Given the vast amount of resources and time we all now devote to regulatory matters it is hard to think that just a few years ago the mortgage industry was essentially self-regulated through the Mortgage Code Compliance Board. Statutory regulation has impacted on the mortgage market in almost every conceivable way and mortgage intermediary firms in particular must feel like there was never a time when they did not come under the jurisdiction of the Financial Services Authority.
But, statutory regulation is a relatively new beast and while the consumer might consider that all parts of the ‘mortgage chain’ are now regulated, we in the industry are aware that there are significant links in that chain – notably packagers and mortgage clubs – which do not come under the jurisdiction of the FSA. Although, as we have seen, this has not stopped the regulator reviewing the role of packagers in the marketplace and issuing guidance on how intermediary firms should deal with these companies.
Many within the industry felt regulation and technological advances would ‘do for’ packagers but this has not been the case. Now the debate has moved away from the survival of packagers to one based on the want and need for this part of the chain to become regulated.
The first major question we must deal with when looking at the potential for the regulation of packagers is: regulated for what? The regulator itself has had to grapple with this conundrum since the decision was made to regulate the mortgage market. In fact, this is the reason why packagers were not brought into the regime. The FSA concluded that because pure packagers did not have any contact with the client, they could not be regulated for advising or arranging mortgages. This was the responsibility of mortgage intermediaries and therefore they were the ones that would become regulated.
Understandably, this left a number of packager firms concerned that they had somehow been removed from the regulatory table. Many felt both their lender and intermediary partners would somehow lose confidence in the only part of the chain which was unregulated. The responsibility for the packager’s work would lie with either the intermediary or the lender and it was felt at the time that lenders in particular, would not wish to take on the regulatory burden of their packager’s ongoing compliance.
Some packagers of course were already regulated for other parts of their businesses. Others decided to set up unused arranger arms in order to become regulated through this route. The rest considered the question ‘regulated for what?’ to be the cornerstone of their decision not to seek regulation in this way.
Whether the firm decided to opt for regulation through the arranger route or chose to stay unregulated, those who wanted to continue to exist worked on making their processes and systems as tight as possible, ensured their service levels were of the highest standards and tried to deliver added value across the board. The packager community banked on the fact both mortgage brokers and lenders would continue to see the benefits of their business models.
And so it has come to pass that packagers are still a much valued part of the chain and continue to deliver huge and growing volumes of business to their lending partners. But the issue of regulation has not gone away and many packager firms are wanting to move onto the front foot in terms of the issues they wish to raise and how they can best represent themselves with the key decision takers in the industry.
After all, packagers and to a lesser extent, mortgage clubs, are still very much on the FSA’s regulatory radar. Concern has been expressed that packagers are in some cases straying into the realms of providing mortgage advice. The regulator itself was keen to review if this was the case. Its concerns included whether intermediary firms were simply accepting the choices and alternative products presented to them by packagers without exploring the client’s options and the other products available in the market and whether some intermediary firms were assuming that, since the packager was providing these product choices, it was they who were ultimately responsible for the mortgage advice to the client.
The FSA reviewed a number of brokers’ practices and their use of packagers, and there was evidence to suggest some intermediaries thought packagers were responsible for the advice. The FSA also found a small number of intermediaries did not review the alternative product suggestions from packagers to “satisfy themselves the product [was] the least expensive or otherwise most suitable” before recommending it to their client.
The regulator used this review to underline intermediary firms’ key responsibilities in using packagers and to reassert that advisers are responsible for the advice and recommendation they give to their clients, not the packagers. It also looked at areas such as cascade underwriting systems, often employed by packagers, and made the same point about adviser responsibility.
With packagers clearly having the interest of the FSA within the mortgage chain, it is not surprising that packager firms have looked at how they should respond to these questions and the wider question of regulation.
At this year’s Packager Summit, it was clear many there felt-under-represented and were looking to establish a more powerful lobbying voice in order to move the debate forward in these areas. While many firms are members of the various packager associations, and these bodies deal with the regulators on that basis, it was felt there was no one organisation representing the packaging community as a whole.” Some lenders will not use unregulated packagers. A voluntary code may well offer the solution that intermediaries, packagers and lenders are looking for”To that end, the Association of Mortgage Intermediaries established the Packager Task Force to bring interested packager firms and associations together, and to see if there were grounds for a common agenda and a strategy to take the community forward. Unsurprisingly, the regulatory issue has dominated our early meetings, with Task Force members split on the need for statutory regulation and the benefits this would bring to both the packager community and consumers. A number of Task Force members had opted to gain FSA authorisation through the arranger route while others questioned the need for regulation as a whole.
Indeed, if we are to believe the regulator itself, then there is no appetite for the regulation of packagers. Speaking to the Mortgage Summit in Dubai earlier this year, Mandy Spink, the FSA’s head of mortgages and credit unions, said it had no intention of regulating packagers in the foreseeable future, although she noted European regulation may force its hand on this issue.
The European White Paper on Mortgage Credit is due to be published this year and Spink commented that, should the paper call for the regulation of packagers, the FSA would have to act. In AMI’s view, the regulation of packagers is unlikely to come out of this year’s White Paper but may well be covered in the European Commission’s ongoing study of credit intermediaries. In discussions with the Commission, it has been apparent there is a knowledge gap at the European level on the existence and role of packagers within the UK mortgage market and the Commission will seek to fill that gap with its work on credit intermediaries.
While the FSA’s announcement may have been greeted with a mixed response, further discussions in this area saw our own Task Force members look at the possibility of self-regulation, along the lines of that which the mortgage industry had achieved pre-Mortgage Day. It was proposed that a voluntary code of conduct could be drawn up which would set standards for every signatory to that code.
Self-regulation may well be a fundamental and forward-thinking move for the packager community. A number of lenders will not use unregulated packagers so establishing a voluntary code may well offer the solution that intermediaries, packagers and lenders are looking for.
The major issue of any voluntary code of course is how it is policed. While AMI has been involved in drawing up a possible code, it is not a second-tier regulator and does not have the resources to ensure firms’ compliance. One possible solution would be for signatories to effectively self-certify their compliance with the code. These issues can be ironed out and perhaps the most important issue to focus on is the genuine appetite of our Task Force members to work closely together and ensure their voice is represented. It is perhaps fair to say that in the past there has been little inclination to work together as a collective, but given the current issues and those that might be sweeping across the continent in the coming months, the need for a united packager voice has never been more apparent.
Chris Cummings is director-general of the Association of Mortgage Intermediaries