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FCA’s execution-only advice rule changes could cut adviser income by £11m

  • 08/05/2019
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FCA’s execution-only advice rule changes could cut adviser income by £11m
The Financial Conduct Authority’s (FCA) changes to mortgage advice rules encouraging execution-only could mean up to an £11.8m fall in income for brokers.


The regulator is estimating that execution-only business could take a further 13.5 per cent to 27 per cent of the new mortgage market following its advice rule changes published yesterday.

The FCA estimated this would provide “savings to intermediaries” of between £2.7m and £11.8m in providing advice.

However, as most execution-only business is currently completed direct through lenders for no fee, continuing this arrangement for these cases would mean a reduction in broker income by this value.

In its cost benefit analysis of the CP19/17 consultation released yesterday, the regulator also said advice firms would likely face one-off costs of £1.9m and ongoing costs of £4.6 to £5.2m per year.

The FCA also suggested consumers would save between £100.1m and £114.4m per year in interest from buying cheaper mortgages – however, its research showed that consumers were no better than advisers at choosing a cheaper mortgage.

And the regulator failed to include the potential costs of consumers buying unsuitable products and not having protections to fall back on in its analysis.

Mortgage Solutions has contacted the FCA for comment on the points raised by the consultation.


‘Changes retain much of MMR’

In its paper the FCA noted that around 70% of pre-Mortgage Market Review (MMR) mortgage sales, excluding internal switches, were advised.

At present only around three per cent of mortgage sales are completed as execution-only without advice.

“If we returned to the pre-MMR advice and selling standards this would suggest a 27 percentage points (ppt) reduction in the proportion of consumers receiving advice,” the FCA said.

“However, our changes retain much of the MMR approach and there is uncertainty around the development of tools to help consumers choose and buy mortgages.

“To create a range to reflect the uncertainty, we estimate half of the reduction of returning to the pre-MMR standards i.e. 13.5ppts.

“Using these estimates, and our estimate for the cost of advice, we estimate the savings to intermediaries to be £2.7m to £11.8m per year,” it added.


Conservative approach to costs

As far as costs to advice firms to implement the changes were concerned, the FCA said it took a conservative approach in estimating these costs.

It expects one-off industry-wide costs of familiarisation of approximately £700,000 and one-off legal review costs to be £1.2m.

It also estimated ongoing costs of the price checking and recording requirement to be £4.6-5.2m per year.

“We expect that where intermediaries are within a network, some of this activity will be undertaken by the network. This would suggest that we have overestimated these costs,” it said.


Possible consumers choose worse-value mortgages

For consumer-related costs and savings, the FCA noted that the proposals were likely to lead to fewer consumers getting advice and more buying a mortgage through execution-only instead.

“It is therefore possible that consumers would choose worse-value mortgages without the help and guidance of an adviser,” it said.

“Our evidence suggests that this is highly unlikely to be a large concern as we are devising the rules to remove advice only where it is least likely to be making a difference.

“Our Mortgages Market Study (MMS) found that advice had little impact on the average cost of the mortgage purchased for those consumers who would not have got advice had the MMR not been implemented.

“That is not to say that advice does not have an important role in the mortgage market for other consumers looking for a mortgage.

“We also note that the changes made as part of the MMR did not seek to prevent consumers choosing to buy mortgages without advice and did not identify harm from consumers choosing to do so,” it added.

The regulator estimated there are between 700,000 and 800,000 advised intermediated mortgage sales per year, and said:

“We note that these savings could represent transfers from firms to consumers,” it said.


The proposals

The FCA is proposing changes to its mortgage advice rules to make it easier to offer execution-only options to borrowers and to equalise treatment of advised and execution-only sales.

It will also require mortgage advisers to tell customers why they have not recommended a cheaper product.

Industry reaction was cautious, with some highlighting that removing centrality of advice was a ‘detriment to the public’.


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