Forthcoming mortgage regulation will no doubt result in a more cohesive and well respected industry but advisers will need to make careful business decisions to account for increasing costs.
Regulation will provide peace of mind for many of thousands of homebuyers but it presents a challenge to all mortgage brokers, who are faced with the choice of being directly authorised by the FSA or being an appointed representative of a principal.
Scandals such as pension misselling in other financial sectors have prompted the introduction of a tighter regulatory framework and the mortgage industry is putting in place a contingency plan to prevent any such scandal. This can only be seen as a responsible move, particularly as we are weeks away from further scrutiny with the publication of Professor David Miles' report into the UK mortgage industry.
In future, the industry will hopefully boast a more wholesome image but the road to achieving this could prove costly and difficult for many advisers and will require careful planning to ensure continued profitability of businesses.
The FSA launched the authorisation process in November last year and estimates that 25,000 firms have already applied for direct authorisation or will do so before the closing date in April, before regulation is implemented on October 31. The choice that advisers are being faced with is not easy and, in the case of becoming directly authorised, the process is likely to be lengthy. The FSA indicated late last year that advisers should allow up to six months for gaining approval of a fully completed application.
It has been debated for some time whether taking the appointed representative or direct authorisation route will prove more beneficial for the individual business. Originally, it was argued that intermediaries must join networks in order to survive but this was a somewhat biased commentary and we are now seeing many businesses seriously investigating all opportunities.
It would be very arrogant of a mortgage network to suggest that an intermediary can only be successful if it joins up when, in reality, the future for individual brokers will be dictated by many other factors. But there is no doubt that the adviser that takes the directly authorised route will be faced with significant cost burdens, particularly when considering FSA requirements for advisers to submit quarterly and half-yearly sales reports.
The adviser becoming an appointed representative will pass on these responsibilities to a provider or lender but the trade-off will be a slimmed-down choice of products to choose from and a network membership fee to pay.
Industry experts estimate that regulation will add an extra 15 per cent in costs to each mortgage advisory business. This includes the cost of bespoke software, administrative fees, business time lost in administrative duties and, in some cases, wages for additional staff required to shoulder the administrative burden.
Initial indications are that IT spend in the industry has already increased and back-office administration providers are likely to be flooded with business and capital inflow. The capital outlay to equip individual businesses for the new era will not be cheap and will add to the increasing cost of PI cover driven by the general financial risk pressures brought about by the market experiences of insurers.
There is no question, then, that cost is a major consideration in deciding whether to become directly authorised or an appointed representative. But while the 15 per cent additional business cost will come as a shock to some advisers, many will have the opportunity to recoup much of the initial outlay with careful business management and the production of a more coherent business model. There is no reason why well run businesses will not be able to increase profitability by as much as 10 per cent and, in many cases, emerge fitter than before.
Becoming an appointed representative is the less complex route and can take as little as six weeks. Extending authorisation through a provider should be an easy process, with lenders, networks, packagers, mortgage clubs and life insurers taking a share of the burden and providing support and clarity to a somewhat clouded process. While firms choosing to be directly authorised will be faced with greater product choice, the risk in guaranteeing a successful business model will be far greater but still achievable.
Whichever route a company takes, the onus will be on advisers to have a full understanding of all facets of their business and be braced for a new era for the industry.