In life we are often faced with two options and in order to get the best of both worlds we feel compelled to consider a middle way. Mortgage regulation is no exception ‘ especially with regard to filtering questions ‘ but will non-advised sales involving filtering questions provide that safe, uncomplicated middle ground?
Within CP146, the Financial Services Authority (FSA) differentiates between three types of sales. The first is advised sales. This is where advice is given to a prospective borrower about the merits of taking out a particular mortgage. For the purposes of mortgage regulation ‘advice’ is specifically defined and will only be provided insofar as an intermediary gives a recommendation for a specific product. It does not apply to more general opinions, for example, that a person should make a purchase from a particular provider or that someone should buy a product of a general type such as a fixed rate mortgage. However, for the purposes of regulation, a broker could be said to have given advice if they provided a generic view of the type of product a prospective customer might purchase and then provided a narrow choice of mortgages based on information subsequently provided by the prospective customer.
The second type is non-advised sales involving filtering questions. This will involve situations where the intermediary uses filtering questions to narrow down a selection of mortgages which a prospective borrower might want to purchase. In this case this would only be classed as a ‘non- advice’ process if an intermediary has not made any recommendations concerning which product would be the best purchase for the client. The FSA expects intermediaries should be able to give prospective customers quite substantial amounts of information without being deemed to have provided advice.
Finally, non-advised execution-only sales. This process is where the prospective borrower has already decided which mortgage they want and no filtering or advice is to be undertaken. An intermediary engaged in this process would have to be regulated even if they are doing nothing more than ‘arranging’ this mortgage purchase.
At first this seems straightforward and positive, the concepts of ‘advice’ and ‘execution-only’ are understandable, and ‘filtering questions’ look a viable alternative. Any process that helps the client narrow down the choices and allows them to make the final choice, seems an ideal situation. The customer is empowered and the adviser can feel safe from any mis-selling repercussions. Furthermore, the FSA is proposing the adviser will not even need to meet the full training and competence requirements.
However, as with most rules designed to be all-encompassing things are often not as straightforward as they seem. Since CP146 was published the FSA has hosted a series of national seminars to take feedback on board and to offer clarification. These seminars were attended by many independent mortgage advisers.
Advisers attending these seminars raised a number of concerns over the use of filtering questions. These concerns fell into two camps: first, how would a customer understand this was not advice; and second, why would an adviser offer such as inferior service? Why would mortgage advisers, who are in the ‘advice’ game, choose to advocate anything less?
This raises the question of whether ‘filtering questions’ are not aimed at intermediaries at all, and it is lenders that will offer this alternative process. That would make sense as there are many ‘tied’ advisers in the UK operating on this basis, but there is always the conspiracy theory that the large lenders are at it again, dictating policy to suit their own means.
However, there is strong evidence to suggest many mortgage intermediaries do not feel this way. Many do not even offer advice at the moment and prefer to just have the information to dish out. According to the Mortgage Code Compliance Board’s (MCCB) Annual Report 2002, one-fifth of firms that registered in 2002 claimed not to offer an advice service. Most of these preferred to offer information on a range of products. And more significantly 8% of firms had moved from offering advice the previous year to information only this coming year. Is this a trend that will continue? Under statutory regulation it certainly looks like it.
So while it can be argued that ‘filtering questions’ could be more suited to the lender who only has a handful of products and sells directly to the consumer, it seems there is a significant proportion of the intermediary market that does not want to offer advice and is also looking for a middle way.
So how different are ‘advised sales’ to ‘non-advised sales involving filtering questions’? The FSA says the proposed suitability requirement when providing advice is broken down into three main elements:
l Whether a mortgage per se is a suitable product for a customer.
l What type of mortgage is suitable.
l Which mortgage and which provider best meet the customer’s needs and circumstances.
The first element involves an assessment of affordability. According to CP146, ‘the adviser will also need to assess the future affordability of the mortgage based on the consumer’s likely income prospects and any likely changes in the consumer’s outgoings or other resources.’
The second element ‘involves matching the consumer’s needs and circumstances to different mortgage features.’ Essentially this step of determining what type of mortgage is suitable can follow the same process as filtering questions.
The final element is the actual recommendation. The FSA is considering two options for rules to govern this. A simpler route may be a rule that states: ‘Consumers should not be recommended a particular mortgage if the adviser ought to be reasonably aware of another mortgage from the range of mortgages they are basing their advice upon that better meets the consumer’s needs and circumstances.’
So how much more onerous are ‘advised sales’ compared with ‘non-advised sales involving filtering questions’? This is difficult to answer at the moment, but certainly a ‘recommendation’ does not seem that onerous when you consider the FSA is not proposing a suitability letter. That leaves affordability. This could prove tricky for non-standard lending, but perhaps those clients an adviser knows are looking to borrow beyond their means (and they are growing in the current property market) simply will not get advice.
So what of other differences between these two sales routes? Look no further than chapter 14 of CP146 ‘ the Training and Competence requirements. This is where the real deciding factor for mortgage advisers could be made. The FSA is currently proposing there will only be Training and Competence requirements over and above the Commitments for advised sales (standard and high risk) and for non-advised sales using filtering questions on higher risk mortgages. So if you do not want to take exams ‘ opt for non-advised sales involving filtering questions.
Looking to 2003
We are waiting to see what effect the qualification deadline of 31 December 2002 will have on advice in the market. We are continually told that a huge number of those registered have yet to pass the exams. We could therefore find ‘information-only’ services become even more prevalent next year. If mortgage intermediaries can make this work financially and a non-qualification route remains on the FSA horizon, then what will the incentive be to take the exams now?
In the event the prospect of offering a service to the customer that could look similar to advice, without requiring the adviser to be qualified, will make this option attractive to intermediaries and lenders selling their own mortgages via the branch or telephone.
Why then have we all read some negative comments about the use of filtering questions? Surely the FSA has done a good job in proposing a viable and achievable alternative to advice? The answer to both these questions lies in Problems with Non-Advised Filtering Questions on page 90 of CP146.
The FSA recognises the problem with this process is ‘the likelihood that consumers will mistakenly believe they have received advice due to the similarity of the sales process.’
It also recognises there is a risk of consumer detriment through errors that can be made when asking filtering questions, and through staff that operate the filtering questions stepping over the boundary between advice, and non-advice without being competent to do so.
The FSA has come up with an option but it is clearly not overly confident it could work, so it is no wonder the industry is equally cautious.
Another option may be that there should be a requirement for all advisers that operate ‘filtering questions’ to be qualified to ‘advice’ standard. That way the risk of mis-buying will be reduced and the adviser is qualified to see whether the client needs a fuller advice service or not.
Many criticise non-advised sales using filtering questions, but what is the answer? The market wants a middle way, so if this is not the solution, then an alternative needs to be found. Answers on a postcard please.
James Mayne is head of strategic development at Britannic Money
Brokers will be said to have offered advice even if they just suggest a type of product and a narrow choice of mortgages.
Brokers will not be able to afford to advise borrowers who they are know are looking to borrow beyond their means.
The FSA needs to tighten up the definition of filtering questions as customers may believe they have received advice.