All packagers will be regulated

The FSA\'s move towards a principles-based approach to regulation makes it more likely that all packagers will have to apply for authorisation in future, says Bill Warren

Certain topics pop up from time to time and one of the regulars is the regulation of packagers.

The subject resurfaced in speeches made at the recent Mortgage Business Expo in Manchester and our friend Michael Bolton was back to his traditional form in Mortgage Strategy a few weeks ago, attacking packagers for their non-regulated status. So this seems to be an appropriate time to return to the basic issues concerning the regulation of the packaging sector.

The first thing to be clear about is that mortgage and general insurance firms are not regulated according to what they call themselves but according to what they do. If firms believe they are carrying out a regulated activity the onus is on them to become authorised and regulated by the Financial Services Authority.

The two regulated activities that are likely to take place in a mortgage or general insurance company are advising and arranging.

The question of whether or not advice is being given is fairly clear cut. If a customer is told “I suggest you go to the XYZ building society for a loan”, this is not advice. Nor is “I think you should go for a fixed rate mortgage.” But if particular products come into the recommendation, advice is being given.

Packagers that only handle business-to-business cases from brokers will rarely be in a position to speak to or give advice direct to customers, but they are likely to do a lot of things that closely resemble the activity of arranging.

Towards the end of last year the regulator revised its factsheet entitled FSA regulation of mortgage arranging and advising – do I need to be authorised? and anyone who is still unsure of the facts surrounding this matter will find this useful publication in the mortgage firms library section of the FSA’s website.

The factsheet states that arranging a regulated mortgage contract involves any of three activities. The first of these is making arrangements for someone to enter into a regulated mortgage contract as a borrower. This is followed by the activity of making arrangements for a borrower to vary the terms of their existing regulated mortgage contract. The third activity is making arrangements with a view to a participant in those arrangements entering into a regulated mortgage contract as a borrower. It is not necessary for the arrangements to bring about the mortgage in order to make the arranging activity regulated, which means the scope of this type of arranging is wide.

This last point brings us to the question of whether the regulated activity is being carried on by way of business because if it is not then the person doing it does not have to be authorised. To qualify as ‘by way of business’, an activity needs to be continuous and to have a commercial element to it. Firms do not necessarily have to be making a profit out of their arranging activity. Similarly, if such activity is free to customers it is not necessarily excluded from the category of by way of business.

The final element in deciding whether or not a firm needs to be authorised centres on the exclusion of certain arranging activities from regulated status.

These exclusions include circumstances whereby the arranger’s role is so small that their involvement plays no part in the outcome of the application. Similarly, if a firm is merely providing the means of communication between parties to a regulated mortgage contract, this is excluded from the regulated activity of arranging.

When faced with the question of whether or not to apply for authorisation, packagers had to be sure that they were never undertaking any sort of regulated mortgage arranging. Unsurprisingly, when the time came to register, the vast majority of medium to large packaging firms took the view that they would be happier as regulated businesses.

Only the smaller packaging firms undertaking a restricted scope of activities remain unauthorised and unregulated, and many of these are finding it increasingly difficult to generate enough business.

So will the regulator decide to tidy up the situation and indicate that all packager firms will have to apply for authorisation? It seems to me that this is bound to happen at some point in the future, and is even more likely under a principles-based rather than a rules-based approach to regulation.