We were pleased to welcome 3 FSA speakers at Deloitte in Bristol on 8 March. Our thanks go to our hosts who welcomed our South West Chairman Mark Ross from Ernst & Young.

Chris Paske who attended CIMIRF in Leeds last year went through what FSA had done in mortgage and general insurance regulation over the past year. The M & GI programmes followed a thematic approach choosing an important issue and investigating it across a sample of firms e.g. Disclosure and PPI. The outcomes of the GI programme aimed at consumers having sufficient information to buy on a non advised basis, understanding the key features, being recommended suitable policies and having their claims dealt with promptly and fairly.

FSA looked at integrated regulatory reporting, perimeter regulation, disclosure, payment protection insurance, controls over appointed representatives, client money, claims management, conflicts of interest and critical illness, which are still ongoing.

On the perimeter over 1700 firms were looked at and only handfuls were wilfully acting illegally. The main areas of concern were technical issues, insurance backed warranties and what is covered by each regulated activity. On disclosure FSA are looking to raise standards. There were poor quality of style and presentation, not all information included, unusual exclusions not given due prominence and product descriptions poorly worded. IDDs raised concerns where they departed from ICOB content and format although no disclosure documentation was deliberately misleading. However, less than one third of Primary Insurance brokers used the FSA template whereas a higher number of secondary firms used the FSA template.

PPI selling practices were poor with a lack of proper compliance records. There was a risk of inappropriate sales, over reliance on product documentation, poor quality and timeliness of product and price disclosure, the level and structure of inducements and targets for sales staff could encourage misselling and variable monitoring.

Networks were an area of concern particularly those with over 100 members where there were inadequate staff to ensure compliance. It is not just the feeling of compliance but the ability to demonstrate compliance that matters.

A robust approach has been taken with firms who fail to maintain proper records for client money. Issues included deficits in client money accounts, problems with calculations and issues around the correct trust status of client money accounts.

On conflicts of interest the objective is to ensure effective management and not elimination of conflicts. It is in the firms’ interests to manage conflicts effectively and FSA’s ongoing role will be to monitor how firms are applying these principles to the management of conflicts.

For mortgages the FSA have looked at perimeter, disclosure, IDDs, KFIs, lifetime mortgages and payment protection insurance sold with mortgages. The main areas of concern included providing the right information to customers, insufficient information being collected, assessment of affordability and poor record keeping.

Wither perimeter work over 600 firms were contacted and 450 visits carried out. Nearly all firms were legal due to the fact lenders will not deal with unauthorised firms. The purpose of disclosure is to help consumers understand the service offered see clearly the features of the product and shop around to compare products and services. IDDs were often not issued when first anticipating giving personalised information and advice and if by phone within five working days. Disclosing independence was also a problem. KFIs were found to be too long and differences between pre-sale and offer letter KFI. The name of the party receiving commission was often omitted and formatting issues plus the timing of documents being sent out. Firms need to check the accuracy of input to produce the KFI, ensure the document is issued at the correct time and review project findings and templates used on website.

Life time mortgages are viewed as a higher risk product aimed at older consumers who are more vulnerable, they are complicated, more difficult to understand and difficult to unwind. The press release issued in May was damning with advisers failing to ask fundamental questions so it was not clear whether the lifetime mortgage was suitable. Often larger funds were released than necessary and some were worse off as a result. Borrowers borrowing at 7% and reinvesting at 3.5% was also a concern. There will be further work on this next year. Firms should visit the FSA website put appropriate procedures in place, explain the downsides, do comprehensive fact finding, suggest independent legal advice and involve family where appropriate.

PPI also affects mortgages with a lack of controls found, failings in the quality and timeliness of product and price disclosure, single premium cancellation, inadequate training and supervision of sales staff and inadequate checks at some firms that the customer is eligible to claim. Most firms did not assess suitability adequately including needs and exclusions for advised sales and half the firms offering non-advised sales did not have adequate controls to prevent staff giving advice.

The mortgage industry had adapted to regulation. Some business models were not economic with unrealistic assumptions about market growth, knowledge of the requirements is still patchy although there are examples of good practice record keeping should be better and action has been taken against some higher risk firms.

Jackie Doyle-Price from FSA gave and informative talk about treating customers fairly (TCF). It is based on FSA principles but does not mean the customer is always right and should encourage innovation by firms. Senior management can therefore implement TCF in a way that suits them and there are a variety of ways to do it.

The July 2005 publication raised issued that mortgage and insurance intermediaries need to consider. There will be more in the July 2006 TCF update including the product life cycle and case studies. Firms claim to be customer friendly but one well known building society found some aspects of their product development did not comply with TCF principles.

There should be enough information to enable an informed decision, a clear outline of the product characteristics and communication of the details so customers can understand the implications of things like long term tie-ins. The scope of service being offered needs to be made clear and there should be no undue pressure. The relationship between product providers and distributors needs to be revisited in the light of TCF. Firms’ responsibilities in respect of each other have a role in delivering TCF.

Complaints management is an intelligence test for how firms treat their customers fairly. Many firms do not have a complaints management system and new procedures can lead to the identification of more complaints.
There will be further thematic work on the quality of advice, responsibilities of providers and distributors, management information, progress made by firms and specific work on mortgage and general insurance. The outcomes for TCF should lead to more repeat business, greater confidence in the industry, fewer rules, and fewer complaints upheld by FOS and are good for consumers and for firms.

When asked about fairness over time we were reassured there was no intention to create retrospective legislation. There will be further work on industry codes though FSA do not wish to create more rules by the back door. It may be difficult for some firms to comply without check lists but FSA do not lay down specific rules for this. There is a consultative group with FOS that considers TCF issues. Even if firms think they are treating customers fairly when investigated systematic unfairness can be founding processes. Firms need to think about embedding TCF in the culture of the firm. For example on intermediary cancelled its relationship with a product provider because of its misleading literature on guaranteed returns.

Simon Jackson talked about FSA priorities for the coming year. He explained the role of the Retail Intermediaries Sector team with its aim to move FSA away from silos and provide a horizontal approach across FSA to promote cohesion, avoid duplication, pick up risks across the sector and plan to prioritise and mitigate. For example all trade associations now have a relationship manager to improve the links with the industry.

In the Retail sector a lot of work is being done with testing of improvements FSA expect to be made. If firms continue to fail they will go to enforcement. It will continue to be a year of reflection and review to test effectiveness, preparation for home reversion regulation in 2007 and the EU mortgage directive with a white paper expected in Q3 2006.

This year will be one of assessment and action. There must be improvements in disclosure and the serious shortcomings in selling practices. Records of suitability were poor with 67% of firms unable to demonstrate why the product was sold. Overstating of income is fraud and fails to demonstrate affordability. PPI sold by prime is satisfactory but store cards and unsecured loans were not. Discussions with trade associations are underway. There were a lot of problems with client money on the wholesale side and FSA are now looking at the retail side.

Supervision will be business as usual with TCF being integrated into quality of advice and the provider and distributor relationship. FSA will be looking more holistically at how risks are explained. High level governance, implementation of CRD and the review of regulatory returns are all on the supervision agenda.

There is a review of FSCS funding though it is a zero sum game as if one pays less another must pay more. Deloitte are also carrying out a review of the total cost of regulation. Preparation for MiFID is a key focus with a move to a more principle-based approach, review of conduct of business rules and the financial promotions review all tied in with MiFID rules by early 2007 and implementation in November 2007. FSA are also working on making it easier to do business with them.

FSA’s internal priorities include Arrow II training and TCF training plus increasing their knowledge of the industry they regulate. There was also an appeal for firms to consider the ’shadowing programme’ where FSA offer a member of their staff to work with a firm for one week to exchange knowledge and information though it was emphasised this would not include monitoring or reporting back afterwards. The team also invites speakers from firms to talk to 50 – 100 FSA staff about every 3 weeks as part of their ongoing training programme.

Anthony Smith FCoI