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Perils of lenders regulating brokers

To cut its burden the FSA is still considering making lenders reponsible for brokers’ regulated activities but this could result in serious consumer detriment, says Bill Warren

When mortgage regulation was in its consultation phase, one of the early proposals was for lenders to supervise the activities of advisers and take responsibility for their regulated activities. This idea was dropped after strong and justified opposition from lenders but it seems we have not yet heard the last of it and two factors are currently prompting discussion of the subject.

First is the Financial Services Authority’s reported view that lenders are strongly involved in treating customers fairly in terms of product design, testing, marketing and broker training, and that the TCF element of borrowers choosing suitable products does not rest solely on the shoulders of advisers.

So, could TCF start to be used as a high-level umbrella under which lenders could be obliged to supervise or take responsibility for the compliance of advisers who introduce cases?

Second, it is generally accepted that the FSA is seeking ways to reduce its burden of directly supervising huge volumes of small mortgage and general insurance firms by looking at ways in which trade bodies can take on part of this burden. This was referred to by Chris Cummings, director-general of the Association of Mortgage Intermediaries, at the trade body’s recent annual dinner. Unsurprisingly, Cummings’ view is that AMI exists to further the aims and benefits of its members, not its regulator.

As with many such issues concerning the FSA’s intentions, at the outset details remain far from clear. Much preliminary discussion usually takes place behind closed doors, often with the trade bodies that represent the interests of industry stakeholders such as AMI, the Intermediary Mortgage Lenders Association and the Council of Mortgage Lenders. It has been reported that the FSA will reveal its intent on this issue in the summer but we don’t need to wait until some firm information about this hits the market to start thinking carefully about the implications.

So far, the CML and IMLA are thought to be confident that the FSA will not try to use lenders to regulate intermediaries. AMI is not so complacent and it seems that Mortgage Strategy readers already have their suspicions, as a Mortgage Strategy Online straw poll in April showed 64% of respondents believing that the regulator was using TCF to introduce lender regulation of adviser firms by the back door.

The most important issue for intermediary firms is the possibility that, if forced to take on the policing of mortgage advisers, lenders could close down their intermediary channels altogether and concentrate 100% on direct to consumer distribution.

How likely is this and does it pose a threat to the broker sector? After all, many lenders are already using the benefits of rapidly developing IT to gear up their direct business and cut out the cost of involving brokers. Might they welcome the obligation to police intermediaries as an excuse to get rid of them all together?

Although we have to take such rumours seriously as they have the potential to affect our business activity in a catastrophic way, is this U-turn by the FSA likely to happen in the foreseeable future?

Here are some questions to consider. If mortgage lenders, via the TCF principle, are made to police intermediaries, what happens about general insurance, where TCF also needs to be upheld? Will mortgage and general insurance firms find themselves answerable to two sets of supervisors? Will the new system then extend to investment product providers and IFAs? Will those lenders facing the extra costs of policing mortgage firms charge them fees for so doing, and if so will their FSA fees go down?

And who will be responsible for paying the Financial Ombudsman Service customer compensation costs should complaints reach this stage?

If the worst happens and lenders are forced to take on this policing role there could be two types of detriment to consumers. First, if lenders’ compliance costs rise so will the cost of products to consumers. Second, if lenders avoid extra costs by eliminating advisers it could be bad for consumer choice. In either case, will the FSA’s declared aim of helping retail customers get fair deals be furthered or damaged? If this proposal ever gets to consultation stage the regulator’s postbag will be large indeed.


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