Had there been a deterioration in the dress code at Canary Wharf? Imagine my embarrassment when someone explained to me that the move did not relate to the kind of shorts I had in mind, which almost certainly says more about me than anything else.
However, one of the effects of the present market turbulence is that many of us have had words and phrases added to our vocabulary. Even I, with my limited knowledge, have taken to screaming at the TV when all kinds of unlikely people from chefs to irritating regional presenters blame all woes on the credit crunch – what do they know?
But this did start me thinking. What do any of us know? When – as is all too common at the moment – talk turns to what is happening in the financial markets, it’s clear that a surprising number of people, including me with and my obsession with net shorts, have a distinct lack of knowledge.
Of course, the concern is that there are brokers advising borrowers on which way to go with regard to the products still out there. But should you go for a tracker or a fixed rate? Should you fix long term or short term? How can you give this kind of advice without some market knowledge? When you consider that there is a steady stream of enforcement decisions coming out of the FSA which show the lack of knowledge of brokers of even basic stuff, you have to worry.
In recent weeks we have seen MAH Mortgage and Finance which, it seems, did not assess (or did not record that it had assessed) customers’ ability to pay the mortgages it recommended, could not provide proof of the suitability of self-cert deals and recommended loans into retirement with no assessment or record of how borrowers might repay. The company has been ordered to carry out a review of past business and had all its permissions withdrawn. I wonder how it would have fared given a brief test on the workings of the capital markets.
Then Approved Financial Solutions was fined £63,000 (after a 30% early settlement discount) for a host of failings including an inability to demonstrate the suitability of the mortgages it recommended. It also recommended a number of sub-prime self-cert deals when a high street mortgage was clearly more suitable. I wonder if it could explain the workings of the Bank of England’s US$ overnight repo operations and their impact on liquidity.
I know it’s unfair to expect brokers to have a working knowledge of the capital markets. I couldn’t really explain the intricacies myself – after all, I thought ‘haircuts’ were, well, haircuts.
But I do believe recent problems have exposed a couple of big mistakes in the way mortgage regulation is structured. Given that we have now seen a host of compliance failings, why is there not a compliance controlled function* for mortgage firms? I never understood it when the draft rules were published and still don’t. I don’t see the position im-proving either. Even the FSA has ex-pressed concern that in current market conditions, compliance staff have been among the first to go.
The FSA must require mortgage brokers to be approved persons with CF status. At present, there is nothing to stop rogue advisers moving between firms. The FSA has no clue where they are. An IFA selling an ISA or a PEP has to be an approved person carrying out a customer function. Given that a mortgage is the biggest transaction into which most people enter, why should a mortgage broker be so different?
The other advantage, of course, it that a change would also allow for a more rigorous training and competence regime for mortgage brokers so maybe a few more of them would be able to advise on whether a fixed rate, a tracker or even spending some time on a lender’s SVR might be the right decision in the current market conditions.
And I will not trouble you with what I thought ‘pump and dump’ meant.* The term controlled function relates to the carrying out of a regulated activity by a company which is specified under section 59 of the Financial Services and Markets Act – Approval for particular arrangements.
Philip Tebbatt is principal of niche financial services law firm Slater Rhodes and can be contacted at firstname.lastname@example.org