The changes affecting the structure of the FSA and the specific proposals for regulation in the mortgage market laid out in the mortgage market review mean all regulated firms must now identify what the impact of these regulatory changes will be on their business.
The MMR proposals have been the key focus of those involved in the mortgage market but they only represent a small part of the changes being proposed, all of which will, to a greater or lesser extent, have an impact on the market.
The replacement of the FSA with the Financial Conduct Authority and changes to the prudential regulation of all firms will be key to the implementation of these proposals.
Developments are also taking place in Europe, with proposals for a directive, a major reorganisation of supervisory arrangements and further changes resulting from the economic difficulties being experienced within the eurozone.
The new UK regulator is not likely to be in place until late 2012 but there are already pointers on what can be expected.
The FCA’s frame-work will include:
- prevention – by market knowledge and engagement with external stakeholders;
- culture – firms will be required to provide proper pro-tection for consumers at all times;
- regulatory contact – building on the current supervisory approach of small firms;
- prudential control – with all firms subject to baseline monitor-ing; and
- audit – with firms’ auditors required to play a role in support-ing prudential and conduct supervision.
The past reliance on principle-based regulation is now seen as ineffective and rules will be introduced to support treating customers fairly requirements.
The FCA will take on new powers of early intervention in terms of banning products where there is perceived to be a serious problem.
It will also have the ability to with-draw any misleading financial promotion and publicise where such enforcement action is being taken.
In terms of regulatory action, there will be more of a focus on the use of credible deterrents where it can be proven firms or individuals have acted improperly.
These deterrents will include even higher financial penalties, criminal prosecutions and also a requirement for all consumer losses to be made good.
The planned regime will be stronger than anything that has been experienced before. Any failure by a firm or individual is likely to result in punitive damages.
The focus will be on ensuring that all business is conducted to the highest standards, with clear audit trails to demonstrate to an external audit that the rules have been complied with and client interests protected at all times.
Inevitably, ensuring compliance with these changes will result in higher costs, internally and externally. Audit costs are likely to rise as regulatory requirements are included within the normal financial audit programme.
It is important all internal staff are made aware of the requirements and how they impact on the firm’s practices. They should also understand the potential impact of a failure to meet the required standards.
Richard Fox is chief executive of the Society of Mortgage Professionals