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Ripple effect

Last week’s publication of the retail distribution review was not directly relevant to mortgages. However, there will likely be some sort of read across to the sector in due course. Implementation of the RDR is not scheduled until 2012 and it has been years in the making. It is therefore highly improbable that any similar changes to mortgage regulation will take place for at least three years, especially seeing as the implications of the forthcoming European Commission mortgage directive will need to be considered.

A week is a long time in politics but barring a political earthquake there will be a Conservative government in less than a year’s time and we know the Tories are planning changes to the regulatory landscape. Current thinking is to partially dismantle Gordon Brown’s discredited tripartite regime and shift responsibility for prudential banking regulation to the Bank of England while leaving the regulation of advice to the FSA. Thus, it will most likely be the FSA’s responsibility to consider what aspects of the RDR should apply to mortgages.

The proposal to change the names for adviser types to better identify who is genuinely whole of market is sensible. The FSA’s current definition of “whole of market” is so badly worded that it is widely abused and misleads the public. Thus, although the FSA quite rightly requires all information from advisers and salespersons to be “clear, fair and not misleading”, it breaks its own cardinal rule with its definition of whole of market.

The major issue from the RDR is the banning of commission and here it is important to recognise a key difference between investments and mortgages. When anyone asks for advice on investments, by definition they have available cash and so using a small amount of that cash to pay the adviser’s fee is a mindset issue rather than a practical problem.

The exact opposite applies with a mortgage. Because anyone seeking advice for a mortgage is borrowing money, any fee they pay will mean that, other things being equal, they will have to borrow extra that amount. For some this may push them over one of the loan-to-value thresholds, in which case the marginal cost of the extra borrowing to pay the adviser’s fee could easily be more than 50 per cent.

There was evidence pre-credit crunch that certain cowboy brokers put borrowers on a sub-prime mortgage because of the high procuration fees available; a decent broker would have placed them on a mainstream mortgage. Those days will not come back for a long time, if ever, and the variation in mainstream proc fees is generally small. Hence the risk of product bias in the investment world as a result of the huge variation in commission on products that do similar things is just not there for mortgages. As a result, I think it would lead to consumer detriment, or to use the current jargon, produce an undesir- able outcome, to ban procuration fees in the mortgage market.

Ray Boulger is senior technical manager at John Charcol

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