The biggest mortgage news last year is also destined to be the biggest thing to happen in 2004 and it will hit every broker and lender for years to come. It is now more than three months since the FSA published its final rules covering the sale of mortgages, thereby giving the industry a full year to prepare for their implementation on October 31.
In terms of the differences between MCCB regulatory controls and the statutory regime, the key principles are very similar. You must give appropriate advice, you must be qualified, you must carry professional indemnity insurance, you must act diligently and honestly and in future you must hold a minimum amount of capital, which was never a requirement of the mortgage code.
Moving from around 25 pages of the mortgage code to the new FSA rules at over 300 pages is, however, a significant shift. The Mortgage Conduct of Business Rules naturally impose a high degree of prescription – such is the way of statutory regulation.
Last October, the industry, to some extent, breathed a sigh of relief as several features of the new regime appeared to have been amended significantly following the consultation process. It was felt that the new regulator has listened to the industry's views and concerns. Major shifts from the proposals for consultation included a decision to scrap rules relating to intermediaries holding client money and the decision to effectively separate packaging fees from procuration fees in terms of disclosure.
Additionally, the FSA has not prohibited self-certification for the employed in the final rules. In CP176, the regulator questioned whether borrowers in full-time employment could be regarded as suitable for self-certification. In the final rules, lenders are permitted to operate self-certification for the employed in circumstances where the lender “considers it appropriate” and has reasonably satisfied itself that the client income declaration is honest.
The FSA publicly stated that this focused on the lender using common sense about earnings and ability to repay.
The regulator also appeared to tackle positively the issue of data accuracy in key features illustrations – allowing a degree of tolerance on illustrations produced by mortgage sourcing software. Not surprisingly, final rules demand that brokers must take reasonable steps to ensure that the monthly repayments recorded in a KFI are as accurate as possible but the new 1 per cent or £1 margin for error compared with the lender's own quote was helpful.
The industry knows that mortgage sourcing systems are not completely accurate in all cases and the new FSA tolerance gives intermediaries the flexibility to continue using sourcing systems as a cost-effective way to generate KFIs at point of sale for clients.
It is appropriate to also mention how the FSA appears to have deliberately worked hard to make direct authorisation as accessible as possible. We have an environment where networks increasingly and massively exaggerate the risks and costs of direct authorisation (it is in their commercial interests to scaremonger brokers into seeking appointed representative status with networks). The capital adequacy requirements for small brokers and the FSA application fees and PI requirements have all to some extent been adapted to better suit small firms. Mortgageforce polled 100 firms in January and found that 88 per cent favoured direct authorisation.
Another example of the regulator making DA more palatable and questioning the network assertion that becoming an appointed rep is manna from heaven, is the fact that smaller brokers are not now required to produce a full regulated business plan for the FSA's assessment. The FSA believes that scrapping the need for a three-year business plan will encourage smaller firms to apply directly to the FSA “rather than seek appointed representative status”. Here, here.
Rob Clifford is chief executive at national broker franchise Mortgageforce