Does the FSA completely understand distribution in the mortgage market? I sadly have to draw the instant conclusion of no.Mortgage Promotions, together with other traditional mortgage clubs, lobbied the FSA before M-Day advising it that the planned stance of disclosing all gross fees paid out by lenders on KFIs would cause confusion in the marketplace and, maybe more important, would confuse customers. Looking back, it seems that the FSA made a number of incorrect assumptions about mortgage distribution and mortgage clubs. Even before statutory regulation, mortgage clubs were valued by lenders and intermediaries. Most lenders were very supportive of mortgage clubs because they create quality distribution coupled with economies of scale. Most intermediaries use mortgage clubs because they are typically too small in their own right to negotiate with lenders. The first misconception was that the fees that mortgage clubs receive are “material”, that is, significant in size and that such fees negatively affect the mortgage product the customer receives. The payments made to clubs are not typically material. In most cases, Mortgage Promotions, for example, only retains from the gross procuration fee an amount equal to 0.03 per cent of the advance. With one of our exclusive products, we only retain an amount equal to 0.01 per cent of the advance. This payment is made by lenders to mortgage clubs for the work they undertake in promoting lenders to intermediaries and the administrative function they undertake on procuration fee distribution. Mortgage clubs are not involved in the individual sale or advice process – hence the reason they do not carry out a regulated activity under the MCOB. Another misconception is the view that a mortgage club is “connected” to the intermediary. This too is not the case. An intermediary does not belong to the club. Intermediaries who are registered to use a mortgage club are usually directly authorised by the FSA but they could be appointed representatives of principles who allow their ARs to access the whole of market via any lender, packager or club. Either way, the mortgage club has no contact with the consumer. Either the intermediary firm (in the case of directly regulated firms) or the principal (in the case of ARs) is responsible to the FSA for the advice and regulation of the intermediary. Of course, intermediaries who fit the above category can register to use as many or as few clubs or packagers as they want or they can access lenders direct. The relationship between a mortgage club and those registered to use it is very loose. A mortgage club is no different to an advertising or marketing agency which helps lenders and other product providers market themselves better to intermediaries. If such an agency was paid a fee based on the effectiveness of a marketing campaign according to the number mortgage applications received or completed as a result of a particular intermediary advertisement then no one would suggest that the fee received by the agency should form part of the KFI – a mortgage club is no different. We need to get back to basics and think about what the KFI is there to achieve and about where product bias might exist. A potential bias exists at the advice level and with the intermediary of firm is giving the advice. A mortgage club has no contact with consumers (directly or indirectly). They cannot create any point-of-sale product bias. If the mortgage club has negotiated a better fee from a lender for an intermediary than they would have received from a direct submission application to the lender (as a result of bulk purchasing by the mortgage club) then that enhanced fee should be disclosed to the consumer so any product bias is transparent. I continue to argue that a requirement to disclose the fee paid to organisations which provide information (often through an electronic sourcing system) in a way which helps intermediaries search the market effectively and, as such, does not deal directly with individual borrowers and has no contact with borrowers and does not carry out a regulated activity creates consumer confusion. To prevent this, these organisations’ names should not appear on a consumer document, regardless of whether they have negotiated some income from the lender. There is no point in criticising the situation without an alternative. I know that the MCCB also grappled with this issue and it seems to me that an alternative wording needs to be somewhere between the old MCCB way and the new FSA way. I suggest the following wording is adopted: An organisation which is not a mortgage intermediary (that is, has no direct contact with and does not give advice to the consumer and cannot therefore influence the individual product choice), has no legal connection with the mortgage intermediary or mortgage intermediary firm and provides outsourced services to lenders and other product providers such as marketing, product design and administration should not be shown on a KFI. Where this type of organisation (typically a mortgage club or pure packager) pays a fee to the mortgage intermediary/ mortgage intermediary firm on behalf of the lender then that fee should be agreed with the lender and that fee should be disclosed on the KFI as part of the normal disclosure arrangements.” This wording is more transparent, gives the customer the information they need without confusing them and reflects the market as it currently works.