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Is mortgage industry ready for crossover to regulation?

Mortgage brokers have less than two weeks to return their completed application forms for FSA regulation but concern is growing that many are not ready for the transition.

Regulation of mortgage business will begin on October 31. There will be no grandfathering or six-month run-in period as has happened in other sectors.

Mortgage Code Compliance Board head of communications Brad Baker thinks the FSA may have underestimated the number of brokers applying to be directly authorised. Around 12,000 firms are registered with the MCCB and it estimates that more than 7,000 will apply for directly authorised status.

By March 31, 5,945 mortgage firms had registered for application packs. The FSA had received 4,229 applications for authorisation, with around 70 per cent from mortgage brokers and the remainder in connection with general insurance business.

The regulator says it plans to issue its first “minded to authorise” letters at the end of this month.

Baker says that although it is not within the MCCB&#39s remit, it has undertaken to provide as much information as possible for its members ahead of regulation. The most recent seminar organised by the MCCB to help brokers prepare for regulation was attended by representatives from 1,600 firms.

Many brokers are waiting to see before they make a commitment to a network.

Manchester Building Society applied for FSA authorisation for its mortgage network last month. Chief executive David Cowie says many advisers he has spoken to are so shocked by the amount of paperwork they have to complete to join a network that many will not even consider becoming directly authorised because they believe it will involve even more paperwork.

Cowie suggests that some brokers may apply for direct authorisation now but change their minds later in the year after mulling over where they want to position their business. He says: “Some of the commission levels the new network set-ups are offering are hard to believe, varying between 12.5 and 15 per cent of advisers&#39 income. We do not think this is fair.”

Mortgage Force managing director Rob Clifford says: “I suspect that more than half of mortgage intermediaries have significantly underestimated what they will have to have in place to comply with statutory regulation.”

However, he disagrees with those who are predicting chaos and says the new requirements should not present huge difficulties for businesses already running as commercial enterprises. “It will not turn the regulatory process on its head, it will create a benchmark for compliance,” says Clifford.

He does not believe that the FSA will come down heavily on brokers which do not get their act together before October 31 but thinks it will scrutinise each firm&#39s activities from November.

However, Clifford echoes the feelings of many in the industry that regulating the mortgage market is using a sledgehammer to crack a nut. He says mortgages are less high risk than investments and that voluntary regulation of the sector has worked efficiently until now.

He says the costs that go alongside statutory regulation will inevitably drive up the cost of products for consumers.

The Council of Mortgage Lenders believes the FSA has significantly underestimated the total cost of statutory regulation at £136m.

However, groups such as Sesame say they have developed technology to help advisers cope with the shift to regulation and the increased paperwork. Director of sales technology Paul Yates warns that giving holistic advice is going become increasingly difficult for advisers because regulation means they need to complete different paperwork for different types of business.

Yates says advisers face a risk of missing some of the required documentation and predicts that most will be forced into considerable rekeying of data into separate systems.

The overall paperwork process is similar for each of the three areas of regulated business but the detailed rules specified by the FSA require production of documents in different formats.

For designated investments, the adviser has to produce a suitability letter that sets out in some detail why the product has been recommended. Mortgage advisers will have to produce a key facts&#39 document but are not required to produce a recommendation letter.

Yates says this will produce a quagmire of documents for small firms struggling to adapt to new regulatory demands.

Consumers&#39 Association senior policy adviser Mick McAteer has no doubt that introducing mortgage regulation is crucial in rebuilding damaged consumer confidence although he accepts that it will be a costly process.

However, groups such as the CA are particularly worried that borrowers currently taking out mortgages through brokers will not have any recourse later down the line if these firms take appointed representative status.

McAteer believes confidence is so low that more radical action is vital. He feels the industry is seriously underestimating the impact this will have on their business in the long term.


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