Continuing my look at the Financial Services Authority’s investigation of the risks facing the mortgage industry, let’s consider what it thinks are the biggest ones facing us and how they will affect brokers and lenders.
The FSA’s views on priority risks are outlined in Section B of its Financial risk outlook 2008. Unsurprisingly, it says many financial institutions’ business models are under strain thanks to adverse market conditions.
These include the structured finance vehicles that some firms have chosen to use over the past few years. The regulator says these vehicles have had a negative impact on firms’ financial performance as a result of the stressed market conditions we are experiencing.
In some circumstances this has put pressure on key measures of prudential risk, such as capital and liquidity. And the disappearance of some financial vehicles from the market, such as structured investments and conduits, will increase the costs of funding and may lead to a reduction in risk dispersal.
This may force some lenders to reduce the size of their mortgage business, which would have bad consequences for consumers and the economy.
The liquidity crisis has hit the industry and its players hard, resulting in a number of changes to business models and in some cases retrenchment or complete withdrawal from the market.
When such major changes lead to redundancies, one of the questions the regulator will ask is how much planning, risk analysis and quality thought went into firms’ business plans. Is there a fundamental flaw in their approach to business and do their management teams have the necessary skills and competencies? And was the Treating Customers Fairly regime and the delivery of its six desired outcomes considered at the planning stage?
More progressive firms that have secured the services of quality compliance consultancies will have less to worry about. They will have obtained objective risk analyses from their consultants on top of the usual compliance services, resulting in a more robust approach. They should not need to take dramatic action to survive the prevailing market conditions.
So what should those firms that are hanging on and still trading in perhaps a contracted sector of the market be doing to reduce risks?
The obvious answer is to ensure they are embracing what the regulator is saying. For example, they should be focussing on quality through the provision of compliance monitoring that covers all aspects of TCF, especially in the area of management information.
Do firms have the MI needed for today’s challenges? Are they obtaining the most appropriate information to meet the FSA’s requirements? Can they clearly demonstrate the reviews required are being carried out?
This need to demonstrate quality is another reason for firms to evaluate and perhaps utilise external compliance resources, even in a market where incomes and margins are stretched.
External consultants have the ability to objectively address these issues while reassuring the management of regulated firms that their systems and management controls are satisfying the FSA.
In the middle of such a fight for survival, the launch of the Association of Independent Financial Advisers’ Manifesto for advice seeks to enhance the professionalism of advising firms.
It also delivers a strong case for fair treatment, not just for consumers but brokers too. This is a refreshing and forward-thinking address to the many challenges brokers face at a time when the fight for survival has never been so intense or difficult.