When the sale of mortgages was brought under the Financial Services Authority’s regulatory regime in November 2004, packagers and mortgage clubs were excluded from the new arrangements. ‘Traditional’ packaging activities such as arranging product exclusives, negotiating enhanced procuration fees and providing information on best product fit did not need to be regulated as they involved no direct contact between the packager and the consumer – and there was not perceived to be a need for consumer protection against the risk of being treated unfairly by product providers.
At the time there was pessimism among some observers about the survival prospects of an unregulated packaging industry in an otherwise regulated market. “Packaging is doomed” was the refrain from some quarters – although not from the Intermediary Mortgage Lenders Association (although some members may have made remarks of the sort).
Two years on, it is clear those pessimistic commentators were wrong and regulation did not prove to be the first nail in the packaging coffin. In fact, numerous packagers have shown resilience and resourcefulness – not merely surviving, but adapting and thriving in the constantly changing mortgage landscape.
IMLA research in 2007 revealed that more than four-fifths of packagers reported an increase in business volumes in 2006 compared with 2005, with the average volume of mortgages packaged per packager firm standing at 216m. Moreover, the packager market is estimated to have grown 30% since regulation came into effect, and is now worth around 30bn.
Talk has shifted from whether there is still a place for packaging to whether it is time for the FSA to take another look at regulating the industry. One thing that may stand in the way of any change in policy is the fact that in practice most packagers are already regulated, thanks to the broad nature of their activities. The majority of larger packagers now act as distributors and arrangers and are regulated as a result of being involved in the advice process or arranging mortgages.
That said, the fact that there is some ambiguity in policy terms about which packagers are subject to regulation through their activities could be grounds for a reassessment. In other words, regulating all packagers could remove any confusion about what constitutes advice and who requires regulating. Among the few ‘pure’ packagers left which do not undertake other activities and so do not currently fall within the scope of FSA policy, it seems regulation would be broadly welcomed.
So far though, the FSA will only be examining intermediaries’ use of packager placement teams to help them to place cases. The regulator will look at whether sufficiently thorough sourcing of deals for customers is being undertaken.” More and more lenders are benefiting from wider distribution channels to intermediaries packagers can provide”Self-regulation for the packaging industry is one solution that has been put forward. It is certain that packagers would prefer to embark upon this and establish a code of conduct voluntarily, as opposed to being administered externally.
A stumbling block could be the lack of a unified trade body. Despite there being a number of packager associations, they remain exclusive (in terms of a small membership) with diverse member needs and expectations. A single united voice for packagers and distributors would be key to self-regulation having any possibility of becoming a credible reality. While all the associations are committed to ensuring that best practice and the highest industry standards are adhered to, it is probably only the Alliance of Mortgage Packagers and Distributors that is explicitly committed to regulation and wants its members operate under the same regime as intermediaries and other players in the market.
Self-regulation would not harm the chances of packagers encouraging those intermediaries which do not use their services to do so. The view among intermediaries about packaging at the moment is undoubtedly mixed but the benefits they can offer in particular circumstances are evident. When dealing with clients who do not fulfil mainstream lending criteria, for instance, intermediaries can take advantage of packagers’ knowledge of niche markets. Packagers can also offer value because they can source a number of lenders quickly, reducing the time intermediaries have to spend approaching individual lenders.
In finding the most suitable deal for a client, the issue of cascading has caused some controversy. While deals from a whole host of lenders may have been assessed in the first instance to identify the appropriate product to meet a customer’s circumstances, this may not be the case with the second product. One might easily comply with criteria, but may not necessarily be the best available compared with other lenders’ propositions.
Some have argued that cascading, with its obvious implications for treating customers fairly, is one area where regulation could be called for – where packagers are a part of the process. It is questionable whether regulation is needed to tackle the issue, which can be dealt with relatively simply. Indeed, where packagers are involved these problems can effectively be avoided as, if one product is unsuitable, they have virtually instant access to a number of different product solutions from a range of lenders.
More and more lenders are now benefiting from wider distribution channels to intermediaries that packagers can provide. It is probably fair to say that most lenders would not stand in the way of any moves to regulate the packaging industry. Lenders do draw comfort from those packagers that are regulated and as such have built in compliance procedures and knowledge of the regulatory guidelines. A fully regulated mortgage market would provide an added element of reassurance for lenders and would also ease any concerns associated with satellite packagers for instance.
FSA regulation in the UK is not the whole story, however. Around 70% of all regulation now comes from the European Commission. In 2008 it will be reviewing national regulatory frameworks to decide whether a more integrated European mortgage market is required to ensure there is a level playing field for consumers across the continent. While direct European Union intervention is a possibility, and of course a standardised system could be implemented throughout Europe, this seems unlikely in the short term.
Regulation was not the only reason why people had doubts about the future of packagers back in 2004. The rise of technology has also been seen as a threat, with the specialist market becoming more automated and the actual process of ‘packaging’ a case taking on less significance. Technology has led to changes, as packagers have evolved to become distributors – in the process, investing in their own state of the art technology capable of sourcing products from a number of lenders. The way some packagers have adapted has, in turn, led to renewed calls for regulation from certain quarters, particularly those carrying out the regulated activity of arranging.
So has the case for regulation been made? The answer is no. IMLA remains open on this agenda, and despite taking a strong interest in the packaging industry, has no set view on how the question of packagers and regulation should be dealt with. This is very much a debate between the FSA and the packaging industry itself. However, we will watch this space with considerMDable interest.
Peter Williams is executive director of the Intermediary Mortgage Lenders Association