Execution-only costs less to deliver, it removes the knotty problem of compliance and lowers the potential cost of complaints. 

Settling for too little for too long

My view remains that a significant number of lenders and brokers are likely to take the execution-only route if the Financial Conduct Authority (FCA) rules that they can. It is highly likely that, as the industry warned the regulator back in 2012, it will be gamed and consumers are the ones who will lose out as a result. 

I was therefore interested, though not surprised, to see UK Finance claim this week that the Mortgages Market Study recommendations would not drive execution-only but would result in borrowers getting ‘the right advice for them’. 

I completely disagree. 

Borrowers in the UK mortgage market have been settling for far too little for far too long, driven by the vested interests of those few players who dominate the market. It is time for a change and a proper appreciation of what other players in the market offer.

Brokers becoming lenders

I was encouraged to see Habito announce it was launching a range of buy-to-let mortgages. This follows Molo’s launch six month’s ago into the buy-to-let sector, offering landlords fully digital mortgages. It’s fast and painless. Everything happens online from application to credit and affordability checks, security checks, valuations, product recommendations, approvals – the works. 

The attraction is obvious: with a very low-key launch and next to no advertising, Molo has already attracted more than £250m of applications through its system. 

This is clearly just the start. The next logical step is a launch into residential mortgages, which Molo plans for next year, on a fully advised basis; not just jumping on the execution-only bandwagon but providing customers with the help, support and protection they get today and should continue to expect in future.

Varying advice standards

I have witnessed first-hand the varying standards of regulated advice available in the market. With a digital approach, the good standards are hardwired into the process. It doesn’t have an off day, it does not cut corners, it isn’t influenced by third parties and outside influences; it basically provides quality advice and a good customer outcome consistently every time.

This is something the regulator should be actively encouraging. 

As I’ve said before, the regulator would be far better focusing on and supporting the industry to develop technology that will deliver a fully regulated, compliant, speedy and efficient online advice process for all customers.

We’re at a pivotal moment in the mortgage market today and we have a choice to make. 

Do we keep regulation that ensures a good outcome for all customers and invest in making digital advice technology more widely available to provide a fast and efficient service.  

Or do we change the rules and allow firms to spend their money on systems that provide a poorer outcome for consumers that will take years to manifest? 

I know which side I am on.

In its quarterly bulletin, the trade body noted this was not necessary and that it was possible to create simple, customer-friendly online processes without removing advice, which were already being used regularly.

“It is being argued that the move towards execution-only for simpler refinancing deals would facilitate much better use of technology to smooth the customer experience of the process,” AMI said in its quarterly bulletin.

“The so-called ‘difficulty’ of providing fully regulated mortgage advice online without the need for human intervention has become a convenient justification for the ‘need’ for execution-only. This is a complete misnomer.”

It noted that around £7bn of mortgage applications have been originated online as part of a fully advised end-to-end process with customers having the option to jump out to speak to an adviser if they need help.

“This is online advice with the option of a human touch but which can be fully completed without.”

Key to sustainable mortgage broking

It further warned that the regulator should not confuse the issues and that it was the way firms were using technology that was the problem.

“The market and the regulator must be extremely careful not to misdiagnose the challenges facing this market and rush to change policy that will result in thousands of mortgage borrowers receiving a poorer outcome than they should and would under existing regulation,” AMI continued.

“Technology is not the problem; how some firms in the market are deploying it is.

“This comes back to supervision and taking the time to really understand the services available in the market, across the whole of the market; it is time to listen more broadly than just to the self-professed disruptors.”

AMI concluded that this sector of remortgaging and product transfers could be the defining one for advisers and their businesses.

“Increasingly, retention is the key to sustainable business in mortgage broking. It will only become more so if the regulator chooses to reintroduce execution-only transactions,” AMI added.

Regulator cannot be left alone

Meanwhile, AMI warned that the Financial Conduct Authority (FCA) should not be left alone to decide how inter-generational financing should operate, but that it required political input too.

The trade body also suggested it expects interest rates to rise a little quicker than the Bank of England is currently predicting, but not until next year.

And it highlighted that builders were not yet considering changing their plans despite the significant overhaul of Help to Buy which could severely limit buyers’ options using the scheme.

Considering inter-generational finance, AMI said it was timely that the FCA had announced its intention to lead a consultation with industry on the matter.

However, it was “concerned at the lack of overarching direction on this given to the regulator by government”.

“Brexit and a leadership contest may be priorities in the short-term, but politicians cannot afford to pass the buck on social policy formation that will affect the people of Britain for generations to come,” it continued.

“The regulator cannot be left to scope this vital policy area without direct intervention and guidance from elected politicians.”

This week provided several insightful comments on a range of subjects, including execution-only and the value of advice, equity release drawdown, and Shariah-compliant mortgages.

First is Andy Wilson’s response to the article ‘People using execution-only will find their journey a lot more challenging than they expected’ – poll result.

He said: “It isn’t hard to get a mortgage. If you are reasonably credit-worthy, have a decent deposit and provable, stable income then most lenders will take you on. What is hard is getting the most suitable mortgage.

“Many of my clients could do this mortgage broking job. With a liberal sprinkling of logic, use of new technology, adequate research tools and analytical skills, they could quite easily find the ‘best’ mortgage.

“However, this takes time and effort, and we have already invested heavily in being able to source the most suitable deals for a wide range of clients. We can also apply our considerable experience.

“Those that go off and try to find their own will usually end up with a ‘good’ deal, competitive in the marketplace and with a reputable lender. It may not be quite the best deal using some metrics, but many would be happy with that.

“I could service my caravan once a year, using Youtube videos, a service manual and a great deal of learning. But I don’t; instead I pay a competent dealer who has experience in all of the caravan’s systems to do it for me. They will be quicker than me, and know pitfalls and bear traps that I might easily fall into.

“I can then trust that when I tootle off to a long weekend away, the gas system won’t explode, the lights will come on, the water will leave the vehicle down a pipe and not via the floor and the wheels literally won’t fall off.

“But of course, it is not the process of getting the mortgage we are concerned with here. It is the fallout afterwards.

“Is the mortgage flexible enough to meet changes in the borrower’s lifestyle or employment? Does the product term reflect big foreseeable changes coming up? Does it provide a safe harbour through the choppy waters of Brexit?

“Does the loan drop back at the end of a product term onto an exorbitant standard variable rate at a time when the borrower has suddenly just become self-employed? And if so, are there adequate product transfer options? What if there is a chance they want to rent the property out?

“Many borrowers could find a mortgage unaided. What they pay us for is to find the right mortgage and take away all of the donkey work.”

Stop treating clients like idiots

The next comment came from Mortgageswithjoy, and their response to the article Maximum drawdown facilities should not be recommended for a bigger commission – Wilson.

They said: “As an equity release adviser I struggle with this concept a little.

“Most (but certainly not all) of my clients are fully aware of the implications of putting this money into a low savings account, but equity release is for the client to spend as they want to, after all it’s their money.

“I find it annoying that the financial services sector takes away the rights of the consumer and treats them all like idiots.

“The problem with the draw down facility is that lenders charge a higher interest rate for this than having it in one lump sum and [one] lender has stated recently to me that further draw downs are not guaranteed when the customer requests them, even if the facility is built in. Future draw downs will be at the prevailing rate at that time which could be higher.

“Ultimately, paying a higher rate on future draw downs could mean faster roll up and bigger debt, but nobody seems to know how to calculate this effect. If the client wants all the money in one go, they should be able to have that choice.”

What is Shariah-compliant?

The final response came from Options Mortgages in reply to the article L&G Mortgage Club adds Shariah-compliant lender Gatehouse.

They said: “I’m curious to know what a shariah compliant mortgage is – I’ve asked Lloyds Bank and Islamic Bank of Britain in the past and both in my opinion are unsatisfactory answers as their benchmark for calculating the ‘rent’ portion is linked to base rates, so it is interest rate linked.

“As a Muslim and a certified mortgage broker of over 25 years I really do think this is a gimmick product.”

The regulator was heavily criticised by Association of Mortgage Intermediaries (AMI) bosses last night at the trade body’s annual dinner for its “worrying” fixation on price and for appearing to have “pre-determined” outcomes with consultations being little more than a “process tick-box exercise” with “no robust impact analysis”.

AMI chairman Martin Reynolds highlighted that the volume of papers issued by the FCA was “unhelpful” and “does nothing to help firms plan and develop for the betterment of their clients”.

Reynolds pointed out 11 papers from the FCA in the last four months along with others from the Financial Ombudsman Service and Financial Services Compensation Scheme.

“I would ask, are all of these really in the best interests of the consumers?” he said.

“The challenge is they appear to be issued in silos with some having little or no robust impact analysis included.”

Not true consultations

Reynolds noted that AMI had a positive relationship with many sectors within the FCA, but felt the regulator had become more closed-minded and less willing to listen to the industry.

“We do feel the FCA is changing, it does feel less consultative at times than previously and we feel there could be better consumer outcomes if it approached consultations in a more open-minded way, rather than what appears to be a pre-determined outcome approach,” Reynolds continued.

“In our view this is not true consultation but more of a process tick-box exercise.”

Long-term repercussions

Speaking specifically about the FCA’s MMS, Reynolds also hit back at the regulator’s approach and criticised it for using “misleading” figures to justify its position.

“I will say that the continued fixation on price over best advice is worrying. The continual use of the statistic that 30 per cent of customers could have had a cheaper product is misleading,” he said.

“While price is a determinant in any advice process, it’s not the only one.

“I would welcome feedback from the regulator in relation to [its] research on how many of those 30 per cent actually received the best advice while not the cheapest product. Surely that is the full outcome from any advice process.”

He added: “I will make no apologies for keeping this issue on the agenda – good advice should be at the heart of all discussions with consumers.

“The rush to use price as sole determiner and the potential extension to the execution-only rule is wrong and it could have long-term repercussions with customers losing valuable protections.”

Mortgage Solutions has contacted the FCA for a response.

Delivering a speech at its annual awards, Roberts (pictured) said the club was working hard to influence the Financial Conduct Authority’s (FCA) thinking, but this needed to be replicated across the industry.

“We are working hard on our value of advice campaign and we are working hard to influence the regulator’s thinking,” he said.

“We will continue this journey and are pleased that many of you are actively supporting us. However, there is room to do more.

“Our research shows that potentially thousands of borrowers still don’t know how an adviser can help with their mortgage and as a result they are missing out.”

Engage industry and beyond

Roberts was addressing the FCA’s approach to encouraging the growth of execution-only process for borrowers taking out mortgages.

This proposal has left many in the industry worried that consumers will be exposed as they lose the protections available through advice.

Legal & General Mortgage Club’s Value of Advice research found that consumers who use brokers were more likely to switch lender when remortgaging than those who secured a mortgage direct.

And Roberts added that they were also more likely to be informed about protection options and how to protect their family.

“Now is the time for us all to be vocal about the value of advice,” he continued.

“Never has it been as important to ensure we are engaging across our industry and beyond to ensure that the value of advice can be heard and most importantly understood.”

Improve mortgage journey

Roberts also revealed that the mortgage club was continuing its strong performance with seven per cent growth over the year so far, following 12 per cent growth last year.

“Improving the end-to-end mortgage journey has to be a major focus for all of us as outside disruptors look in on our market with interest,” he added.

However, the FCA contends that an execution-only process is no riskier than an advised one and that UK borrowers could save a £100m pounds as a result.

So, Mortgage Solutions’ latest poll asked brokers whether they are concerned by the potential resurrection of execution-only sales as a real force in the mortgage market.

Around 36 per cent of brokers said they are very concerned, with 38 per cent saying they are moderately worried because it could cause problems if not handled well.

Nine per cent of brokers said that they are a little concerned because they cannot see too much risk from it.

Around 17 per cent said that it will only be limited take-up from knowledgeable people, so they are not worried at all.

Mark Stallard, managing director at House and Holiday Home Mortgages, said: “Brokers are concerned because following the Mortgage Market Review, we were told that customers needed help and advice and intensive checks would need to be made for affordability purposes and detailed advice would need to be offered in most cases. I don’t understand what has changed?

“My personal experience is that lots people from all walks of life want brokers to help them. Either because they have not got the time, inclination or understanding to do it themselves.”

Stallard said that a lot of people using execution-only will find their journey a lot more challenging than they expected.

He added: “Day after day a broker starts with what looks like a simple case only to find all sorts of pitfalls and traps in the detail.

“We have seen a lot of very savvy first time buyers come to us for help even though they could have done it themselves. Like most major transactions in life, help is always welcome from trusted sources.

“Brokers are concerned naturally for their livelihoods and for the way it will pan out for good customers if they are enticed away. We will just have to keep banging that drum to our client banks as to what value we add.”

Small part of the market

James Chisnall, director at City Finance Brokers, said that as professional advisers, their role is to discuss in detail their clients circumstances and future plans with a view to making a formal recommendation based on that client’s specific needs.

He said: “The recent FCA consultation paper proposed making the process clearer for clients who would not be taking advice. It also aimed to reduce the amount of detail on regulated firms’ policies in this area.

“Execution-only sales have always represented a very small part of the intermediary market. An example would be a high net worth client who is fluent and sophisticated with the financial market and knows exactly what they want – they simply need a broker to process the case for them.

“Frankly, this happens so rarely that I don’t see execution-only sales ever becoming a competitor to good, quality advice, particularly if the advisory process has been followed correctly.”

Some clients fully equipped to make decisions

Dominik Lipnicki, director of Your Mortgage Decisions, said: “There has always been space for execution-only sales within the market. Some clients know exactly what they want, they are fully equipped to make decisions by themselves, while the majority might prefer an advice process with a wide range of options.

“Everyone is different and as brokers we shouldn’t be worried but we should move with the times. There is no point in fighting changes because they will happen anyway.”

Chris Sykes, mortgage consultant at Private Finance, said: “From our perspective, the resurrection of execution-only mortgages is a troubling development in the mortgage market. Mortgage advisers are qualified and regulated for a reason, and that reason is to bridge the information gap that exists between borrowers and lenders. Lenders sell products, whereas advisers sell solutions.

“We frequently find that the products our clients have in mind when they first approach us are far from optimal; the advice we provide can therefore prove to be extremely valuable, averting our clients from a course of action that would have left them burdened with suboptimal financial entanglements.

“None of this is a great surprise: the mortgage market is a confusing place; consumers cannot be expected to navigate this terrain without the support and advice of an experienced consultant.

“The worry we have, therefore, is that borrowers will approach lenders without having received advice from a qualified consultant, and that they will take out mortgage products that do not serve their best interests.”

Market focused on underlining reasons for using advisers

David Hollingworth, associate director at L&C Mortgages, said: “The results of the poll show that brokers are taking the potential for a return to execution-only very seriously indeed.

“That’s good news as it suggests that the market will be very focused on continuing to underline all the good reasons for using an adviser. Many borrowers have already switched onto the benefits of advice, particularly as they have faced a market where the right criteria choice is as important as the interest rate.

“Product transfers could be seen as an area where borrowers might be tempted to use execution-only options with their lender but that still doesn’t assure them that they have the best rate in the market. Brokers can factor transfers in alongside a broader shopping around of the open market, so need to accentuate that they can offer the best range of options to their customers.”

Metro Bank became the latest lender to remove its objection to landlords hosting tenants on benefits, following the high-profile campaign initiated by landlord Helena McAleer.

Despite the case of a teacher and her partner who were denied a mortgage because of a county court judgement (CCJs) from a parking ticket, Mortgage Solutions discovered lenders are increasingly willing to ignore minor CCJs when considering applications.

The ongoing intense market competition is driving adviser interest as rates continue to fall.

And the industry is still in disbelief about the regulator’s plans to open up the market to execution-only business.

Metro Bank latest lender to remove landlord restriction for tenants on benefits

Lenders ‘ignoring’ small CCJs and looking to lend, say brokers

Halifax cuts remortgage rates by 0.35 per cent

FCA’s U-turn on mortgage advice rules is ‘utterly unfathomable’ – Bamford

Coventry BS, Newcastle BS, Ipswich BS and Pepper Money cut rates – roundup

Estate agent’s ‘misleading’ Help to Buy ad prompts regulator action

Nationwide extends remo offer period and updates broker system

Property market slowdown continues with longer sales and price corrections

PRA changes are ‘forcing landlords to take products which do not fit their plans’ – Marketwatch

Lender funding: Brokers need to do their homework and be careful who they pick – Hersch

I suggested the perceived move away from advice by the FCA in the paper could be a ‘mis-read’ from the industry and that, when it listened to further industry feedback, it may accept that any move towards encouraging execution-only business was a retrograde step.

Regardless of whether the tech exists to do this, or not.

Now, however, that doubt no longer exists.

Utterly unfathomable U-turn

The FCA’s consultation on mortgage advice and selling standards gives no reasons to mis-represent the regulator.

Its ambition is clear and it is seeking to change the rules around advice in order to deliver what it sets out in the final report.

No-one can be in any doubt, because it exists in black and white, that the regulator wants to see more execution-only business and it does not care that this could result in consumers getting unsuitable mortgages.

When you write that down, it seems utterly unfathomable.

A regulator, which enshrined the importance of advice in the mortgage market via the Mortgage Market Review (MMR), U-turning in such a deliberate and pre-meditated way.

Wow.

Cheapest is best myth

And the evidence it presents for such a move?

It believes certain consumers could have got a cheaper mortgage themselves if the execution-only tools existed to allow them to source it.

It has been told that the advice rules do not allow for such tools and it wants to therefore create the environment where this technology exists.

It might say otherwise, but this is all about a perception that ‘cheapest is best’ and it wants to row back on a distribution channel – namely mortgage advice – which it perceives not to be recommending the cheapest mortgage.

This is despite the fact that no-one in the market believes the cheapest is best myth and (lest we forget) its analysis of the market comes from 2015/16 data.

Filled with dread

We are specialists in the high loan-to-value (LTV) mortgage sector, used extensively by first-time buyers, and these are individuals who have never been through the mortgage process before and will have a raft of options available to them.

Is the FCA really suggesting that these new borrowers can find the most suitable product if they are left to get on with it themselves?

The thought of large numbers of potential first-timers trying to secure the first and cheapest deal they see via an execution-only tool fills me with dread.

It surely cannot be right for a regulator to be promoting this distribution avenue for first-timers, can it?

Advisers will have countless examples of clients who came into their office, or called them up, with a clear idea of securing a mortgage which was completely unsuitable for them.

And if we drag everything back to price, and the ease of securing a mortgage via technology, then we are, in my opinion, opening up a huge can of worms.

Not self-preservation

I am not an adviser. This is not a view based on self-preservation as some may argue against advisers who raise it.

But it is based on common sense and the importance of advice in a marketplace which, not just for first-timers but for all borrowers, is more complex and competitive than it has perhaps ever been.

Encouraging consumers to do it themselves seems utterly bizarre and, for the life of me, I can’t quite get my head around why the regulator would be so intent on this course of action.

Maybe over time, they will be able to explain themselves.

Until then, it will be no surprise to hear many within the mortgage market raging against it.

One of those appears to be that we have the same regulator that introduced the Mortgage Market Review (MMR) – which placed advice on a pedestal – now seemingly suggesting that many consumers don’t need that advice.

Instead it is focusing much attention on why clients are not always recommended the cheapest mortgage and a desire to change its rules to facilitate more execution-only business.

That seems like a fundamental change in direction and one that, if it makes it through to new rules, will have a big impact on our sector and the lives of advisers.

Bizarrely, at the same time, we have a government which, in two new guides for prospective home buyers and sellers, outlines the work of advisers and how they might be useful.

This is especially so if the individual is self-employed or has some unusual circumstances which might curtail the number of mortgages available to them.

Is there a discrepancy here? Why do we have a regulator seemingly intent on eroding the importance of advice, when it was the one that created an environment where advice was deemed all-important?

How is this TCF?

I read with great interest the comments of Robert Sinclair at FSE Manchester where he talked about the ‘deceitful’ and ‘dangerous’ consultation paper on these advice changes.

These are strong terms, and knowing Robert well, he would have thought long and hard before using them, but they clearly outline the depth of feeling on this matter and how important it is for the industry to push back against the proposed changes.

Is Robert right? Are we effectively seeing a regulator attempting to reverse-engineer the market into a place where execution-only is far more accessible and therefore acceptable, simply because the levels of such business are much higher than it anticipated?

It does seem odd, especially when you read the words of the Financial Conduct Authority (FCA) itself which recognises and accepts that an increased amount of execution-only business is likely to mean that more consumers get unsuitable mortgages.

How can this be right or deemed to be treating consumers fairly?

We must make the case again

Having worked within an environment where advice has not just been prominent but widely accepted as right for the vast majority of clients, it seems that we are going to have to make the case for mortgage advice all over again.

No-one is going to make the case for us.

Our industry has to do this and it has to use all the positive examples of what mortgage advice can deliver to clients.

For instance, I saw a tweet from a broker which highlighted how they’d saved a client over £7,000 in mortgage payments over a 24-month period.

For a regulator seemingly obsessed with price that might fit the bill, but the bigger message cannot just be on cost, it has to include all the protections that come with advice, which clients simply will not get by going execution-only.

Taking it for granted

There are many positives that we in this industry might take for granted, and if we are doing this, then so will our clients and mortgage borrowers in general.

That cannot be allowed to happen – regulatory changes are unlikely to go in our favour this time, but that does not mean advice is not still the best option for the vast majority of people.

It’s perhaps time to put that message forward again because those who might wish to push execution-only options, and cut out the adviser, are about to have those wishes granted.

It accepted that it was important for customers to have freedom of choice and recognised that not all customers need advice.

But it was also very concerned that creating an execution-only channel, to accommodate a minority of consumers, could be used as a means of circumventing the more rigorous advised-sales standards.

It drew a comparison, at the time, with self-certification—worried that execution-only might similarly become the norm and be used beyond the small group for which it was created.

Interestingly, lender and intermediary representatives agreed that it would be difficult to prevent an execution-only process from being gamed.

As a result, execution-only was put in a very small box, available to specific customer types and with strict controls around firms’ policies to monitor the extent to which it was used.

A very radical change

Now, however, the regulator is proposing letting execution-only out of its box and making it more generally available.

The FCA says that “the advice rules introduced under the MMR had the effect of limiting consumer access to execution-only processes more than was intended,” and that what is now proposed is not a radical change.

Anyone involved at the time will recognise this as a very radical change—almost a complete reversal of the MMR’s policy intention.

Lenders and the lender trade bodies must be delighted, but it’s worthwhile remembering some of the MMR findings.

High-risk customers unadvised

In 2007, lenders provided advice in 36 per cent of mortgages they sold, while intermediaries provided advice in 92 per cent of those that they completed.

Worse, this included, for example, that 58 per cent of credit-impaired borrowers were not given advice by lenders.

And 63 per cent of self-employed borrowers were not given advice by lenders.

The regulator was concerned by the fact that a considerable number of customers, including higher-risk customers, did not get advice if they went direct.

Is the FCA really no longer worried about this?

Impossible to contain

Once the execution-only process is out there, it will be impossible to contain.

In today’s challenging, cost-conscious market, taking the easy route is almost a no-brainer for lenders and intermediaries alike.

Lenders save on paying a procuration fee and on the cost of expensive in-house qualified advisers and compliance processes. They also get rid of redress and claims management costs.

Some brokers, similarly, will be tempted to move away from advice, which is expensive to provide and comes with exorbitant professional indemnity and compliance overheads, as well as with the ever-present spectre of the Financial Ombudsman Service.

They may lose a procuration fee, but they’ll gain a referral fee and reduce their costs and overall compliance burden.

Why not simply provide consumers with generic information, ask them to choose a deal for themselves and then arrange the mortgage on their behalf on an execution-only basis?

The FCA says that’s okay, so why not?

What the FCA really wants

Is this really what the FCA wants?

Doesn’t this risk exactly the same unintended consequence we saw following the Retail Distribution Review (RDR), which has left millions of middle earners in an advice vacuum and is now having to be retrospectively patched up?

The regulator would be far better focusing on and supporting the industry to develop technology that will deliver a fully regulated, compliant, speedy and efficient online advice process for all mortgage customers.

That would be moving forwards rather than backwards and would deliver a positive outcome for all, regulator included.