2012 may sound like a long way off, but in business terms it is just around the corner. In 2012, the Retail Distribution Review (RDR) will finally be embedded into the
financial services industry, and ahead of its implementation, intemediaries have a great deal of soul-searching, business planning, client analysis and studying to do, if they are to continue trading.
I have feared for the long-term future of the mortgage intermediary, and for many,
the RDR could be the final nail in the coffin. In June 2006, when the review was originally launched, the market was buoyant and few brokers would have thought that
the gravy train was about to dry up.
In the knowledge that less than 20% of brokers adhere to a business plan and only a similar percentage are proactive when it comes to client management, it would be difficult for the majority to anticipate what was going to happen in the market. Against such a backdrop, it is highly likely that the six fundamental elements of the RDR will cause concerns to the majority of brokers accustomed to earning their income on the back of a distribution model driven by providers willing to pay inflated commission rates to increase market share.
I do not intend to go into the detail of the review. You can do that yourself, by adding to the huge number of hits on the FSA website, though I suspect many of those will have been from consultants, journalists and the strategy and compliance people at the organisations that will be affected between now and 2012, rather than mortgage intermediaries. I would like to concentrate on the six areas in which the FSA is seeking to make the consumer’s lot a happier one, or at least a less complicated one.
Clearer communications.
A more bespoke market.
Greater confidence in the
professionalism of the industry.
An honest and transparent remuneration
structure, in which all influence of
product providers is removed from the
process of setting adviser remuneration.
A regulated framework that encourages
customers benefiting from innovation
(so-called guided sales channels).
This confirms my view that the true professional will survive and prosper in the
new environment, while many who have just played at business will become victims
of change.
No element of the industry will be immune to the need for change but the IFA and mortgage broker will be seriously effected, particularly network members. Every firm will need to reconsider its future business strategy and determine how it will migrate from being a distributor of products to a retailer of professional services.
For many, this will pose challenges, not least how to develop their own business proposition, something many have not approached before. It might be that they will require further qualifications which will be time-consuming and can be costly. It must also be remembered that traditional commission-based models will soon be untenable and it will not be long before many product providers move to factory gate pricing. With that will come a transitional period when revenue streams will be interrupted and brokers will need to be able to fund their business during that time.
Enhanced commission terms will disappear from the network offerings as their training and support functions will inevitably come under the spotlight. These changes will again raise the perennial question: “does your network add value to your proposition (if you have one)?” Hard times lie ahead for the networks, especially those with ARs.
In conclusion, the mortgage broker and IFA markets must now start making business changing decisions. They must expect a serious review by their traditional paymasters of their distribution strategies, and be prepared to see the potential re-emergence of the bancassurance model (could Santander become all-powerful?).
The recession has already ravaged the profession. The RDR will inflict further damage. If you have never believed that you really needed a professional approach
to business planning and client and partner relationships then now is the time to start
believing.
