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Packagers must be regulated

It does seem peculiar that nearly three years after the introduction of statutory regulation we are still asking the same question: Should packagers be regulated? When regulation first came along, there wasn’t as much clarity as one might have expected from the Financial Services Authority. Indeed, as the deadline for registration approached it was the devil’s own job to establish whether packagers should or should not apply to be regulated.

The Mortgage Partnership promotes itself as a ‘pure packager’. That means it does not sell to nor advise consumers – it is in business to distribute mortgages for lenders and for the benefit of the intermediary. It offers to reduce the administrative burden of the mortgage process for intermediaries and to help source deals for intermediaries. It does not advise clients on their mortgage choices.

Back in 2004 TMP was regulated by the Mortgage Code of Compliance Board, which was straightforward, and although the MCCB may not have fully understood packaging it appeared to do a pretty good job of introducing standards into a disparate industry.

Three years ago a number of lenders were also saying they wouldn’t deal with an unregulated packager – one of the prime movers being BM Solutions. At the time TMP was doing serious packaged volumes with BM and was reluctant to lose a product provider because of regulation. But on the other hand it also had a number of lenders which believed packagers didn’t need to be regulated and rather perversely The Mortgage Business, which has the same parent company as BM Solutions, was one of these. The FSA wasn’t as helpful as it might have been and, a bit like the MCCB, didn’t have a good grasp of what packagers did. It told TMP to read the appropriate areas of the regulation and make a decision based on its understanding.

Clearly if the lenders couldn’t agree how packagers should proceed, then how was TMP expected to make the right decision? And yet a decision had to be made. In the end it was simple. The firm asked itself: should TMP be seen to be on the same level playing field as the people it did business with? The answer was a resounding yes.

To TMP it seemed that it was only fair that intermediaries and their clients should expect it to have the same levels of transparency as they had to have. The firm also believed its position would demonstrate an arguably more professional stance which would give lenders greater confidence in its ability to transact business properly. It would hopefully enhance TMP’s reputation and put it in a better position should the FSA formally decide packaging was a regulated activity.

But searching through the appropriate regulation and then understanding it was another matter. I was reminded of Donald Rumsfeld’s famous quote: “There are things we know we know, and there are things we know we don’t know, but we also know that there are things we don’t know we don’t know”.

There is a lot in mortgage regulation which doesn’t seem to apply to a ‘pure’ packager. Even the term ‘packager’ appeared to be a virtually unknown concept to the FSA and despite numerous requests for guidance TMP knew it would have to decide for itself.

It was looking for something in the handbook that said it must be regulated. In the end the handbook gave ” Principles-based regulation and TCF will demand that regulated firms ensure those they deal with outside of regulation do not compromise their own standards of TCF”it all the clues it needed. Its services would become part of mortgage arranging. In addition, even though TMP does not advise clients it thought it unreasonable not to have contact with them (for example, when their broker is unavailable and they needed a progress update) and finally because TMP takes application fees direct from clients it means it then has a contract with them. These three areas gave TMP all the ammunition it needed to justify its rationale for becoming regulated. The three areas meant that all pure packagers should be regulated. There was no lack of clarity, no misunderstanding – packagers should be regulated. The regulation said so and so it followed that all packagers should therefore be regulated.

But here we are in 2007 and still the question is being asked. In the intervening years TMP, as a regulated packager, has put in place all the processes and procedures required – senior management controls and responsibilities, regulatory reporting, professional indemnity, training and competence for staff and directors, financial promotions and so on. Has all the hard work paid off? In 2004 TMP wasn’t looking at any outcome other than getting the processes and procedures in place.

At the time we cursed statutory regulation for the amount of time, effort and not least the 40,000 we estimated it cost. Now, nearly three years later, we still curse the Retail Mediation Activities Return (when it comes around) but it is getting easier. Our new T&C procedures allow us to measure the knowledge of our staff and our recently introduced treating customers fairly policy allows us to have at least replaced our unpublished ethic with one that all of our staff know and hopefully understand.

That said, to be regulated by the FSA a firm has to confirm that it is going to carry out regulated activities and if it is not carrying out regulated activities then there is no need to be regulated. Indeed, if you say you do not carry out a regulated activity then you cannot be regulated.

TMP has built its case on foundations in the sand and its proposition off the back of a flimsy argument. How can just talking to a customer about whether their references have appeared or when the valuer is going to make an appointment be a regulated activity?

But the question keeps cropping up. It was raised at the Packager Summit in January and the Association of Mortgage Intermediaries has started a process which aims to bring about better understanding of the issues. The FSA has now said it has no intention of regulating packagers, but such pronouncements presumably give it a bit of wriggle room.

At the same time such unequivocal statements mean we now have clear evidence that even the regulator believes we should not be regulated.

All of this means we have got precisely nowhere. Perhaps the future will give us an indication of what should happen. After all, the horizon is filled with the FSA’s principle-based regulation and TCF.

The implementation of principles-based regulation and the embedded nature of TCF will have a much greater impact on packagers than anyone has hitherto identified. The question is not whether we should be regulated or not. It will be whether we will deliver our services to the right standards that meet with the requirements of our customers (lenders and intermediaries), backed up with processes and procedures that are sufficiently robust to continually deliver.

Principles-based regulation and TCF combined create a virtuous circle. Principles-based regulation will bring a seed change in the culture of the industry. This change will have a dramatic effect upon how consumers are treated, and those parts of the transaction which are outside of the direct control of the lender or intermediary will have the microscope focused on them.

Principles-based regulation combined with TCF will demand that those that are regulated ensure the organisations they deal with outside of regulation do not compromise their own standards of TCF. TCF will be used as the driver to ensure customers are delivered with fair outcomes. In order to demonstrate that, brokers and lenders will have to show continuous due diligence on the packager.

Becoming regulated isn’t the be all and end all, just as being unregulated is not the root of all evil. But unless distributors have some form of discipline from which they can demonstrate that they also have standards and a commitment to FSA principles and the ethos of TCF, then product providers and intermediaries will find it increasingly difficult to demonstrate their own in turn.

The challenge that packagers will face is how they demonstrate that they achieve the standards imposed upon them by the lenders and intermediaries. They can try to do this individually and some will have the resources to achieve this but for the majority there is really only one way they can go. For those serious about this part of the industry self-regulation must be the way forward. Principles-based regulation and TCF will be another of those challenges packagers have to face up to. MDBut it is clear that packagers must be regulated.

John Mawdsley, managing director, The Mortgage Partnership


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