channels that can guarantee quality (through compliance) and business volumes.

It seems to me that one the biggest losing sectors is going to be the packaging community with many of the smaller packagers hoping that things will carry on as normal and refusing to acknowledge the sweeping changes that will soon engulf the mortgage industry.

A story that passed by me last week concerned a business development manager at The Mortgage Operation who got 10% of his business from one MGM tied broker. He has now been told to stop placing business with TMO and use an MGM approved packager instead.

This is only the tip of the iceberg – you are going to come across hundreds of similar situations over the next few months.

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