There has been a lot of column inches of late dedicated to the issue of future commission disclosure for all those products which could have been, but were not, recommended to clients. This has come as something of a surprise to many advisers, being part of the requirements of the European Mortgage Credit Directive (MCD), which will be introduced in March next year.
The news for advisers across the piece is that this disclosure of commission issue will mainly affect the directly authorised (DA) sector of the market because DA brokers can, and do, use a variety of distribution routes to market. However, when you actually look at the detail of how DA clubs/distributors work, nearly all of them have the same gross/net procuration fees.
For certain lenders, a DA distributor can exercise flexibility and take more of a competitive stance within their business models by paying away a larger proportion, or all, of the gross fee paid to them by that lender, but these are few and far between and can quickly and easily be identified. Paradigm, for example, produces a regular update sheet on comparisons between all of these club/distributor routes as part of our competitor watch and so this could easily be adapted and provided for use by advisers in client-facing discussions, therefore satisfying the need for commission disclosure information if the customer does request those details.
Having now started to talk to our member firms about the MCD and the changes, most feel this will not be an issue. Currently the remuneration a firm receives for using a particular lender is reported on a KFI. When the KFI is explained, the circumstances where a client has decided to reject a broker’s advice based on the commission received by them for a certain product or where the client has requested to view all commissions still have yet to occur. A review of a firm’s rejected advice process or execution-only cases since the implementation of MMR would probably back this theory up.
The bigger issue behind disclosure of remuneration to a customer, as far as we can see, is that the new European Standard Information Sheet (ESIS), unlike the KFI, document must not include any payment to a third-party; for example, it excludes commission to a Principal, but firms can include this in other documentation and currently we are telling our members they should be doing this.
There has also been some debate about advisers using the ‘independent’ title and again I think this has also been slightly misunderstood and some in the industry are getting confused and wrapped up in previous RDR legislation. Some lenders choose to deal with limited distribution or do not deal with intermediaries at all – this does not mean that a broker firm should have to remove the word ‘independent’ from their branding because that lender chooses not to deal with them. They will be able to continue to use the term ‘independent’ in their service proposition, name and branding if they look at a sufficiently wide and representative selection of lenders within their scope of services. Firms will therefore need to consider their scope of service and whether they will offer first charges only, first and seconds and give the advice themselves or potentially outsource to a seconds broker firm.
This means if they are using the term ‘independent’ and, for example, they outsource seconds to a seconds broker they will also need to know that the seconds broker firm is offering a sufficiently wide representative selection of second-charge lenders to meet that independent definition. If a firm does not consider the majority of lenders they can still use the term ‘independent’ if they do not receive any payment from those particular lenders.
Distributors, clubs and support service providers can assist DA brokers with these new MCD requirements by carrying out due diligence regularly on the specific strategic partners that they offer on their panel that may be used for outsourcing and referring clients to. There may be some more information and clarity to come on this piece as we move forward to March 2016 particularly disclosure of commission involving third-parties.