Targeted data to sharpen our focus

The Financial Services Authority draws information from a variety of sources, but product sales data in particular has proven to be vital to the regulator\'s work in the market, says Paul Hunter

“Statistics are no substitute for judgement,” said US Senator Henry Clay in the 1800s, and of course he was right.

However, the use of high quality data can inform our judgements, which for the Financial Services Authority means becoming a more effective regulator.

One key source that in-forms our strategy is product sales data. But how do we use this to scrutinise smaller firms?

Our supervision of 18,000 small retail firms, encompassing intermediaries since 2004, has meant we have had to adopt a contrasting regulatory app-roach to how we deal with large firms.

A major plank of our strategy is to use an innovative set of systems and business processes, much of which is reliant on various data sources.

One such source is the Retail Mediation Activities Return, which provides us with firms’ self-reported information on a range of topics. But we also want to know about the business they are undertaking.

We considered a number of ways to collect this data. The most appropriate and cost-effective method was to go to providers rather than brokers, as they were already gathering product sales information for management and marketing purposes.

In April 2005 we began collecting product sales data from about 460 firms each quarter, covering the work of sales teams and brokers. Of these, almost half report on mortgages.

The data collected varies according to the products sold. For mortgages, we record pro-duct types and any special features, the firms selling them, their providers and the deals’ terms.

We plan to collect further data to reflect changes to our regulatory scope, including home reversions and home purchase plans.

We also receive high level information about customers (birth dates, impaired credit histories and employment status) plus property details (purchase prices and property values).

Product sales data only relates to new sales or in-vestments and captures loans for house purchases and remortgages. It doesn’t cover further advances, top-ups, transfers or details of cancellations, fees or commission.

Also, it only records regulated mortgage contracts and therefore excludes pro-ducts such as second charge lending, commercial and buy-to-let mortgages.

We are able to use this data to record the products each brokerage sells. This allows us to identify samples for some of our thematic work.

The product sales data also provides us with an independent source of in-formation on brokers’ business activities.

For example, we are able to compare firms’ permissions against the products they are selling in practice and relate this to other information we hold on them.

This may come through RMARs or other sources, including data from other regulators, providers, whistleblowers and consumers. This allows us to build up profiles of individual firms and highlight some of the potential risks they may pose to our statutory objectives.

We use this information when allocating our resources, for example, when selecting firms for inclusion in thematic work.

Product sales data also gives us the opportunity to take an overview of the sector as a whole and its emerging trends, allowing us to produce an aggregate picture of the risks brokers face.

But it’s not only used to regulate small firms. We also use it to supervise larger firms and identify the challenges facing the whole market.

We’ve collated the information and some of the highlights are set out in the box. The data provides an important overview of developments in the industry.

Reports setting out the data in detail will be available on the FSA website later this month at doing/regulated/ returns/psd/index.shtml

Product sales data highlights

• More than four million mortgage transactions have been reported via product sales data.

Selling channels
• 58% of all sales were sold by brokers.

• 81% of lifetime mortgages were sold by brokers.

• 83% of impaired credit mortgage sales were made by brokers.

• 71% of mortgage transactions since April 1 2006 were advised sales.

• 41% of all mortgages sold through direct sales were advised sales.

Repayment methods
• 64% of customers chose capital and interest as their mortgage repayment method.

Debt consolidation
• Half of all mortgages were arranged for remortgaging purposes.

Income multiples
• 45% of first-time buyers borrowed between 2.5 x to 3.49 x their income.