The Financial Services Authority (FSA) has changed tack over recent months and when it comes to enforcement it is now as agitated as a sniffer dog running through Pablo Escobar’s old Columbian villa.
Distribution problems are at the very heart of its search at the moment and whether we are talking about the Retail Distribution Review, ‘Treating Customers Fairly’ (TCF) deadlines or the recent survey into how well principals are managing their appointed representatives (ARs), distributors can be in no doubt that those acting illegally will be found out.
The real issue for the FSA is that in many cases firms are making no effort to improve the way they operate. They get pulled up for something, tell the regulator they will put it right and then go back to their old ways as soon as the watchdog is off the premises.
Having spent the last three years cajoling and harrying firms into acting compliantly, the FSA is no long prepared to act like a sheep dog. It has now become a doberman and is well and truly off the leash.
Just ask the four firms being considered for referral to enforcement and the other 11 who have been told significant remedial action is required on their behalf to get them up to standard on the back of the recent review into principals and their handling of ARs.
According to the FSA, key concerns include firms’ written procedures not being followed in practice, an over-reliance on remote file checking, poor communication to ARs and a lack of appropriate management information or measures to test whether ARs are delivering the TCF consumer outcomes and working towards the end of December 2008 deadline.
Discussing the findings of the FSA’s survey, Stephen Bland, director, small firms division at the FSA, said: “It is disappointing that failings still persist despite the help and information available from the FSA. We have set a deadline of the end of December 2008, by which time we expect all firms to be able to demonstrate that they are achieving the six TCF outcomes.
Principal firms therefore need to act now to ensure that they have appropriate controls in place and management information that enables them to be confident ahead of the deadline that their ARs are treating their customers fairly.”
A changing emphasis
For anyone in the market that thinks the FSA is getting a little hot under the collar, they should take a look back to 2005 when the FSA released findings of a similar survey into the conduct of principals in regard to their ARs.
At the time, Alison Hewitt, head of department, retail firms division at the FSA, said: “We expect networks to apply appropriate controls on their ARs so that these firms maintain the same standards as directly authorised firms in their dealings with customers.
"Our emphasis at this stage is to help networks improve and the factsheet is designed to help achieve this. However, we will be carrying out further work next year to monitor the position and will take appropriate action where concerns remain.”
That emphasis has now changed and if networks are not prepared to take the help offered by the FSA and work with the regulator to run a compliant and well-managed operation, then as far as the FSA is concerned, it is time to stop barking and start biting.
It is difficult for networks to pass judgement on what other firms in the sector are doing and certainly few have been so crass as to stick their heads above the parapet and declare they have got all the answers to working compliantly.
However there are a number of networks who have worked hard to make sure they are on top of their regulatory obligations. Sally Laker, managing director of Mortgage Intelligence, says: “We are working as hard as we can and everybody has to. All networks should be striving to achieve excellent standards.”
In an environment that is moving towards a more principles-based footing, it is difficult for firms to act correctly in each and every situation, but according to Laker, the key thing is that they can show the FSA they are working towards this goal.
She adds: “It is important that the FSA looks at whether a company is trying to implement TCF, and offer continuing guidance to ensure that what is in place meets all its requirements. However, where clear guidance is available and where firms continuously fail to act, then they are their own worst enemy and it is difficult to have sympathy for them.”
Proving compliance
Unfortunately regulation is not something that happens to someone else and everybody has to get on with it, whether they like it or not. It is not so much that it is particularly difficult to act compliantly, but increasingly networks are realising how difficult it is for them to prove all of their ARs have actually been compliant.
David Copland, deputy managing director at Pink Home Loans, says the simple rule of thumb must be; if it is not written down, then it did not happen.
It really is as simple as that, and he explains: “ARs may think they have done a good job, but the regulator is looking for them to demonstrate it.”
Copland says the network does not operate an electronic file checking system, and most of the file checks take place on the AR’s own premises. By contrast, Mortgage Intelligence runs a remote file checking system which it operates in tandem with face-to-face visits to its ARs.
For some this is part of the problem. There is not just one right way to do things and firms have to be responsible enough to work out what is best for them and also ensures that both they and their ARs are working to standard.
However before an AR even joins a network there is a lot of work that needs to be done if FSA regulations are to be met. At the moment the regulator says networks are in some cases being too slack in their recruitment procedures.
Over at The Mortgage Times Group, head of marketing, Payam Azadi, says this is a particular area of focus, and comments: “New members have to go through a two or three day induction course depending on how experienced they are. After the course we will test them and then sign them off, put them through more training or turn them down.”
This is similar to the regime followed at Pink, and Copland says that when the firm moves to its new premises in February there will even be a dedicated training suite for new ARs.
He is also keen to point out that even once ARs have joined the network, that is not the end of the line as far as compliance is concerned. He adds: “Suspensions do happen. If they don’t follow the controls we will ultimately take them out of the network.”
Effective communications
To try and ensure there is something between recruiting firms and then having to sanction them, there has to be effective lines of communication in place. Most networks seem to operate a strategy which incorporates face-to-face meetings with compliance officers and business development managers along with e-mail, mail and telephone communications.
By looking at the business that is being written and communicating effectively with ARs, Azadi believes it is possible to nip a lot of potential problems in the bud. He explains: “The compliance officers monitor the business the ARs are writing and so they spot the trends and potential mistakes.”
He says the firm then uses this information to send out a common errors e-mail bulletin which highlights these problems and makes sure everyone is aware of them and can stamp them out in the future.
Pressing issues at hand
How the FSA’s latest review into networks will affect the market remains to be seen. It may end up driving consolidation in the sector, but for many there seem to be more pressing issues at hand when it comes to potential merger and acquisition activity in the coming months.
Dropping sales volumes and tightening margins are putting everyone under pressure. Simply relying on pure volume is going to be a difficult road for some firms, while others will have to make sure their services are up to scratch to merit the fees they charge.
Either way, networks have as much respoinsibility to their ARs as their ARs have to them. Networks must be able to provide the long-term support, guidance, products and services that their members need to do their job properly and the coming year is likely to put some firms under intense pressure. How they handle that pressure will be all important to their long-term survival.
In looking to the future, the biggest surprise is that some networks have not got to grips with the idea that the FSA is now off the leash and taking a hard line on compliance. We are three years down the road from ‘Mortgage Day’ and as far as some are concerned the regulator has actually been a little slow in getting up to speed.
Laker is in no doubt over the role of the FSA, and comments: “It is the networks’ responsibility to ensure that ARs are working with the correct procedures and mindset. If they are not doing this then it is the role of the FSA to make sure that these things are implemented.”
The FSA is taking to this particular role with a vigour that some will will find worrying and others will find comforting. Being on the right side of this split is the only sensible option for those networks looking to enjoy longevity.
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