Since 1986, when the Financial Services Authority (FSA) decided that ‘polarisation’ was needed to ensure full client protection, the financial services and mortgage market place has not, and will probably never again, see such a sea of change.
In their wisdom, the Government and the FSA has decided ‘ in contrast with the majority of brokers in the field ‘ that polarisation has not worked and that the time is now right to address other areas too, including the regulation of mortgages and general insurance.
There is no point in being too defensive on this subject. Everyone in the industry needs to decide how they are going to deal with these massive developments in order to ensure they remain in business.
Some have already made dramatic statements on how they believe the market will look post regulation. Several large mortgage clubs, including Mortgage Next and Mortgage Intelligence, have already announced that they will apply for full principal status under what will be a continuing drive towards an Appointed Representative (AR) regime. And because there will be few lines drawn between the numerous elements of business (financial services, mortgages and general insurance (GI)) the barriers preventing others moving into other markets will also be removed.
Therefore, what we will see is a dramatic flattening of these elements. Lenders will move into GI, and life providers, knowing that a large part of their business stems from the mortgage market, will want to protect their market share and will also want to join in. Penetration and market share will be the drivers of the future and the FSA, via the AR system, has made this a certainty.
Deciding factors
So is this the end of the truly independent IFA or mortgage broker? Not necessarily. Certainly, the increased costs of being independent will oblige many firms to do their sums and decide on the best route forward, but many, especially the niche practitioners, will resolve to remain so. The deciding factors will be costs ‘ stemming from network/AR fees, Professional Indemnity (PI) insurance and internal compliance provision ‘ and true self-determination.
We are in the early days of a maelstrom with apparently little that can be done to change the overall destiny that the Government and the FSA has created for the sector. Certainly, the primary elements and structures are clear, but the FSA still needs a lot more feedback. However, one positive to emerge is that it has been brave enough to admit that it does not have a great deal of knowledge or experience in the mortgage and GI markets and has shown that it is a ready listener.
The example of the Association of Independent Financial Adviser’s (AIFA) success in introducing the ‘menu’ system, rather than the defined payments system, is an indication that fundamental issues can be resolved positively. Therefore, the groundswell of opinion supporting full regulation of second charge lending, the buy-to-let industry and, of course, equity release schemes is promising and there are noises being made from above that the FSA has heard the message and that we should all watch and wait.
The need for a dynamic voice in ensuring the future of independent financial advice is paramount, and the AIFA and its newly fledged subsidiary, the Association of Mortgage Intermediaries (AMI), are in the right place at the right time to do the job. Their voice needs to be strong and determined and they will certainly need all the support they can get from brokers, irrespective of their status.
Current concerns
However, the issues they face are daunting. The continuing deluge of Consultation Papers from the FSA require a great deal of time and feedback in order to take the thoughts and arguments of practitioners back to the regulator.
On the mortgage side the FSA is still to reply to the responses to CP146 concerning the issues of filtering, equity release, real time promotions and comments on the obvious exclusions relating to second charge lending and buy to let.
In the meantime CP174 has raised various concerns, primarily surrounding the costs of remaining in the industry. The three key elements are the burden of responsibility on ‘Approved Persons’, minimum requirements for PI insurance and Capital Adequacy costs.
All of these have cost implications which in turn could force independent advisers into the arms of ‘umbrella groups’. It is just a question of degree.
The current concern as to the lack of fairly priced PI insurance in the market has been acknowledged by the FSA and we are led to believe this is being investigated.
Capital Adequacy (a minimum of £5,000 or 5% of turnover) may cause some alarm as it appears to duplicate the cover provided by PI insurance and, of course, adds extra financial pressure on firms, at a time when costs are increasing naturally, to put the relevant compliance processes in place.
Under the recent CP180 the FSA has given an indication as to the likely costs of registration. The most startling issue is the burden being placed on medium sized firms (over £1m and up to £25m turnover) whereas the smaller and larger firms seem to have been treated more fairly. With only three bands of fees there is a very strong case for the FSA to look to increase the number of bands to make the arrangement more equitable, especially for those firms at the lower end of the £1m’£25m rung.
A summary of the financial effect on the average broker firm is as follows:
l Installation of compliance processes: the vast majority of firms will have to carry some additional cost and may even require additional staff
l Registration fees: while the smaller firms seem to have been catered for, there has to be some concern for mid-range businesses
l PI insurance: premiums are high due to the lack of capacity and concerns over rising claims
l Capital Adequacy: some firms will need to reorganise and perhaps even seek new working partners in order to ensure they have the financial strength to meet not only this requirement, but also the full extent of the changes ahead.
Perfect partners
Brokers who wish to stay in business need to consider their options seriously and if they decide that they can no longer afford to maintain true independence, then the best option may be to find a partner.
Recent history has shown that finding the right partner is full of pitfalls. The collapse of some mortgage packagers and the issuing of law suits against a number of mortgage networks shows that utmost care must be taken to get it right first time. Failure to do so may have all sorts of financial and compliance consequences.
From a brokers point of view the most important considerations are to protect themselves, via their income and costs, and protect their clients. These two points are stated very deliberately as the client will be king in this new market.
Protecting income via commissions and procuration fees as well as payment for services rendered is one thing, but there is also the sensitive issue of ensuring that client needs are more than adequately catered for via a partner ‘ a network, AR principal, packager or referral site. Quality of service must be very high to ensure that the broker’s goodwill and client relationship is not undermined but rather strengthened. A lost deal today could mean the loss of the client and all forward income into the future.
The broker has to get it right. At the very least they need to run a checklist when searching for the right partner. This includes obtaining the latest audited Financial Statements from Companies House and running a corporate credit check as well as asking for bank and accountant’s references.
Under closer observation it is also advisable to have a more detailed checklist that will include comparing the costings and rewards across the whole of the market and remembering that big is not always best ‘ smaller networks often have better working relationships. Look for a ‘low maintenance’ arrangement where you can get on with your own job and take personal references from brokers currently using the services of your target partner. Finally, do not get locked into any time restricted or business volume contracts. What is right today will almost certainly change in the next year or so.
The FSA needs to be told not to force brokers down the AR route. However if you think this is the right choice then at least ensure that all avenues are explored.
key points
The FSA has shown that it will bow to concerted pressure.
Brokers need to fully understand the consultation process in order to work out the cost implications
Becoming an AR could enhance the broker’s proposition.
