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Structured argument

The Association of Mortgage Intermediaries has warned mortgage brokers who decide to sell structured investment products that there are a number of potential risks that must be avoided.

In a technical note issued last week, AMI policy analyst Katie Taylor warned brokers to be careful when selling savings products such as accumulation plans, investment plans, income plans and structured funds.

Taylor says while there is nothing wrong with selling these arrangements, it is important for firms to consider the implic-ations, such as confusion and inadvertent pressure on borrowers to purchase an investment product alongside their mortgage plan.

Edeus recently began targeting brokers with two guaranteed savings products in conjunction with Newcastle Building Society. Managing director Alan Cleary says he believes that brokers will be able to manage any conflicts and an increased take-up of these products by brokers will not lead to regulatory problems.

Cleary says: “If a customer comes in to enquire about a mortgage to a mortgage broker and they happen to have some cash lying about in a current account attracting very little interest, the broker will find that out during the fact-find.

“An alternative income for the broker is not reason enough for regulated brokers to start pressuring clients. Those brokers adding pressure are going to be rogue brokers who pressure the client regardless, not because it is an investment product.”

OFM Group managing director Andy Sewell says if the mortgage-only brokers want to diversify into investments, they should get their financial planning certificate.

Sewell says: “Mortgage brokers are currently looking for additional sources of income and we are being encouraged by some providers to look at selling limited investments as an alternative revenue generator. But there are clear rules around what we can and cannot advise on.

“In addition, most mortgage-only brokers do not want to be giving investment advice. If we did, we would do the exams and become IFAs. So I do not think conflict of interest and misselling investment plans is a significant concern.”

Taylor says some of the savings products being offered are similar to products that are sold on a regulated basis.

But they are exempt from FSA regulation as the cash is invested in a building society cash account, subject to Inland Revenue income tax on a recurring basis. Instead they should be sold under banking code rules, which the AMI says all brokers considering selling these products should be aware of.

AMI director general Chris Cummings says it is imperative that the broker understands the product and the regulatory environment.

He says: “What we are keen to see is that firms move into new lines of business in a thoughtful manner while bearing in mind that they may not have come across structured products before and may not know how they relate to the wider investment market.

“It is a matter of understanding the products, making sure the scheme you have got in place allows your advisers to deal with these products and that you are being entirely transparent about the service you are offering.”

Brokers seeing investment products as nothing more than a short fix to flagging profit margins should think again, says Cummings.

He says: “It should not be to do with an income stream, it is actually about reinventing your business and mortgage advice.”

In a bid to avoid regulatory repercussions, brokers could pass over their client to an IFA rather than advising outside their specialism. This way, the broker could earn an introductory fee without ramifications.

But with Edeus offering up to 2.5 per cent commission on its savings products, could this cloud the broker’s advice to the client, especially in the current market conditions?

Cleary says: “The idea that the attractiveness of a 2.5 per cent commission will outweigh the broker’s understanding of each product is like saying that a broker will chase commission on mortgage products. It is not the case at all.

“The bottom line is 99.9 per cent of brokers do the job properly. If there is a broker out there trying to rip off a customer, they are going to do that irrespective.”

Taylor also warned in the technical note that the Financial Ombudsman Service is likely to take a different view to cases where a client sought such a product than where the client is sold a product when originally seeking advice on an alternative area, such as mortgages.

The note says: “In this case, it could be argued that a greater duty of care is needed and therefore there is a potential liability to selling these products.”

A FOS spokesman says: “Firms should ensure that they are fully aware of the implications of offering advice on both mortgages and investment products. However, we expect that brokers will continue to maintain their current high level of service.”

Taylor says in some circumstances advisers should be considering recommending offset mortgages rather than the structured products that are on offer.

She says: “While methods of diversification should be welcomed in a difficult market, it is important that members carefully consider their responsibilities towards a client.”

Cummings advises: “Do your homework and you will be fine.”


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I have a great deal of my financial wealth with an insurance company, consisting of an investment bond, unit trusts and an Isa, as well as close to £100,000 of my pension fund. However, I am becoming increasingly concerned about the performance of this company. Can I trust it when it tells me that I should take the long view and that my investments are safe with it?

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