Beyond the worlds of John le Carré and Raymond Chandler there aren't many places where the knock on the door is as synonymous with fear and foreboding as it is in the financial services industry. Mortgage intermediaries have since 1998 grown accustomed to occasional MCCB inspections visits but with the onset of statutory regulation many are asking when, why and how the FSA will make site inspections of its own. The surprising answer is that, for those who successfully meet their obligations to the FSA, it might never happen.
March 31 saw the publication of the FSA's final rules for regulatory reporting in Policy Statement 04/09. Though thousands of firms are starting to implement compliance changes in time for FSA authorisation, regulatory reporting will become an equally important fixture in the mortgage intermediary's calendar from 2005. As a central pillar of the FSA's risk-based policing system regulatory reporting will ultimately replace the MCCB compliance visit.
The system roughly works like this: brokers submit a report of their firm's details – ranging from trading name and address to balance sheet details and PII and capital arrangements – every six months. The FSA will check this and feed it into a data warehouse along with quarterly information supplied by lenders and product providers. Since this provider information will also include product sales data – with details of every product transaction processed and its intermediary source – the combined data will provide early warning if individual inconsistencies or worrying market trends become evident.
Against this backdrop any firm attempting to submit lifetime mortgage applications, for example, without the training and competence or PII provisions required to perform that function, would stand out on the FSA's risk profile analysis once lender product sales data are compared with that firm's details at the time of authorisation or its last report. Equally, a firm claiming to offer whole of market advice to clients might expect enquiries from the regulator to prove product suitability if the FSA's matrix spots that business is only ever placed with two or three lenders.
How is this possible? Well, those of you who are ideologically opposed to the onward march of the laptop, e-trading and web-based technology in general may wish to stop reading now – regulatory reporting will be 100% online. The FSA has opted for this approach for two main reasons. Firstly, the cost of hiring the staff required to process returns from tens of thousands of firms manually would be instantly prohibitive. Secondly, a development called XBRL has enabled it.
Whereas systems have previously faced integration difficulties because of data inconsistencies (lenders' inability to feed reliable data straight into sourcing systems being one timely example), XBRL enables the seamless pooling of huge quantities of data from many sources.
Every company in the financial services industry will be obliged to file reports, with the choice of submitting their information online via standard web-browser technology such as Internet Explorer or through direct system-tosystem links with the FSA (as will lenders), with XBRL forming the hidden wiring within the system. Think of a jigsaw piece that transforms itself to fit into the space you want it to fit into and you're some way towards understanding the principle of XBRL.
But that's quite enough about high-level technology. For the vast majority of mortgage intermediaries, reporting will take the form of an online document similar to the current FSA online application form.
Many of the categories will be identical, as will be the individualised password system and confirmation of receipt framework. Next week we'll take a look at what the FSA wants to know about your firm, when it will want it, and how you will have to submit it.
A full reaction to the proposals contained within PS04/09 and PS04/08 can be seen on the AMI website at www.a-m-i.org.uk/closed/cug/ami_says.asp