One thing this year has not been short of is consultation papers on reforming the industry.
The last few weeks have been no exception. Following hot on the heels of the Sandler and Pickering reports, we now have the FSA's CP146 on regulating mortgage sales.
At the same time, PS129 also appeared, giving the results of the FSA's earlier consultation on implementing the e-commerce directive. Let me deal with the latter briefly.
There are some who believe that the FSA consultations are merely a matter of paying lip service to the concept of asking the industry for its views. It then, regardless of the response, puts in place whatever the FSA wanted to do in the first place.
Anyone seeking evidence of this need look no further than PS129. None of the issues have been addressed which could put the UK financial services industry at a severe disadvantage compared with practitioners from other European Union states selling into the UK, who may benefit from a less thorough regulatory environment. This does not bode well for the outcome of CP121.
Moving to mortgage regulation, the main document runs to a mere 353 pages. Add to that a further 123 pages for policy statement 98, including the feedback on CP98 and 58 for CR14, the research document on providing better research to consumers on mortgage information, and it is reasonable to assume that many people in the mortgage industry will have had a daunting pile of reading in recent weeks.
Clearly, such lengthy documents cannot be summarised in a single article of this nature, so I will focus on just a few issues that are particularly relevant to industry technology.
The FSA has an objective that is far from easy to achieve – creating a single regulatory environment for the personal finance industry. I think there are many worthwhile concepts included in CP121 but it also includes some very ill-conceived thinking which demonstrates a lack of understanding of some of the practical realities of consumer behaviour in the personal finance market. Sadly, CP146 continues the trend.
One interesting proposal is the idea of a single initial disclosure document covering both mortgage and investment products where multiple products have been discussed.
Presumably, the same should also be possible for general insurance. To me, this makes excellent sense in terms of clarity for the consumer. The technology challenges to achieve this, however, will not be small.
This proposal must presumably answer a further question in the consultation paper, specifically – should the independence regime for all disciplines be the same? Anything less must inevitably cause consumer confusion.
CP146 suggests that one option may be to have differing definitions of independence between the mortgage and investment industries. Pity the poor consumer in such a situation.
The alternative suggestion is allowing the status quo to be maintained. Is the FSA not being given powers to regulate mortgages because the current model of consumer protection in mortgage sales is seen as broken?
If so, how is it adding value if it simply maintains the status quo?
It appears that CP146 was completed some time ago and was delayed pending the release of the Treas-ury's legislation enabling the FSA to act as the mortgage regulator.
A number of other consultation papers bearing later numbers were issued in July before the arrival of CP146.
Even if this is the case, I find it hard to understand why no reference is made within CP146 to the extensive proposals within the Sandler report.
If CP121 has some good ideas but lacked practical reality, the Sandler report contains some very valuable suggestions on how to achieve a more equitable environment both for the consumer and marketplace practitioners. Sandler is not perfect and there are elements of the report that will need further attention to be fully workable.
Why is there no reference to any of the Sandler proposals in CP146? If we are going to have a consultation process, should this not be in respect of all the proposals currently on the table rather than just the ideas put forward by the FSA? Could it be the FSA is suffering from the “not invented here” syndrome? It is difficult not to reach such a conclusion reading this document.
Reading Sandler, I thought that his proposals for the investment industry could be easily adapted for the mortgage market.
It would be unfortunate if the FSA does not try to accommodate the best ideas from both, regardless of their source.
CP146 introduces the concept of a non-advised filtered sale. This is an approach that would lend itself very well to the internet and other digital media but it also brings with it significant dangers.
The way in which these filters are applied can clearly influence the ultimate product that is presented to the consumer. If the resulting table includes any ranking at all, it is difficult to think that the consumer is not going to believe they have received some level of recommendation.
This must be an area where some conditions should be imposed, yet the FSA says it has discarded the ideal of specifying the acceptable questions in the form of a decision tree.
Do I detect a 180-degree turn? So decision trees are not practical for mortgages because they are too complex yet they are OK for pensions?
Yet in CP146, the FSA suggests that choosing the wrong mortgage is less of a problem than choosing the wrong pension.
Decision trees could play a valuable part in aiding a consumer's understanding of financial products but they are best used in conjunction with a professional adviser or a highly sophisticated analysis program that can accommodate the full complexity of a client's needs in identifying the options available.
This brings us neatly to the question of the FSA's own internet-based mortgage comparative tables. These, apparently, are to have filtering questions. Perhaps now we see why they want a non-advised definition for filtered sales.
As I understand it, under the Financial Services and Markets Act , the FSA is not allowed to give financial advice itself so if filtered questions were considered a form of advice, the FSA tables would be in breach of its own enabling legislation. Well, that is a good reason to exclude controlling such filtering isn't it?
The FSA has, by its own admission an unparalleled level of power to control this industry. It has a duty to wield such power with great care. Is it not a necessity that an important element of such care must be to deliver joined-up thinking across all the areas that it regulates?
If it is, then it has to be said that, on the evidence of CP146, the FSA is woefully failing both the market and, most important, the consumer.
Ian McKenna is a consultant and director of the Financial Technology Research Centre, which works for a wide range of industry organisations, life offices and technology companies, including Microsoft and The Exchange. He can be contacted by email at email@example.com Tel: 020 7935 2599