When it was announced that mortgage packagers and clubs were not going to fall under the scope of the Financial Services Authority’s regulatory regime many were surprised and some quite offended. Packagers and clubs would be able to operate in the mortgage market without the stringent checks that intermediaries and lenders were going to have to endure. They would not incur the cost burden of regulation and there was a feeling in some quarters that packagers and clubs would be able to get away with things that brokers and lenders wouldn’t.
Put simply, it just seemed unfair. If the mortgage industry, which had been self-regulating for five years and had considered itself to have done an adequate job in doing so, was to become regulated by the FSA surely the entire industry should be regulated, not just certain parts. Regulation was a strange beast anyway – largely a response (some would call it a knee-jerk reaction) by the government to the Equitable Life endowment mis-selling debacle. And many in the industry resented it, given that most advice on endowment mortgages had been considered to be good advice at the time anyway.
But on M-Day it was only mortgage lenders, intermediaries and networks that became regulated. There are any number of arguments as to why historically it was decided to keep two main distribution routes in the mortgage market out of regulation, including the belief the FSA did not have the resources to regulate the entire industry, or that the FSA and Treasury simply did not understand what packagers and mortgage clubs did.
That view persists today and probably rightly so, as efforts to ascertain the government’s reasons for not including mortgage clubs and packagers in the regulatory regime by this magazine have revealed that Treasury policy advisers do not even know what a mortgage packager or club is.
Three years on the debate over packager and club regulation continues, albeit without much support from the FSA or the government.
Self-regulation is a consideration but how it would work appears to be a sticking point. What many appear clear on is the need for the distribution of mortgage products to become a regulated activity under the FSA, if only largely now for the sake of appearances. The FSA’s official position on the regulation ofmortgage clubs and packagers has not changed since before M-Day. It was, and still is, perceived that neither has any contact with the consumer and therefore there is no need to regulate their activities.
Robin Gordon-Walker, one of the spokespeople for the FSA, is also quite clear the decision was not taken by the regulator itself but by the government. “It was a decision at government level as to what should be regulated in terms of mortgages and it was the government that took that decision and can explain the reasons for it as it did at the time. We waited to see what scope it would have and then got on with it. It is not for the FSA to explain why some were excluded and others included [in the regulatory regime].
When pressed, Gordon-Walker admits the FSA made representations to the Treasury on the nature and scope of regulation of the mortgage market but adds: “When the scope of regulation was being discussed a lot of people responded to the consultation. When we respond we don’t do it publicly like the Council of Mortgage Lenders, but behind closed doors. So our consultation was not made public and still has not been made public.”
And therein lies one of the biggest problems with regulation as a whole and more particularly the regulation of mortgage clubs and packagers. Most in the industry complain about poor communication from the regulator but there is a sense of frustration in Gordon-Walker’s comment that seems to suggest the FSA has its hands tied somewhat in that it simply is not allowed to make public many things it would like to.
This also leaves the industry to make up its own mind on particular issues, with the consensus among packagers appearing to be that they were not regulated for two main reasons.
Eddie Smith, managing director of the Alliance of Mortgage Packagers and Distributors, is a proponent of the view that the FSA never had the time and resources to regulate the whole of the mortgage industry. “Primarily from the packager side of things, the reason they were not regulated was based on the belief we were not carrying out a regulated activity in that we were not giving advice to the consumer. But I think most packagers realise even if that were not the case there are advantages in being regulated. There were also companies that went to the FSA about whether they needed to be regulated and were told they didn’t,” he says.
“The FSA looked at what it could achieve in terms of regulation and what it could manage and took a quick-hit approach to getting mortgage regulation started.
“It also had no idea what packagers did and it may have gone and visited a few packager firms now but it still has not got a full grasp of what packagers do. If it did go and see what they do it would see businesses which were well conducted. I simply don’t think the regulator has the time or resources to carry out such visits.”
By and large, Vic Jannels, chairman of All Types of Mortgages, agrees with Smith as to why packagers and clubs were left out of regulation, saying: “Packagers were not regulated because, firstly, the FSA did not understand the position they held in the marketplace.
“The FSA looked at the firms that were providing the finance and the people that were providing the advice to the client but it did not actually take account of the various parts that other firms in the mortgage chain played.”
That said, Gordon-Walker is adamant that there is good reason for not regulating packagers and mortgage clubs, arguing: “The duty is still on the mortgage broker to advise the client and ensure they advise the client ” Many packagers chose, as much out of a desire to stay in business as out of a sense of propriety, to become regulated as mortgage arrangers”from the panel of lenders and products available from the packager. Of course products can change, so although the packagers can tell the broker they have a better product for their client it is still up to the broker to choose that product.”
The problem with taking this line, as the FSA did in 2004, was that by keeping mortgage clubs and packagers out of the regulated environment it put certain businesses in, to say the least, a difficult position. Jannels points out that the decision not to regulate distribution left packagers in particular with a serious problem because various lenders took the view that they were not going to deal with packagers that were unregulated.
This left packagers effectively having to find a way to become regulated so their lender partners would still work with them. So while, as Smith says, the regulator told many packagers they did not need to become regulated and did not carry out a regulated activity, many packagers chose, as much out of a desire to stay in business as out of a sense of propriety, to become regulated as mortgage arrangers. Despite the FSA telling them they did not need to become regulated packagers felt they had no choice but to apply for FSA authorisation.
Gordon-Walker’s view is somewhat different: “It is true that firms that believed they were arranging opted for regulation. It sometimes could have been as a pre-emptive move in that they were not sure they carried out a regulated activity so chose to become authorised in case they may in future need to become regulated.”
Given the response from the FSA, Jannels’s frustration is understandable, as is his argument that: “If you are going to regulate an industry then regulate the whole industry. All packagers and mortgage clubs should have had to become authorised.”
Smith agrees, arguing it would have been a reasonable assumption that regulation should have applied across the entire mortgage chain. He adds regulation across the industry is probably the preferred stance of the FSA but it does not have the resources to manage it.
The debate over the issue has somewhat stagnated with the passage of almost three years since the onset of M-Day and the most recent pronouncement from Mandy Spink, head of mortgages and credit unions in the small firms division of the FSA that it had looked at the issue of whether packagers and mortgage clubs should fall within its scope and concluded once again that such a move was unnecessary.
But if the debate has seemingly stalled due to a lack of willingness on the part of the regulator to engage in it, packagers and mortgage clubs have themselves continued to talk about regulation with the obsession of a spurned lover. The current thinking revolves largely around the issue of whether “pure packagers” need to be regulated and how far packagers are straying into the advice process when they make product recommendations. For Jannels the issues are clear cut. Mortgage clubs on the whole, he says, may be one group within the industry where regulation is not needed or may only need a light touch because clubs simply provide opportunities for brokers to go to lenders but do not get involved at all in the sales process.
But his position changes if the mortgage club offers compliance services. “If they are offering compliance services then they are then involved in the regulatory process. There is an argument that the packager alliances that offer compliance services may fall into that grey area as well. If you offer compliance services then you should be regulated but if you only offer white label services then it’s a different matter,” he says.” In the meantime, it appears the industry, tired of waiting for the FSA to decide to regulate it, is beginning to consider how self-regulation might work”Smith’s view on the need for packagers to be regulated boils down to their relationship with brokers. “A broker probably has a packager they will use regularly and will choose a certain product from that packager and will ask them to process the case for them. Then the packager may look at the product and tell the broker there is a better product available. If the broker does not go back to their client but simply accepts the recommendation of the packager then the FSA may begin to take an interest in that and it has indicated as much already.”
But Smith says most packagers would argue they do not make product recommendations unless absolutely necessary and those that do would say they are simply making the broker aware a better product is available. As far as many packagers are concerned, he says, that is the extent of their involvement and as long as the broker goes back to the client with the revised product recommendation there is no reason for the FSA to take an interest.
However, Jannels points out many packagers have become much more involved in the manufacture of mortgage products and it is this he believes, more than anything else, could finally force the issue and lead to the regulation of clubs and packagers.
He says: “The FSA, as a result of European Commission interest, is looking at what constitutes a manufacturer so if a packager negotiates an exclusive product and is instrumental in creating a mortgage product there is a view within some parts of the FSA that such involvement brings you as a manufacturer into the regulatory regime.
“If all you are doing is working as a distributor and simply presenting to brokers the lenders on your panel then you don’t need to be regulated but if you are working with several lenders and help with the design of certain products then you should be regulated. All packagers and mortgage clubs try and develop exclusives with lenders to get ahead of their competitors, so they should all be regulated.”
In the meantime, it appears the industry, tired of waiting for the FSA to decide to regulate it, is beginning to consider how self-regulation might work.
But neither Jannels nor Smith sees a resurrected Mortgage Code of Compliance Board as a viable alternative to FSA regulation. Smith says: “I don’t see something like the MCCB happening but the individual packager associations could offer help. What will happen is we will see more compliance services offered as part of the overall services offered by the alliances.”
Jannels, meanwhile, suggests a code of conduct would be the best route given the disparate packager alliances and associations and the lack of an overall trade body representing purely distributors’ interests.
“A code of conduct would be useful because the industry could see we are adhering to an agreed set of rules to show the job is being done for the benefit of the end user. There is a general consensus among the bigger packagers towards that and it would not mean people being kicked out of the industry but that everyone signs up to a set of standards and rules of business. This is a very entreprenurial part of the industry so the code of conduct should not be something that tells packagers how to run their businesses but rather be a set of high level standards and ideals.”
Given the apparent lack of interest or resources from the FSA or that it still doesn’t fully get what mortgage clubs and packagers do, self-regulation and the continuing fudge of gaining authorisation as an arranger appear to be the only two options the two communities have.