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Miss the N4 congestion

Since the countdown to statutory mortgage regulation started ticking away, we have been talking to our packager introducers about how the proposals will affect their businesses and have used their feedback in our responses to the FSA.

Advising, arranging, administering and lending are the four regulated activities for mortgages. Although pure mortgage packaging will not be regulated, many packagers deal direct with the public and may need to be authorised.

Recently, we held two seminars which gave our packagers a chance to hear about the timetable to N4 on October 31, 2004 and to put their own concerns to our compliance team and a senior representative from the FSA.

The seminars raised some thought-provoking issues, which are no doubt starting to occur to other mortgage packagers and brokers who believe that their activities are likely to fall under the scope of statutory regulation.

Many firms want to be told what to do but the Financial Services and Markets Act is not a set of black-and-white rules. It is framework legislation which will be fleshed out by the FSA&#39s rules within perimeter guidance, subject to a series of industry consultations.

The onus for preparation rests on individual firms although the FSA authorisation team will provide guidance on the subject. The final rules are due to be published this autumn and, while applications for authorisation cannot start before this, it is clear that mortgage intermediaries must start to prepare to submit their applications without delay if they want to have a smooth passage into statutory control.

The EU insurance mediation directive is also a key driver as it means that selling general insurance will also be a regulated activity. Building and contents, ASU and MPPI insurance are closely linked with mortgage sales.

Another critical difference for many businesses is that anyone who introduces insurance business to another firm needs to be authorised although they will not need to be authorised for introducing mortgages.

Consultation on the FSA&#39s CP160, Insurance Selling and Administration – the FSA&#39s High-Level Approach to Regulation, closes on March 10, so thoughts on the implications for mortgage intermediaries must be fed back before then.

Coming to grips with all this will not be a simple matter and cannot be left to the last minute. Individual firms must decide where they are likely to fit in the framework and start putting systems and controls into place that will support their application for authorisation.

Equally important is the need to build into working practices the records and documentation that can provide ready proof of an effective compliance system. Applications for authorisation will require certain back-up documentation, so these systems need to be set up sooner rather than later.

Our seminars also highlighted the distinction between authorised and exempt categories. The Financial Services and Markets Act says only authorised or exempt persons can carry out a regulated activity. Authorised persons are those given specific permission to carry out regulated activities by their FSA authorisation. One group of exempt persons is representatives appointed by a principal who has taken on the responsibility of dealing with all their compliance. The FSA&#39s CP159, Appointed Representatives – Extending the Current Regime, is out in the field, with the discussion period closing on March 31.

On the subject of the legislative framework, it was explained to delegates that the act set out threshold conditions that anyone who wants to be authorised must satisfy and continue to satisfy. These cover such topics as the suitability, knowledge, resources and systems of the person or firm seeking authorisation.

Looking ahead to the authorisation process, it was explained that the process is risk-based. For example, very big firms or operations that hold client money inherently represent a higher risk to the public. When applying for authorisation, applicants are asked to seek specific and clearly defined permission for each of their activities, which helps the FSA assess the level of risk that each firm represents.

The FSA will adopt a proportionate approach to authorising and regulating mortgage and general insurance firms. The process for assessing firms which are ongoing businesses trading in a market with non-statutory regulation should be considerably less painful. The benefits of due credit for firms in good standing with the MCCB and GISC will play a part.

The question uppermost in delegates&#39 minds was how and when they should be applying for authorisation. The FSA is allowed six months to process applications so, to be sure of getting their authorisation through in time for the October 31, 2004 deadline, firms must apply as soon as possible after January 1, 2004. It is expected that there will be 35,000 applications so earlier applications should be processed more quickly than those submitted after a jam has built up.

It was also pointed out that 30 per cent of current applications processed by the FSA have to be referred back because the forms and/or back-up documentation are incomplete. The proportion is likely to be higher among mortgage industry applicants as they are not experienced in this process.

Anyone continuing to trade without authorisation after the deadline will be breaking the law and could be subject to fines, imprisonment and being barred from business.

It was stressed that the FSA is doing all it can to smooth the way for authorisations. Application forms, currently some 380 pages long, will be slimmed down to around 20 or 30 pages, along similar lines to the Inland Revenue&#39s tax return, with add-on pages. Each applicant will have an explanatory pack, together with as much advice as they need via the telephone.

The threshold conditions are designed to provide a flexible framework to accommodate different sorts of business. There is still time for everyone to make their own views known before the final rules are published in the autumn.


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