The statutory framework for the regulation of mortgages, which excludes mortgage advice, will continue until at least 2003. While this has been criticised by advisers, it should not allow complacency – especially where changes in distribution allow advisers to follow best practice now and at no extra cost.
Until now, mortgages have been largely exempt from the compliance regime, unlike other business areas where failing to comply has incurred fines and even orders to stop trading.
It is for this reason the mortgage industry needs to ensure now it is in a position to cope, especially in light of the changing distribution methods offered by the internet.
The evolution of compliance's has been fast and far reaching – from basic file checks through to retrospective judgement and mystery shopper methods.
While no one doing their job properly fears any of these, we all have a living to make and with the FSA, net works, the MCCB and the newest kid on the block, the GISC, it is all time and money.
Compliance as a profession has taken off – as has its cost. It now involves whole departments geared to understanding and anticipating changes in legislation. When I joined a network compliance department eight years ago,I was the fourth member of staff. Now the same network employs 150 compliance staff.
The internet revolution has led and will lead to even greater flexibility by distributing information in a more efficient and streamlined manner. However, in all the excitement and hype it would be easy to assume that the technology which is making the advisers' lives easier on the one hand might create extra compliance paperwork on the other.
Mitigating the compliance risk
The first thing is to identify what areas of the distribution process create the greatest compliance risk.
The first area that would apply is quality of product information. With over 4,000 mortgages to choose from, this has been one of the highest areas for concern. The problem is further increased because many advisers will want to take external events into account, such as demutualisation opportunities.
The flexible mortgage market causes a specific prob lem because comparisons are not exclusively rate or featuredriven and the what-if calculators that assist greatly in the sales process are all currently lender-specific.
Linked to product information is product literature and the “selective memory” of some customers – especially where small print is concerned. Five years hence, it is conceivable that many will deny ever having seen the literature that details overhang or redemption penalties.
An issue that is exclusive to the lending industry is early access to underwriters. Many busy brokers spend over 50 per cent of their time chasing lenders and rebrokering business that does not fit their original recommendation. As such, there is an inherent risk that the second or third attempt has a less rigorous compliance trail.
Overcoming the electronic compliance issues
At IFonline, which was born out of the CML common trading platform initiative, we have been working with the above issues and more for some time. Far from hindering the compliance situation, the greater use of technology has the potential to vastly ease the initial compliance needs as well as providing an audit trail that is virtually impossible to replicate with a paper-based or hybrid system.
So what are the features of electronic distribution that will provide so much benefit?
1: The elimination of decision-in-principle systems with lenders and their replacement with full credit and criteria underwriting at point of sale. This will not only make the advisers life easier but also ensure a one-stage compliance procedure.
2: The automation of pro gress checks and thus auto mation of compliance trail.
3: Product data is integral so there is no possibility of error during the transition from the sourcing engine to online decision in principle/full cre dit score and actual application. This single-stage process also ensures the client documentation is both comprehensive and compliant at source.
Data warehousing is ano ther major benefit derived from electronic processing. The adviser no longer needs to worry about storing paper copies of customer documentation, marketing materials and illustration. These will be held by the mortgage platform provider in a secure environment that can be accessed by the advi ser of the regulators at any time in the future.
Generic flexible calculators that work across all products also aid the selection and, as a result, the compliance process. The more advanced calculators allow an adviser to work out the total cost of credit by each year of the loan, for example, if he knows the customer's circumstances will change in the future.
Another advantage of such systems is that they fully reflect the MCCB e-comm erce guidelines. They facilitate compliance departments being able to mystery-shop remotely without wasting the adviser's time.
This type of technology not only provides the adviser with a faster and cheaper way of transacting mortgage business but also eases the compliance pressures by auto mating the process.