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A fairly good start

The regulator and brokers have had a fairly good first year under regulation but there is still a lot to be achieved, says the FSA’s Andy Watson

This first year of Financial Services Authority mortgage regulation has been a busy one for us all. At the FSA, we have been working extensively with firms and on focussing on the priorities we set ourselves, and firms have been getting to grips with statutory regulation.

I’m pleased to say a lot of the negative predictions made when we took over regulation have not materialised. We have not seen a significant contraction in the number of brokers, packagers still play an active role and there is continued innovation in products. This has all occurred during a slowdown in economic and housing market activity.

Our view of how the industry is doing one year into regulation is fairly positive. Most firms have been keen to learn and raise standards. Our emphasis has been on educating firms to ensure they are aware of the rules and to highlight the risks we see in the market. We’ve done this by publishing the findings of our project work and sharing the good and bad practices we have seen, and have been pleased by the response from firms.

The industry has responded well to the challenges regulation has brought and though there is still more work to be done, we hope you will continue to work with us to raise standards so consumers get a fair deal and the industry can continue to prosper.

During the past year we have worked to improve the way we communicate and help firms through our tailored handbooks and our regular newsletters, email round-ups, web pages and local roadshows and surgeries where firms have an opportunity to meet us and ask questions.

Our strategy is also designed to ensure our own people at the FSA understand the needs of the financial services industry and that our values of a risk-based approach characterised by swift and proportionate decision- taking are reflected in our day-to-day dealings with you.

We began with a clear set of priorities. These were to enforce the perimeter (making sure only authorised firms carry out regulated activity), make sure that our financial promotions requirements (mainly adverts for mortgages or mortgage services) were being met, ensure customers receive the necessary documentation, look at the sale of higher risk products such as lifetime and sub-prime mortgages, and introduce electronic regulatory reporting requirements.

This work would be undertaken alongside our day-to-day work of supervising the market and dealing with issues in specific firms that emerged.

All the work we have done Tduring this first year can be traced to one of our Principles for Businesses: “A firm must pay due regard to the interests of its customers and treat them fairly” which we all know (and love) by now as Treating Customers Fairly. There has been renewed emphasis on this by the FSA, but it is not a new requirement and we expect it to be business as usual for all firms.

You will probably have read about our work on subjects like equity release, disclosure documentation and sub-prime mortgages. Feedback on these can be found on our website ( You should look at the results and consider how they can be applied to your firm.

Equity release was of significant concern to us. Despite us looking only at a small sample the results were nevertheless disappointing, especially when you consider that consumers tend to be elderly, vulnerable people. Our mystery shopping suggested firms were not gathering enough information to assess the suitability of the product. The quality of subsequent investment advice was also identified as a major concern. We will do some further work early next year and expect firms to ensure that the appropriate advice is being given and that they have taken on board our earlier feedback.

We have also looked at small brokers in the sub-prime market, reviewing their selling practices and undertaking detailed file reviews. While we saw some good practice, in 80% of cases there was a lack of evidence to show how the product met customer needs and circumstances. Though further information was provided when we asked the broker, it was often difficult to assess whether the sale was suitable without the required documentation.

We were also concerned with the results of our disclosure project. The Key Facts documents are intended to help consumers both shop around and understand the products and services they are being offered, so are a major part of our regime. This project took place early in the year and we expect things to have improved since then, but we were concerned over the quality of some of the documents we reviewed.

In addition, there have been some areas of concern that we have identified consistently during our visits over the past year. These include the collection of information, product research and the demonstration of suitability and affordability.

To make sure customers are being treated fairly, ensure you collect and maintain a complete record of customer circumstances before making recommendations. We find some firms are recording insufficient information to demonstrate the suitability of mortgage advice. This is essential.

An area we find particularly concerning is lack of evidence of affordability. Many firms are still unable to show from a customer’s file the steps they have taken to source a product and, where the cheapest option has not been chosen, how the recommended product meets their customer’s needs and circumstances.

Being a regulator I have naturally tended to focus on the negative side. But we have also seen many instances of good practice and we do share these in our feedback both to individual firms and in the information we put out on our website following our reviews.

For example, in the sub-prime market we were pleased to see many firms diarise and contact clients when they have achieved a better repayment history, to obtain a lower rate and a better product.

Our focus over the past year has been on raising industry standards through education and collaboration with firms. We ask firms where we find problems to change the way they carry out their business. But while we want to work with firms we are prepared to make full use of our powers where we find wilful non-compliance with our rules and where there is a serious risk of consumer detriment. For example, we have referred firms for enforcement action for non-disclosure and for frauds including assisting consumers to inflate their salaries to get loans.

The choice of what work we will do and what areas of the market we will concentrate on is based on market intelligence and a thorough analysis using our risk-based approach. We have the flexibility and knowledge to undertake several projects within a particular market each year and to react quickly to market developments and potential risks.

But you should not be surprised to see us follow up in future a number of the areas we have already looked at this year. We will do this to see if improvements have been made by the industry. Where we find messages have not been taken on board and firms show a wilful non-compliance with our rules we are likely to consider taking strong action against them.

We are using technology to help us keep an eye on the market and emerging risks. Recent developments include data that lenders provide us on the mortgages they sell and the electronic reporting that brokers have started through the Retail Mediation Activities Return.

This technology allows us to retrieve more accurate and up-to-date information than ever before. We will be using this information when we decide what we should be looking at, and try and stay ahead of the market in spotting trends.

We recognise how well most people in the mortgage industry have dealt with the changes regulation has brought. Firms have generally been welcoming when we have visited them, and our surgeries and roadshows have been well attended. Indeed we even have firms asking us if we can come and see them. It is clear that while some firms are having problems, most have been positive in their attitude toward statutory regulation.

Andy Watson is head of mortgages and credit unions in the small firms division at the FSA


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