What constitutes an independent mortgage broker looks set for a radical overhaul following the publication of FSA consultation paper 146 on the regulation of the mortgage sales process.
The FSA's Approach to Regulating Mortgage Sales proposes two options for how independence will work. In typical FSA fashion, the consultation paper does not specify which option the FSA favours, leaving the industry scratching its head as to the likely way forward.
The first is a fundamental reworking of the term “independent” to bring brokers in line with IFA regulations. This would embrace concepts such as suitability, knowing your client and being compelled to search the entire marketplace for the best product, which until now have been foreign to the mortgage market.
This is not to suggest that there are not mortgage intermediaries offering a value-added service to their clients but there is nothing which compels them to do so.
The second option is less disruptive. It entails keeping brokers much the same as now but compelling them to disclose which segment of the market they represent and how many lenders' products they can recommend.
Many IFAs believe that the idea of having one common definition of independence has merit and is a proven way of avoiding consumer confusion.
The FSA appears to be arguing on one hand that having a common definition of independence across the board makes sense but on the other that the type of business carried out by mortgage brokers tends to be more straightforward and less risky than investment IFAs.
Riach Independent Financial Advice proprietor Bob Riach says: “I would reject that assertion out of hand. Probably the biggest purchase anybody ever makes in their life is a property and it is probably one of the longest running investments as well. There are so many schemes and products available on the marketplace today, it really is a complicated advice process.”
What it means to be an IFA has probably never before been in such dispute. Depending on the outcomes of CP121 and the Sandler review, the level of training, scope of advice and how remuneration works are set for major upheaval.
London & Country Mortgages head of operations and compliance Patrick Bunton says: “Whatever they come up with in CP121 they need to apply to mortgages as well, otherwise consumers will get completely confused.”
The timing of CP121 and Sandler appears to be roughly similar to that of the implementation of mortgage regulation, which means the two regimes will be developed simultaneously.
But how can the industry decide if it wants independent mortgage brokers to be brought in line with IFAs if no one know what the IFA of the future will look like?
Prudential Premier Mortgage Club national mortgage manager John Malone says: “We do not know how polarisation will be changed and how that will impact on the mortgage industry and we are not likely to find out until the end of the year at the very earliest.”
If reformation of the IFA sector is carried out along the lines set down in CP121 – which seems unlikely taking into account Sandler and the latest sounds coming out of Canary Wharf – then mortgage brokers are not enthused about the prospect.
Savills Private Finance director Mike Boles says: “It would make sense to bring mortgage brokers into line with independence as defined in the IFA sector but how it would work in the real world is a different thing. I do not think they could bring mortgage brokers into line with how independence is defined in CP121.”
The biggest stumbling block, as with IFAs, is the issue of remuneration. The vast majority of mortgage brokers rely almost exclusively on procuration fees paid at a rate set by the lender. In other words, remuneration is very similar to commission.
In CP146, the FSA questions whether there would be a case for extending CP121's defined-payment system or any subsequently amended system to the mortgage market.
Another area of contention is the observation in CP146 that, even if a more rigorous definition of independence is implemented, the FSA would still see a place for lender panels. The report says: “We propose that independent mortgage intermediaries should also be able to use panels, providing these panels are properly sourced, representative of the market and regularly reviewed.”
But brokers say the way panels work in the mortgage market is very different from the investment world.
Bunton says: “Panels exist in the investment world but the distinction is that the panel tends to be product-driven, not provider-driven. In the mortgage market, either a lender is on the panel or it is not.”
The second option for the definition of independence neatly avoids many of these problems and is by far the easier option as it would only involve the broker revealing his status at outset. But does this go far enough?
There are those who believe this will be the chosen path because the FSA wants to introduce regulation with as little disturbance to the market as possible.
LIA head of public affairs John Ellis says: “In the mortgage market, the lenders are very powerful and have a strong lobby. They want the market to operate with as little interference as possible. I think it would be difficult for the FSA to impose any real disruptive changes.”
Some in the industry question whether mortgage brokers or their clients are really bothered about the word independent. Malone says: “If I were a mortgage broker, would I be upset if I did not have the word independent in my title? I do not think so.”
If this is the prevalent attitude in the industry, perhaps it will not matter how the FSA chooses to define independence.