News that the Financial Services Authority (FSA) will be regulating mortgage advice from 2004 has hit the industry in different ways. Lenders are relieved they will no longer be responsible for the actions of the armies of advisers they transact business with, and the mortgage community as a whole has reacted positively that advice would finally fall under the FSA’s remit, meaning the market can enjoy the benefits of a sole regulating force.
Now the dust has settled, advisers are starting to ask how the new regime will impact their business. Behind every question lies the same fear ‘ cost. But will advisers have to pay a higher price for statutory regulation?
Under the Mortgage Code Compliance Board (MCCB), fees are calculated according to the number of advisers belonging to a firm. For a one-man band, this means annual fees of £123, a firm of 10 advisers pays £1,023, so firms with over 1,000 advisers pay £7,050, plus an additional £23 for each adviser.
According to Brad Baker, head of communications at the MCCB, basic fees are likely to increase.
‘One of the key issues advisers should be aware of is redress. Under the Mortgage Code, advisers belong to the Mortgage Code Arbitration Scheme, but they only have to pay if they need to use it. This means the majority of advisers do not pay anything. Under statutory regulation, all advisers have to join the Financial Ombudsman Service (FOS), and this has a compulsory levy to pay on top of the FSA’s basic fees. Advisers need to be aware that fees may rise.’
Alison Hoyland, spokesperson for the FOS, confirmed all mortgage advisers will have to join the FOS in 2004.
‘The amount advisers will pay to join has yet to be decided. Membership fees could be calculated in two ways ‘ either by the amount of business they transact, or by the number of advisers in each firm. It is more likely to be the latter method as this is the way IFAs are currently charged. Whichever way, the industry will have to consult on the decision and show what they will be charging,’ she says.
The revised 2002/2003 FOS charge for IFAs stands at £40 per adviser, with a minimum levy of £100. If you need to use the service, there will be an additional case fee charged on a ‘pay as you go’ basis. To demonstrate how much case fees will cost members, just 50% of the FOS’s total expenditure is met by general levy ‘ the other half is made up by case fees.
Current costs for IFAs could have been higher if the FSA had had its way. Before consulting on the current fees in a consultation paper (CP119), the FSA originally proposed a fee of £362 per adviser, instead of the revised £40. Respondents stood firm that this figure was too high, bringing the figure down to its current level.
What advisers will have to pay remains uncertain. However, one lesson that should be learnt from the experience of IFAs is to ensure opinions are heard if the level of charges the FSA proposes seems unreasonable.
A further blow
Nick Baxter, managing director of Mortgage Promotions, feels certain advisers will have to pay out more in fees to the FSA than they are currently paying under the MCCB’s scheme.
‘The MCCB’s budget is £4m and, the Treasury said in its consultation the FSA’s budget will be £32m. With the current level of advisers, this means each adviser will have to pay around £2,500 to raise the FSA’s funds. The cost will go up. And this is in addition to the fees that will be charged by the Financial Ombudsman Service,’ he says.
However, Stephen Smith, director of housing and marketing at Legal & General, says lenders will ensure it is not advisers who have to pay the price for increased regulatory costs.
‘It is in the interest of lenders and financial services companies to ensure their distribution is happy and well-fed. I think the increased costs will be passed onto the customer through higher procuration fees, or via an adjusted procuration level on financial services products in order to make sure that the distribution stays there and advisers remain able to sell mortgages and related financial products,’ he says.
Nick Caplan, chief operating officer at IFonline, says we might even see a complete overhaul on commission methods.
‘Whether the fee type arrangement will remain, whether this will need to be broken down in a way that consumers can understand it, or whether this fee will come straight from the consumer is a significant matter of debate at this point,’ he says.
When it comes to compliance costs, Charles Haresnape, head of mortgage sales at NatWest, recommends joining a mortgage club or using a trading platform to mitigate costs. ‘The key is to use an approved mortgage sourcing system, trading platform, or club to help ensure documents are compliant. This will absorb some of the cost, rather than trying to do it yourself,’ he says.
Caplan says unless advisers make use of technology, compliance costs may be too much for many to bear. ‘There is likely to be an increase in the level and effort required to stay compliant in the new regime. It is unlikely this effort will be satisfied solely though manual means. If you did try to do it manually ‘ which I am not convinced is possible ‘ there will be increased costs incurred by advisers. Trading platforms will have a significant role in mitigating these costs.
‘Advisers will have to rely on technology to provide include electronic storage of data and tracking and pulling that data when you need it. When you look at the proposed regime, information and actions need to be shared between a number of parties ‘ consumer, adviser, packager and lender ‘ the only way you can do this in a cost-effective way is through technology, ‘ he says.
For smaller intermediaries, joining a network could make the difference between being able to branch out into new areas of business ‘ such as protection ‘ or not.
Chris Baker, head of product management at The Exchange, says: ‘Smaller brokers are going to have to join some sort of trading platform or network. It is not cost-effective for a company like Scottish Provident, for example, to do business with a small broker who deals with half a dozen cases a month. But if you work through a network, everyone is happy. Providers have a single point to pay commission to and advisers get higher rates of commission due to volume levels.’
Most networks provide an ideal support mechanism for advisers to move into new areas of business. Mortgage Promotions, for example, gives members access to building and contents insurance, mortgage protection, solicitor recommendations, non-investment life products and is soon to introduce travel insurance and private medical insurance.
Advisers can also look to sell different product areas to existing mortgage customers. Haresnape says self-employed clients can provide a lucrative customer base if advisers initiate further sales.
‘There are 11 million self-employed people in the UK and this sector is rapidly growing. Most advisers with self-employed clients will already have arranged their mortgage, but they need to ask whether they are getting the best deal on the commercial side too. Advisers can double their income by ensuring they have the best commercial mortgage. Then they can earn extra commission from related sales such as business insurance, offsetting the added cost of regulation ‘ and perhaps earning some extra profit,’ he says.
Now general insurance is also falling under the FSA’s remit, there will be no extra fees to pay if mortgage advisers want to transact this type of business. Previously, general insurance was to fall under the remit of the General Insurance Standard Council (GISC), for which there is an annual membership fee. But as general insurance is to come under the FSA’s regime, GISC membership will remain voluntary, even though its original rulebook looks likely to mirror new regulation under the FSA.
Along with term assurance, buildings and contents insurance is an obvious and easy sale for mortgage advisers. Commission levels are not huge, but this type of sale can provide a steady and predictable flow of new income.
‘These days technology is such that you can quote for buildings and contents insurance and buy online, without any paperwork in about 15 minutes. You probably earn about £20 to £30 in commission ‘ another 15% on top of your earnings. Term assurance is even more lucrative,’ says Baker.
Current market conditions also mean protection sales can provide high earnings for advisers.
‘Even in the IFA market, advisers are moving more towards protection as it is much more profitable than the investment market at the moment. Commission rates on protection products are still very generous when compared with other products and are ideal for selling on the back of a mortgage. There is no reason why an adviser cannot build up a relationship with their clients to provide advice on more than just a mortgage,’ adds Baker.
To maximise revenue opp- ortunities, Smith recommends advisers take the time to carry out a complete financial needs analysis of customers at the point of the mortgage sale.
‘The time someone takes on a mortgage is an ideal time to discuss all their financial needs. It isn’t wise to take out insurance just to cover your mortgage. Advisers should be looking at family protection needs over and above the mortgage. This could be in the form of family income benefit, critical illness cover or healthcare. Customers are receptive to these products when arranging a mortgage and this can earn advisers a reasonable living. Referrals for conveyancing and surveyors can also earn advisers extra commission. The challenge is for advisers to show they can add value to the sale,’ he says.
We are unlikely to know what fees the FSA and FOS will introduce for mortgage advisers until at least the end of this year.
The price advisers will have to pay to stay compliant under the new regime will not be known until the scheme is up and running.
Advisers cannot afford to wait until 2004 to think about how these costs may affect them and how they can bridge the gap with new income streams.
As Baxter says, whatever the true cost of regulation, it is best to be prepared: ‘Procuration fees are a one-off payment, but if advisers have customers paying premiums, they will get paid on a continual basis. If advisers start looking at new business now, they will have a substantial pot of renewal business by 2004. The time to act is now.’
Kirstie Redford is deputy editor
Annual fees to the FSA and FOS might cost advisers more than they are currently paying to the MCCB.
New compliance costs can be mitigated if advisers join a network, trading platform or club.
Advisers are well placed to move into new product areas, such as general insurance and protection to increase their income.