The lack of urgency in the mortgage industry over the preparation for regulation is astonishing. Consider the havoc the regulated sales process has wrought in life and pensions. The additional cost of sale that regulation creates has caused numerous life assurance companies to close to new business and the problems that have flowed from non-compliant – or purportedly non-compliant – sales in the form of mis-selling claims, have given rise to further huge costs.
The low level of preparedness for Mortgage Day is all the more surprising given the advantages of early compliance. Under the Financial Services Authority's risk-based approach to regulation those organisations that are well prepared will benefit from lighter supervision and a lower cost of compliance. Those that do not achieve compliance in time will face fines, public shaming or at the very least loss of access to the markets for higher risk products that can be sold only through advised sales.
One of the first things organisations need to address is what role they are going to fulfil under the new regime.
For lenders, statutory regulation will increase the complexity and cost of running a sales network and many are likely to reduce direct sales of mortgages. With a greater proportion of mortgage sales therefore made via intermediaries, there will be a shift in the balance of power from lender to broker. And this shift will come at a time when the intermediary market, affected by the same cost pressures as lenders, is likely to be subject to dramatic consolidation.
Smaller intermediaries are likely to opt to become appointed representatives of a larger principal firm rather than take on the burden of direct authorisation. A survey of intermediaries in September 2003 by the Intermediary Mortgage Lenders Association indicates that only 36% intend to proceed with direct regulation. This percentage has decreased from 54% in an IMLA survey in June indicating that intermediaries are shying away from direct regulation as they develop a better understanding of what it will entail.
It seems likely that large numbers of appointed representatives will cluster around a few powerful principals who will control a large portion of the market. Some of these principals will be mortgage lenders, some life companies, some distributors/mortgage clubs such as Mortgage Next, which has already declared its ambition to recruit 500 firms as appointed representatives before October 2004. Lenders and super-intermediaries will compete fiercely to woo the smaller independent brokers.
The most important factors determining which principal a smaller intermediary will chose will be the breadth of the product range to which they will gain access and the principal's reputation. The quality of the systems and administrative support the principal provides will also be key.
The systems requirements associated with the new regime will be considerable. The most noticeable change will be point-of-sale systems that take the client and adviser through a compliant sales process, automatically collecting all the information required to prove compliance and providing a Key Facts Illustration. Lenders and principals will also need to integrate their systems with the point-of-sale systems used by intermediaries. Where systems are still paper-based, automation will gain in importance because the FSA regards systems dependent on paper and human entry as high risk. Meanwhile, yet more systems requirements will arise from the fact that the regulations are likely to drive quotations online as quick quotes over the telephone will be banned unless accompanied by a written quotation.
Critically, because principals will be liable for the actions of appointed representatives, they will need IT solutions that keep precise track of intermediaries' activities. Ideally, the principal will provide a single, FSA-compliant sales system to all its intermediaries to simplify the burden of supervising them. They want to be sure customers get the same advice from every one of their advisers.
Some principals will seek to introduce systems that enable them to propose products automatically, concerned that products with higher commission rates may tempt ARs to compromise on suitability. Such systems will work in a similar way to the technology that underlies online financial advice with a database of products being searched against criteria entered at the point-of-sale and those with the right fit being proposed. This implies greater control for principals but such automated advice systems are also likely to be advantageous to the intermediaries who use them. They create an opportunity to use more supervised staff rather than qualified financial advisers, enabling more sales to be made at lower cost. Indeed, in time, access to such systems could become one of the key factors in an AR's choice of principal.
Another critical point that lenders' and intermediaries' IT strategies will have to address is that lenders will be obliged to ensure that the sales of their products comply with responsible lending rules and affordability criteria. Recent BBC allegations about self-certification mortgage selling have highlighted the dangers. At the very least, the questions intermediaries ask applicants, along with the responses, will have to be transparent to the lender.
A firm's IT strategy could play an important role in where it finds itself in the new order. It will affect the attractiveness of both lenders and intermediaries as business partners; it will dictate an organisation's ability to adapt swiftly and it will help ensure compliance. Start working on your IT strategy for Mortgage Day – there is no time to lose.
Time to decide on your IT strategy
Where an IT system for compliance with the new mortgage regulations has a record of successful operation, the FSA will see it as lower risk. Organisations need to evaluate whether it is better to take time to develop bespoke systems or to achieve compliance more quickly by adopting a customised CP186-compliant solution. The latter is undoubtedly a lower risk option in terms of project overruns.
However, whether or not to use a bespoke or packaged solution is not the only important decision firms will have to make with regard to their IT strategy. An important element of every organisation's plan to cope with mortgage regulation should also be to develop a more flexible IT infrastructure to facilitate adaptation to market, regulatory and distribution channel change. De-coupling distribution and administrative functionality within mortgage systems is a sensible strategy but for many mortgage lenders, whose systems tend to be highly vertically integrated, it could be a costly process. Careful consideration is required before adopting this approach although with so much change in the market, it is likely to be worth the investment.