Shaun Godfrey is group sales director at Bankhall
The FSA recently published estimates of the cost of regulation for brokers opting for direct authorisation. Before making a knee-jerk assumption that these are too high, I urge brokers to look at the bigger picture.
There are direct and indirect costs to be considered here. Direct costs such as registration fees and FSA annual levies cannot be avoided regardless of which route is chosen. There is also a misconception that appointed representatives will avoid all FSA paperwork because their principal will take care of it. The fact is that ARs will have to supply the necessary information to their principal in the first place. This means that infrastructure such as IT and reporting systems need to be in place regardless of which regulatory option a broker chooses. I estimate that brokers would only make a 15% time saving on paperwork by becoming an AR. But the benefit of this time saving must be balanced against the costs to a broker's business, the most important being loss of control.
I believe joining a network is not a long-term solution for the following reasons:
Consumer choice can be restricted
Brokers are vulnerable to the wrongful acts of other members and the impact on PI cost
Client files and records belong to the network
With mortgage and insurance panels, it is questionable whether these organisations can be truly independent
Whose capital value is the member firm building?
Mortgage intermediaries will have to abide by the rules of the network in addition to those of the FSA
Some networks might find they are not able to live up to their commitments due to lack of resources or experience.
Having said this, AR status could prove to be a quick fix solution. That is why we launched Bankhall Point One whereby brokers can benefit from AR status initially while receiving the necessary training and support to enable them to become directly authorised within a year or so.
Some mortgage lenders are also expressing concern over the potential lack of choice that could face borrowers who use brokers that are only able to recommend a limited number of deals. Brokers who choose to work with a principal who operates a panel must place all their business through it and cannot shop around.
The difference with regard to cost is that by joining a network, one-off expenditure will be reduced as brokers will not have to pay the FSA an application fee but the costs for the introduction of the necessary systems for reporting and IT will be similar, as will ongoing costs of regulation.
So the question for brokers is whether losing control of their business is really worth the few hundred pounds saved on the application fee.
Stephen Atkins is group compliance director of Freedom Finance As it is my responsibility to prepare for mortgage and general insurance regulation, one item of information I have been eagerly awaiting for some time is the FSA's estimate of costs, particularly for small firms.
Last year many industry observers suggested a figure of between £8,000 and £10,000 but there was criticism that this was scaremongering by those setting up networks and as a result we have all been anxious to see where we went wrong.
In fact, the FSA stated its estimate of the costs for one or two-man firms on January 20 this year. I missed it – but so it seems did everybody else.
The details appeared in a press release called FSA announces final details of the general insurance regime in the section 'notes for editors'. Try as I might, I can find no further details.
The FSA suggests one-off costs of between £1,900 and £3,700 and annual costs of £3,800 to £5,700 for those firms seeking direct authorisation. It says these costs will vary according to the firm's size and the nature of its business. The lower figures apply to firms active in the secondary insurance market but the higher figures cover the cost of mortgage and general insurance mediation and will be applicable to most firms.
The costs are accurate in my view but may well be disappointing and higher than expected to many firms. The costings will have included an estimate of the periodic fees, the Financial Ombudsman Service costs, the Financial Services Compensation Scheme, the application fees and, I assume, some estimate of the time involved.
Add to this the cost of professional indemnity insurance and the total may well exceed £10,000 – considerably more than is being paid to the Mortgage Code Compliance Board.
However, the figures should not be criticised too much as the FSA is acting at the behest of the Treasury. The coming regime offers improved consumer protection and this is simply the cost of regulation as many IFAs will confirm.
Mortgage intermediaries now have the figures they need to decide if they should apply for DA or become an appointed representative. Although at the higher end of expectations, these costs are bearable. But it is compliance responsibility that will be the real cost of regulation. It remains uncertain how much time will have to be spent on compliance and putting in place the systems and controls required – as well as the planning needed to prepare for regulatory reporting every six months.
It is disappointing that these figures were not available earlier as this would have helped those many firms that did not apply to the FSA before the end of its much-publicised discount period.