The investment and pensions industry has been hit with a constant barrage of change over the past two decades. Platforms, passive investing, unbundling, transparency, the RDR and a string of legislative reforms have all forced advisers to adapt to new requirements.
The mortgage and insurance industry, on the other hand, has barely moved in all this time. This is despite mortgages becoming regulated in 2004, the credit crunch in 2007/08 and a Mortgage Market Review in 2014.
Given the damning findings of the FCA’s Asset Management Market Study Interim Report, a review of similar depth and perception into the murky workings of this market will read like a horror story.
The reluctance to change for the better under its own steam will inevitably result in calls for firmer action, certainly from consumer groups. What is remarkable is that the current state of affairs barely benefits advisers either. Here is my take on what needs to change as a minimum.
Insurance commission fiddles
An adviser will be paid a different commission rate for the same piece of advice, on the same product, depending on which network, national or support service they work within.
So an advice business with a perfect advice record will be paid a lower amount than a higher risk firm that buys in support from a business which negotiates better rates based on aggregated volume. This makes no sense from a consumer perspective.
Without having to ban commission or standardise commission terms, forcing insurers to stop volume based deals would improve transparency immediately.
The arguments put forward that such deals are based on criteria beyond volume are spurious and do not stand up to close inspection, and there are far better sanctions for poor quality firms than paying their neighbours a slightly higher rate.
It would also stop the practice of “dirty premiums”, whereby some distribution groups negotiate a higher rate of commission by increasing the premium paid by the consumer. This is something that should have stopped years ago. Advisers are often unaware their network, national or support service provider has done this.
Finally, it would remove the need for protection panels, which are rarely based on anything but commercial terms, and the resulting skim of commission those running them take. These panels, which lock certain providers out, are extremely influential in driving business levels and less transparent than differing commission payments between providers.
We have seen negative national press in recent years about price comparison websites fiddling the direction of business using these tactics. You would expect far better from independent advisers.
Dodgy distribution deals
Mortgage clubs rake off around 9 per cent of almost all advised mortgages placed for virtually no benefit other than assistance in “marketing” a product.
Enhanced procuration fees do not trickle down to mortgage advisers, they are retained by the mortgage club – the largest of which are hugely profitable.
The only competitive advantage a mortgage club or network can offer to an adviser is to secure exclusive deals. The result of these deals is to prevent genuinely independent advisers from being able to demonstrate as much because they are not a member of a certain network or do not want to use a particular mortgage club.
The impact on a directly authorised adviser is potentially thousands of pounds of detriment to a borrower.
Lazy lenders are too willing to distribute via a mortgage club for their own convenience. I doubt the cosy relationship between the distribution directors at lenders and the chiefs of mortgage clubs are seriously questioned, or understood, by lender chief executives. It pays too many salaries.
The current crop of mortgage clubs would not exist unless they created bias. That is how they earn their money. Advisers should not be locked out of access to specific deals without extremely good reason, and lenders should seriously question their approach to distribution before the FCA does.
At present, millions of pounds are disappearing down a hole and into the hands of mortgage clubs and people running protection panels. It is hard to find any benefit to consumers or advisers. Indeed, the whole system seems to be for the benefit of a small number of people profiting from it.
The RDR gave the investment industry a shake-up; it is time to do the same to the insurance and mortgage market, which has a far greater consumer reach.
Here, I must point out I am encouraged by two things. First, the advisers I deal with have little interest in these deals and have often brought it to my attention before I have noticed. The trouble stems from a small number of people negotiating behind closed doors and tidying away any incriminating evidence behind them.
Second, advisers now seem angry enough to want to do something about it. People like London Money’s Martin Stewart are looking to find a way around the current outdated system, seeking to strike their own deals direct with lenders and insurers that cut out the dodgy middlemen.
The question now is whether those lenders and insurers co-operate and act in the interest of advisers and consumers? Or will they dig their heels in to protect the old guard?
Phil Young is managing director at Threesixty