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Compliance countdown

Compliance with the new FSA regime for mortgage intermediaries, to be introduced in the fourth quarter of 2004, will be complex and costly.

It promises to be a shock for firms that have never been subject to rules before. The experience of companies in other sectors of the financial services industry that came under the previous wave of FSA regulation in 2001, known as N2, has been salutary.

For these companies, the costs have hit the bottom line hard. In a recent survey, 48 per cent of companies under the yoke of the FSA said regulatory costs are a burden.

Yet Mortgage Day also presents a great opportunity that must be seized – to make business processes more efficient and to deliver greater quality and efficiency.

For firms affected by Mortgage Day, substantial changes will need to be made to business procedures, not just to ensure that processes are compliant with the new regulations but also to safeguard profitability.

For companies that have prepared thoroughly, there should be no essential contradiction between achieving compliant processes and cost-effective processes – they will be one and the same.

Rather than seeing compliance as a burden, mortgage companies should begin to regard it as an intrinsic part of their business environment. Instead of designing business processes from a production or sales perspective and then changing them to satisfy regulatory requirements, the compliance department should be involved from the beginning in business planning.

As a result, systems will be more efficient in themselves and will produce higher-quality output, which will create greater efficiencies as there will be fewer referrals of substandard work.

The costs invoilved in implementing systems like this will also be reduced as there will be less need to make retrospective changes by adding the compliance process at a later date.

Preparations for compliance must begin now, even with Mortgage Day over 18 months away, to allow time for the new systems to bed down and for staff to be trained.

Companies that fail to demonstrate to the FSA that they are meeting the requirements of the new regime will not be authorised to conduct business and may well be fined. To learn what information is required to get authorisation, companies could start by consulting the FSA part 4 permission application form.

What compliance requirements can companies begin to address? Record-keeping is essential. All regulated business functions – those that can be categorised as involving lending, administering, advising and arranging – should generate a transparent and exhaustive audit trail.

The company&#39s monitoring and reporting systems will need to be able to identify and trace everything required by mortgage regulation after Mortgage Day.

It is also clear that risk management is vital. Although the Mortgage Day regulations have not yet been finalised, it is clear that mortgage firms will have to demonstrate that their processes can minimise their exposure to risk.

Training and education are key components of Mortgage Day. Under the terms of the new regime, board members will be personally liable for breaches of regulation. Boards of directors will need to be briefed on the con- tents of the regulations and be apportioned their own responsibilities.

Selected senior managers within companies will become “approved persons” authorised by the FSA to implement regulated functions for which they have individual and specific responsibility.

Staff below senior management level need to be educated and trained to comply with the regime. Their competence to act in accordance with the regulations will need to be assessed and it will be necessary to show the FSA that ongoing support and training in the future will be adequate.

Another essential component that will be studied by the FSA is the customer complaints&#39 procedure.

Although a company might have a successful complaints&#39 procedure in place, each step must be documented and the effectiveness of the procedure needs to be apparent to customers, the Financial Ombudsman Scheme and FSA inspectors.

Considerable alterations will need to be made to some management processes, accompanied by a great deal of training. Compliance will need to be integrated further in some form into every part of the business and the compliance department will have to be involved from the outset with all other departments in business planning.

But the returns can be considerable. Business processes under the new regime will have to be redesigned and this offers the opportunity to bring in more efficient and productive processes. Reporting systems will have to be imp-roved so more comprehensive management information will be generated which can be used to pursue increases in product-ion efficiency.

Although the initial costs may be high, the overhaul of processes required by Mortgage Day presents a great opportunity to institute better, more cost-effective ways of working. The winners in the process will be planning now for regulation. By 2004 we will know who they are.

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