At this year’s FSA Mortgage Sector Conference, director of retail policy and conduct risk Dan Waters and director of retail markets Jon Pain questioned the future of mortgage fees and whether remuneration needs to change in an attempt to protect the consumer and add clarity to the mortgage process.
Waters said: “There are concerns, particularly in high-risk sectors, that many unaffordable and unsuitable mortgages have been advanced by some brokers who were thinking more about their own remuneration than their customers’ best interests.
“We’re left with questions about whether we should take a firmer view on remuneration and on excessive fees for certain products.”
Pain added: “We are assessing the extent to which remuneration structures in the market – in sub-prime in particular – have led to a sales bias, product bias or to churning, which has left consumers with poor value or unaffordable mortgages.”
This was echoed by Council of Mortgage Lenders director general Michael Coogan who, in a contentious speech read out by head of policy Jackie Bennett, said some of the problems in the mortgage market were due to advisers: “Some intermediaries have acted more like salesmen interested in their cashflow than advisers protecting their customers’ interests.
“Small firms have been largely unsupervised since 2004 and that cannot be a structure that continues in the future.
“We are going to have to look at a review of remuneration in our sector. Only then will we sustain quality of advice.”
So, have high fees led to bad advice?
Brooks Macdonald senior mortgage consultant Steve Smith says: “Not at all. I for one have never advised a mortgage on the basis of the procuration fee. The problems in sub-prime and self-certification were never about procuration fees but about lenders competing by taking on riskier borrowers.
“They could do this as the risk was never ultimately with them, they would just securitise the mortgage and sell it on.”
Mortgage expert Jonathan Cornell argues that the FSA and CML’s assumptions do not add up. He says when you consider that at the peak of the market self-certification counted for no more than 10 per cent of mortgages, while Pain said 45 per cent of all mortgages had no proof of income in 2007, it means that around 35 per cent of mortgages were fast-tracked.
Cornell says this proves advisers were not chasing procuration fees as fast-track offered lower rewards than self-certification.
“Would a different remuneration structure have avoided the problems in the market? I don’t think so because these numbers indicate that there is no evidence to prove otherwise.”
Regardless, Cornell admits that remuneration will change: “The market has evolved over the last 20 years, so it is right to re-evaluate how mortgage advice is remunerated.
“The FSA seems like it will be making changes, so it is down to advisers and the trade bodies to work with and lobby the Government.”
The Mortgage Warehouse managing director Tim Lee explains how changing the remuneration structure of the mortgage market will not help the consumer.
He says: “It would be a mistake to change the fee process. Most advisers deal with average people of average income and they do not want to pay for mortgage advice – if they don’t have to pay for something, they won’t.”
Independent mortgage expert Mark Chilton agrees that the mainstream UK borrower is not ready to pay for mortgage advice.
“It would be very, very difficult to change remuneration structures. It is true that when it came to sub-prime we did get very close to the American sales culture with aggressive sales techniques.
“But if the FSA wants to scrap the current system of remuneration for the mainstream mortgage market, it would get very tough for brokers and borrowers.”
Chilton says there is a danger of further freezing up the housing market by forcing brokers to introduce fees that could prohibit less wealthy clients from accessing mortgage advice. This would then have a knock-on effect for the economy at large.
“By limiting procuration fees or regulating products you restrict advice, and therefore restrict what you can offer borrowers. You then create a terrible danger of disabling a lot of people from getting into the housing market. And although it isn’t the most important part of the economy per se, it is the confidence behind the economy.”
Steve Smith says that factory gate pricing on mortgages could have implications for lenders’ dual-pricing strategies.
“Banks say direct lending does not cost anything, but branches and staff have to be paid, so something has to be attributed to that in the direct process.
“I reckon that if it was made explicit, the 0.3 per cent paid to advisers would be a lot cheaper than the cost of branch advice.”
But Smith adds: “If the FSA does change the fee structure, it will mean less mortgage advice in the UK and, more importantly, it would mean less people seeking mortgage advice.”