The mortgage market review final paper, published last December, marked the end of three years of discussion. However, it would seem it is not curtain down for the MMR just yet, as the FSA’s proposals to ban non-advised mortgage sales have sparked yet more dispute.
The final MMR paper says non-advised sales should be banned where there is “a spoken or other interactive dialogue between a client and a firm”.
This should potentially be to the advantage of IFAs and mortgage brokers but shouldn’t people be free to make their own choices?
Highclere Financial Services director Alan Lakey thinks the FSA is conflating people making a choice with those buying bad products.
He says: “What is the actual problem? I do wonder sometimes if the FSA tries to solve things that are not really issues. I would always say that people need advice but I think they should be allowed to decide.”
Appleton Gerrard financial adviser Kusal Ariyawansa says the past few years have seen the attitude to mortgage advice shift 180 degrees.
He says: “From being able to get a mortgage by self-certifying, now you must get advice. There are scenarios where experienced individuals do not need advice but there is never any harm in seeking a second opinion.”
The Council of Mortgage Lenders and the Building Societies Association have spoken out against the proposal. The CML believes a ban on non-advised sales would reduce lending, because advised sales are more time-consuming.
Lakey agrees there could be practical issues. He says: “It is quite likely it will cut lending. Advised sales take ages, partly because the lenders are covering their backsides and partly because some of the questions they ask run into other products. Nationwide used to ask people if they were smokers, which has nothing to do with a mortgage.”
Chadney Bulgin partner Jonathan Clark does not think that lending will decrease dramatically. “People will not say, ’Oh, we will not bother buying a house because the process takes longer’. Advised sales take more time but are better.”
He says a bigger issue is the lack of redress available if borrowers choose the non-advised route.
“If people go self-directed, they cannot get redress from the Financial Ombudsman Service. We write everyone a recommendation because if we deal with clients on a non-advised basis and the FSA turns it over 10 years later, we are in a sticky situation.”
Defining what are non-advised sales could pose practical problems.
The regulator has said the only clients capable of making these complex non-advised purchases are the ultra-high-net-worth and mortgage professionals.
But this raises questions about establishing who qualifies for the exemption.
Clark says: “It will be hard to police those very high net-worth people and it is unlikely they will give us all the information about their incomes. The FSA has set the exclusion bar far too high.”
The question of client segmentation has also been raised by the Financial Services Consumer Panel. It disagrees with the FSA and suggests the obligation for advice should be limited to vulnerable clients.
FSCP chairman Adam Phillips says: “The requirements should be limited to those customers who are credit-impaired, equity release, sale and rentback, right-to-buy and potentially first-time buyers.”
“This makes sense,” says Ariyawansa. “Experienced owners do not need advice in the majority of cases, although it would be different if they were increasing their leverage for obvious reasons. It should be mandatory for equity release, though.”
Lakey shares the same opinion and says: “For once, I agree with the panel. However, equity release is already a specialism and I would imagine people going into buy to let should also be included in this group.”
The panel has also raised concerns about the proposed non-advised sales ban preventing people from shopping around for the best deal.
Phillips says: “The FSA is potentially confusing information with advice. That is the thing that makes the buying process and shopping around much more difficult, because you are having to take advice.”
This is not as big an issue as the FSCP thinks, according to Ariyawansa. “People will need to shop around and then seek advice. When a fee is involved, people will naturally want to shop around anyway,” he says.
Alongside the potential negative outcomes for consumers, there could also be downsides for IFAs and mortgage brokers if the MMR is passed in its current format.
“We are probably going to see better deals for people who go direct, further reductions in procuration fees for advisers and possibly a dual under-writing system,” says Lakey. “Someone came to me a year ago to sort out a mortgage and one of the companies I put in an agreement in principle to was Nationwide, which turned him down. The client went direct and got the mortgage.
“It could have been a one- off but I suspect not. It will be easier for lenders to get the business without the proc fees and it will also give them an advantage in selling other products. Taken to an extreme, IFAs could be cut out of the loop.”
But Clark says banks could be the worst hit. He says: “Over the past 10 years, banks have moved away from advice because they cannot get enough staff, they cannot train the staff and they cannot police the quality. It will be difficult for them to get a model that fits the FSA’s proposal in place.”
Some banks are already taking steps to raise the qualifications for their staff. Barclays, for example, is in the process of increasing the training and qualifications of its staff.
A spokesperson says: “We are rolling out training and qualifications to all our staff. We anticipated the MMR but this was not a direct response to that as it has not been finalised yet – it is about customer engagement.
“We already have advised and non-advised in our branches, so the only area this affects is telephony – and we are expecting them to be up to date by July.”
But interference in people’s ability to make their own choices and make their own mistakes is a fundamental change in the approach to the distribution of financial services.
Lakey says: “Am I considered so foolish by the FSA that I should not be allowed to buy a house? When you have mistakenly moved house and it has cost you two lots of stamp duty and solicitors’ fees, you think, next time I will plan more carefully. That’s life.”