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Do lenders lack transparency over cost of mortgage advice?

Liberal Democrat MP Mike Thornton says brokers are at a disadvantage to banks over fee disclosure

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Financial Conduct Authority chief executive Martin Wheatley prioritised tackling bank sales incentives when he took over the top job in 2011.

Wheatley launched a year long investigation into the sector and found widespread failings culminating in an investigation of Lloyds Banking Group.

This month, the parliamentary commission on banking standards warned that sales incentives directly resulted in misselling scandals such as payment protection insurance.

The Co-operative Bank, Barclays and Lloyds Banking Group have all ended the type of sales incentives that worried politicians but the banking commission warns incentives are still in place at certain firms.

Secret bank sales incentives not declared to customers have long been a bugbear for advisers.

The same is true for mortgage brokers who are forced to declare an upfront advice fee and disclose the price of the proc fee in the Key Facts Illustration. 

By contrast bank advisers have to declare very little and the cost of advice can appear free to customers.

Newly elected Liberal Democrat MP for Eastleigh and former mortgage broker Mike Thornton says with more brokers charging fees, they can look costly in comparison.

He wants more bank transparency over the real cost of advice as he says it is currently obscured within the mortgage rate, staff salary or bonus.

Under mortgage market review rules, all mortgage sales will need to be on an advised basis from next April. Thornton believes an all-advised market could exacerbate the problems in borrowers feeling they are being “ripped off” by brokers.

LSL Property Services mortgages director David Copland says: “It is a problem that has always been prevalent in the market. Bank advisers do not show the cost of the advice through the salary or sales incentives loaded on.

“I wish it would change but it is not going to happen because it is too difficult for banks to work out their costs and say this is what we are paying the adviser for the mortgage.”

Copland does not believe it is an issue that can be easily solved as it is difficult to determine exact costs for advice, so brokers should focus on justifying their price tag.

He says: “I don’t think it is something the FCA will be able to solve. Brokers just have to be in a position where they justify why they are giving the advice. They are an expert in the market, they offer choice and have a lot more lenders to go to as opposed to someone going into a branch.”

John Charcol senior technical manager Ray Boulger agrees that brokers must show their worth.

He says: “It would be better if there was a level playing field but it has not been a major problem. There have been pushes to get lenders to include a nominal amount for the cost of advice but it becomes difficult to work out what it would be.

“People value advice from brokers much more than a bank where they do not get independent or whole of market advice. The only time people look at proc fees is when brokers decide to charge a fee.”

Lifetime Group managing director Carlos Thibaut says: “It should be a level playing field and I do not fully understand the rationale for why it is not. However, if mortgage brokers are doing our jobs properly and demonstrating what we add then it should not be a problem. It has not yet been a problem.”

Emba Group sales and marketing director Mike Fitzgerald says: “The playing field should be level and the difference in fees disclosure is plain wrong. There is also a difference in qualifications and years of experience. At banks a young staff can offer a number of mortgages without being qualified and even though it is changing there is still a perception that bank advice is better.”

Some believe more transparency over bank advice costs would have a bigger impact on the banks themselves who could then see the real cost of providing advice.

Boulger says: “The greatest benefit of working out bank advice costs would not be for borrowers but banks themselves. If they had to work out what advice costs, not just the salary but branch costs and bonus, they would see it is way in excess of the typical 35 basis point proc fee for brokers.

“If it was to happen then that would be a bigger benefit to brokers than the disclosure to consumers. It could make banks think why they are trying to sell mortgages through their branch when it is more expensive than through brokers.”

PMS executive chairman John Malone agrees more transparency would alert banks to the true cost of advice and force them to outsource more.

He says: “All major lenders are saying the most cost effective channel is through intermediaries as opposed to their branch systems. Lenders are telling us that acquisition of business is now cheaper through intermediaries than branches.

“During the recession intermediaries went down to a 50 per cent share of the market but we are now starting to move up again.

“The likes of Nationwide, Santander, Lloyds Banking Group and Virgin Money are all doing more business through brokers but the overall percentage is always brought down by HSBC.”

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