A View from the Regulator – Edinburgh
We were pleased to welcome Duncan Gracie, Manager Small Firms Division and Geoff Rae, Associate from the FSA’s Edinburgh office, together with John Bourbon on 28 July at the Edinburgh office of Deloitte. Andrew Murray, Regional Chairman chaired the proceedings. Our thanks go to Deloitte for their hospitality in hosting the event.
The FSA’s Edinburgh presence had been low-key and there was a relatively small team doing mostly desk based monitoring. The team will now double in size from 20 to 42 and they have room for more. The new office covers the whole of Scotland and Northern Ireland all the way down to Manchester. However the team do also carry out visits further a-field when required and London based colleagues also come North when required.
Working in partnership is not a new FSA policy but working with firms to ensure best practice is put in place is something FSA want to achieve.
Geoff Rae began by pointing out that small firms under regulation had doubled from about 11,000 to 22,000 firms. Small firms present the dual problem of being unable to spend a great deal on compliance and their geographical spread. FSA are making a conscious decision however to move away from mainly desk based monitoring to getting out in the field. Roughly once a month they will spend a whole week in an area followed by road shows and surgeries. So far this year they have made contact with over 5,000 firms (about 25% of the total population).
FSA take a risk-based approach, assessing firms using thematic work sorted by the highest risk to FSA objectives. Details from the RMAR and PSD information is used to risk profile a firm, market or product for closer attention. In tackling these risks there are basically four approaches: putting out a message to firms; changing a policy (on mortgages and general insurance FSA still have an open mind); giving out a consumer message (e.g. on the risks of lifetime mortgages) and taking action against firms where necessary.
FSA are very much hoping PSD quarterly returns will avoid having to make ad-hoc requests to firms for information.
Current mortgage priorities include mortgage disclosure, financial promotions, data submission and selling practices including lifetime mortgages and the sub prime market. For general insurance the priorities are similar with a concentration on protection policies where there has been a lot of concern about poor value and the suitability of these products.
The industry has moved a long way but knowledge is patchy and record keeping quite poor with three firms having action taken against them. In perimeter work FSA are trying to achieve a level playing field and there has been a massive exercise where of 450 firms checked only 11 were operating outside the perimeter.
FSA have looked at the lender, sourcing firm and small firm. What they have found is that it is the quality of input that makes the difference and it is usually the small firm that is getting it wrong.
IDDs is another area where firms are getting it consistently wrong with too much additional text not required by the rules and many firms adding a signature and date, which is not permitted. About 80% have 5 or more minor errors and this undermines confidence in the system with the consumer unable to shop around. KFIs should be no more than 5 pages although many are much longer.
With financial promotions FSA have significantly increased resources and profile with over 30 people working on them at Canary Wharf. One of the main concerns has been the systems and controls applied by networks to their appointed representatives.
In late September or early October there will be further information on the sub prime market on the FSA website.
The authorisation project has resulted in categorising firms, with some put as high risk as they are new to FSA. The more serious failings relate to record keeping and disclosure although they still find at least one firm in every region with unqualified staff. Record keeping is a major problem, particularly the lack of fact find information and falsifying of income details. Lack of evidence of income has led to 3 firms being disciplined.
Equity release is a higher risk product but one in its infancy as it has not fully developed yet and much more business is likely as time goes on. It is a higher risk product as it is both complex and aimed at older more vulnerable clients who will find it difficult to understand. FSA have also conducted 42 mystery shops using two scenarios of low level of income designed to encourage referrals to other sources of finance and the second scenario where a much larger sum is required. The results were very disappointing with large percentages of firms failing to ascertain state of health, preferences for estate, existing savings and investments or monthly outgoings. It is not clear how an adviser could determine whether a lifetime mortgage were suitable and the downside is not explained adequately.
Encouraging excessive borrowing is common and investments straight into bonds, which is quite an expensive product. Income producing products are needed and this market is likely to grow. There is a surprising use of loan trusts and many IHT situations are made worse with clear examples of unsuitable advice given. These findings are qualitative rather than quantative and too early to tell whether really widespread but FSA have been criticised for being slow to react in the past so they will have to take the information received seriously. These products should not be regarded as ‘toxic’. FSA are conducting further work and will revisit in a few months.
FSA are encouraged and heartened that firms wish to raise standards and, as the honeymoon period for mortgages and insurance ends they will focus on how firms are shaping up against the standards.
There followed questions and answers including one on non-advised sales. This is not an area FSA have focused on but findings indicate that whilst some firms have good scripted questions others have scripts that could not reasonably lead you to a list of products and providers.
Self-certification has been looked into and FSA are expecting advisers to validate their income data. There are examples of evidence of income being taken then added to without explanation in breach of the rules.
Equity release is something to have a positive view of. There will not be any heavier requirements for competence like pension transfers and it is not likely to come out as a major scandal. However the market is bubbling along at the moment but with the lack of final salary schemes and an aging population it is likely to take off in future. If FSA looks at it early enough hopefully future problems will be avoided.
A question was asked about excessive charges. It is not an area currently being focused on but a personal view was that it would be something looked at in the broader picture like under the TCF agenda. Certainly early repayment charges can be excessive with some charging as much as £14,000. Commission bias in mortgages was another question and something the FSA has considered and may look at as a separate project although there is no clear evidence of it yet.
Asked if firms still need to complete nil RMAR returns the answer was yes but future returns once submitted will only make available sections previously completed. Asked about regulating buy-to-let and secured lending FSA are not aware of anything coming out from on high but it would be something for Treasury to legislate on such as the current legislation pending on home reversion.
What about the issue of responsible lending and suitability of repayment vehicles? Again this is not an area where FSA are currently conducting work although it was considered as a possible priority and is certainly on the radar for a future review. However responsible lending is something that can emerge from other project work and expect to see the results of this work being published in September. August tends to be a quiet month for key messages.
Record keeping standards are certainly an area of concern and the question was raised as to how FSA could help improve standards or give examples of poor standards. Fact finding for mortgage firms is still often done on the back of a fag packet. A fact find for mortgage customers although not a specific requirement of the rules may be very useful. Sub prime lending is a good example where there is often not enough information in particular three areas; 1 a lack of information on poor credit history, which can lead to recommending unsuitable products; 2 details of existing mortgages especially surrender penalties is often missing and 3 advisers frequently fail to assess the needs of the client.
John Bourbon gave a presentation on the benefits of being a member of the Compliance Institute and the future plans to improve the professionalism and competence of compliance staff as per the Institute’s Mission Statement.
This was an interesting and informative seminar, which more than demonstrated the benefits of membership, as expounded by John. The next meeting in Edinburgh will be on 21st September for the Compliance Institute Mortgage and Insurance Regulatory Forum. If any Scottish members were interested in joining the Scotland Regional Committee Andrew Murray would be more than pleased to hear from you.
Opening of the FSA’s Edinburgh Office
The Compliance Institute was pleased to be present at the opening of the FSA’s Edinburgh office on 28th July. The Compliance Institute was well represented with John Bourbon, Brian Hewitt and Andrew Murray. Anthony Smith also attended from the South West region, as an HBOS representative. A reception in the new offices the FSA had only that week moved into with invitations to representatives from local regulated firms. FSA broadened the invitation to all firms despite the staff based in the office mainly dealing with small firms. The event was as much about meeting local firms as raising the profile of FSA in Edinburgh.
The offices were light and airy and Clive Briault assured us, were secured at a very reasonable cost. Both Clive Briault and Stephen Bland gave brief presentations emphasising FSA’s commitment to Edinburgh as a major centre and paying tribute to the work done on financial education to improve consumer awareness and understanding of financial products in Scotland.
The offices contain several meeting rooms that FSA can use with firms and will make their office available to London based staff working in the area. They also hope to introduce improved video-conferencing facilities that may be used with firms dealing with FSA colleagues in London where appropriate. There is also a conference room that will be available for training events and we have already secured an invite for the next Compliance Institute Mortgage and Insurance Forum on 21st September.