The regulator’s mortgage advice reforms will be positive for many, but there are risks, says Neil Pickles, financial services partner at RSM UK.
The Financial Conduct Authority has decided to remove the interaction trigger on mortgage sales, meaning it will not require mortgage customers to automatically receive advice when interacting with their lender.
Advisers have voiced concerns the change could see them lose revenue and have a negative impact on standards, growth and innovation. But the FCA dismissed this, saying the benefits for consumers and the market would outweigh these concerns.
In particular, it said the changes would make it less likely that an execution-only customer will choose an unsuitable mortgage and consumers would find it easier to shop around and ask questions about the products they are considering.
Pickles agrees the reforms could bring benefits but he warns “there is a risk that advised sales become demonised”.
FTA: Are the FCA’s mortgage advice reforms in consumers’ interest when taking into consideration the potential risks?
NP: This is a good thing for those customers whose circumstances mean that advised sales present no benefit. It will speed up mortgage applications, and either remove or reduce the cost of application.
However, there is a risk that advised sales become demonised, when they can be of benefit for a significant proportion of customers, as they allow mortgage professionals to find the most suitable mortgage products for them.
Customer experience will likely be better for those that are not forced to unnecessarily participate in an advised process.
For lenders, it potentially lowers the cost of distribution, which may either enhance profitability, or allow a greater level of competitiveness from a pricing perspective.
The risk is in balancing this with meeting their obligations under the consumer duty, to demonstrate good customer outcomes for those on execution-only.
Customer understanding is also important, to ensure those taking out a mortgage on an execution-only basis fully understand what they are committing to, and reduce the risk of it coming back to bite them later on.
FTA: Is this an opportunity to get rid of issues like conditional selling or is it taking away business from advisers?
NP: Conditional selling is unethical, and in some instances it’s illegal in the UK.
It still occurs though, and it’s difficult to say what opportunity lies in the changes being proposed by the FCA to further reduce this practice occurring.
Conditional selling relies on influencing inexperienced or less financially aware people to take out a product or service before they have chance to seek any further advice, which is unlikely to be in the customer’s best interests.
The reforms may indirectly reduce the prevalence of this practice by increasing transparency and consumer empowerment, but enforcement could remain a challenge.
FTA: Overall, is the regulator creating a market that will be more and more D2C?
NP: It’s possible that what the regulator is doing will result in a more direct-to-consumer market, although not all lenders offer advice, and there is an obligation within the change that’s being proposed for firms to ensure they identify execution-only customers who require advice.
Those lenders may consider that maintaining their broker-led business is optimal.
FTA: Do you think overall consumers will be better off or will they be exposed to more risk than they should be?
NP: It depends on what you mean by better off. Measured purely financially, I’m not sure these changes impact, unless the cost of distribution is reduced so much that lenders pass this on through their pricing.
However, customer experience will likely be better for those that are not forced to unnecessarily participate in an advised process that provides no benefit to them.
FTA: Are there any particular risks that are on your radar?
NP: The risks of this change include customers insisting on execution-only mortgages, when advised sale would be in their best interest, or less scrupulous lenders or brokers encouraging execution-only sales to customers who would benefit from advice.
Both scenarios would put customers at risk of getting poor outcomes.
FTA: Is the government too aggressive with its growth push when it comes to easing regulation?
NP: It’s important that the government’s push for growth does not bring back the unscrupulous behaviours that contributed to the financial crisis of 2009. A proportionate, risk-based regulatory approach is key.
FTA: Do you think the advice reforms overall will accelerate the use of technology in planning and tax services?
NP: The use of technology is already accelerating at pace for market-driven reasons.
Customer expectations have changed on the back of technology-based entrants into the market. The reforms may support this trend, but they are not the primary driver.
FTA: Is there anything else that stands out to you in the FCA’s current work around advice?
The consumer duty has been implemented to oblige firms to ensure good outcomes for customers, and this requires them to evidence how this has been achieved, in case of future challenge.
Therefore, the review of the FCA into how it can evolve its regulatory framework around advice is interesting, as it provides the dual challenge of designing systems and controls that both reduce advice to some customers, while at the same time ensuring good customer outcomes.
carmen.reichman@ft.com
