Preparing for Mortgage Day should be the biggest item on the list of firms' current projects and two key questions need to preoccupy the minds of senior management while their troops are focussing on implementing the detail.
First, why are we being regulated, and second, what impact will regulation have on our marketplace?
The market is being regulated because the Treasury has decided that regulation will bring about changes in the market that it views as desirable. Its objective is similar to the one behind the creation of the Financial Services Act in 1986 that led to the regulation of life and retail investments. It is in this sector that you would be wise to look for clues that might help tackle the second question on the impact of regulation.
The life and investments market in the late 1980s was characterised by powerful manufacturers, servicing a large number of distributors. The culture was sales-driven with product design becoming complex to enfranchise the needs and status of the intermediary.
Distribution changed immensely under regulation. Initially manufacturers responded by establishing large direct or appointed representative distribution channels. This allowed distribution firms to transfer some of the burden of regulation to the manufacturers, who in turn tried to build market share and scale. However, manufacturers soon learnt the folly of this strategy.
Direct sales forces had different cultures to traditional manufacturers, were expensive to operate and harder to control from the perspective of retention and compliance.
The experience with ARs was similar with control being the key area of difficulty. The manufacturer retained the compliance liability and the regulatory risk but the AR operated in its eyes as an independent business. Eventually, regulatory pressures led to the downfall of large direct and AR sales forces and we saw the growth of independent intermediary franchises.
Alongside a rise in operating and distribution costs in the life and investments market another legacy from the regulation of conduct of business has been the series of mis-selling reviews that have dogged the life sector over the past 10 years, with the pain being felt most acutely by manufacturers who operated direct or AR sales channels. Remember, it is the principal firm that carries the responsibility and liability for its direct and AR distribution.
The FSA is now putting the onus firmly onto senior management to consider the appropriateness of their firms' actions against the FSA's principles for business in areas such as treating customers fairly. Compliance with the detail of the conduct of business rules, while important, will not be enough to ensure a smooth relationship with the regulator. The mortgage market needs to ensure it can comply with the detail regulation (thou shall not present APR figures in brackets), but also that it has the infrastructure in place to judge whether it is complying with FSA principles.
If the market does not lift its head out of the detail it is likely that what goes around will come around. The experiences of the life sector are not to be recommended.
Mark Penton is a consultant at Beachcroft Wansbroughs Consulting which specialises in financial services regulation
All your network questions answered by the industry's leading experts
Q: What are the cost and excess figures for network PI cover?
Andy Valvona is network director at Mortgage Next
This will vary by network. At Mortgage Next, the first year's premium is dependent upon turnover and is as low as £345, with an excess of £500.
Bill Warren is network director at the Complete Network
This depends on the insurer and a firm's track record, but I would say expect around £500 per firm, plus an individual excess of approximately £1,000. Many providers are offering cover, but not confirming premiums yet.
Chris French is managing director at the Mortgage Marketing Centre
This question requires us to provide commercially sensitive information, which is difficult. However, we believe that our business should have higher protection for the consumer than the minimum provides.
Elliot Stoneham is commercial and IT director at Pink Home Loans
Pink appointed representatives can choose to use either their own PI facility, provided the level of cover is acceptable to Pink, or Pink's PI insurance facility which provides comprehensive policy cover at a competitive premium. Pink appointed representatives can therefore choose the coverage, cost and excess figures that best suit their business.
Frank Thurlby is head of compliance at Genesis
With most networks costs and excesses are still to be finalised. I do not anticipate seeing huge rises in costs for individual network members. Their PI costs will be similar to those they currently pay. There is no indication that claims are going to increase substantially in number because of mortgage regulation. As a result policy excesses will reflect this.
Chris May is director of Mortgage Times
This is dependent on the network. Some PI cover will be included in costs, some will not. Costs for networks may vary, while typical excesses are £1,000 but this would change depending on the type of claim.
Jason Gardiner is director of House of Finance
All brokers under the House of Finance umbrella have individual PI policies paid for and managed by House of Finance. In the event of a claim against one of our members the excess is £750.
Martin Cave is managing director of Home Loan Partnership
Subject to your compliance record, HomeLoan Partnership's network PI cover is costed not to exceed 1.5% of your turnover, including IPT. Excesses may vary according to product mix.
Richard Griffiths is managing director of Network Data
Some networks such as Network Data make no charge. Others charge for PI and the broker pays the excess in the event of a successful claim; some networks pay for the PI cover but the broker pays the excess. What is the incentive for these latter networks to defend any claims? Answer – none.