Networks are waking up to the potential problems that not advising on certain products may pose for future compliance
Advisers are on the hook for a lot these days. I recently read about a Financial Ombudsman Service case where a client had been sold a basic critical illness policy. On the application form he had ticked both the basic cover and comprehensive cover boxes.
When he came to claim, the insurer refused to pay out, saying he had only basic cover. The adviser had not recorded the conversation and the FOS found in the client’s favour.
This has nothing to do with bridging but it illustrates the world we live in today, in terms of both the growing litigiousness of our society and the increasing importance of having evidence for what advice was given and why.
Many of the products that fall into the specialist finance category are not regulated. But this should not matter where advice is concerned. If a client comes to you for advice on obtaining finance and you turn them away without demonstrating why it was in their interests for you to do so, are you laying yourself open to future complaints?
This notion is becoming far more relevant in today’s regulatory world. Last month, the FCA published its mission statement in which it highlights the fact that some products that are currently unregulated are nevertheless related to regulated financial products. It raises the question of whether it should intervene if it sees customer detriment caused as the result of the sale of an unregulated product.
Add to this the fact that mortgage networks are waking up to the potential problems that not advising on certain products may pose for compliance in the future. Most networks have had protection panels for years. More recently, they have been adding panels to allow their appointed representatives to refer deals to specialist equity release and second charge advisers, as well as those who deal with specialist finance needs.
It is all very well making these relationships available but all advisers know that, when push comes to shove, the 80:20 rule wins: the most successful brokers focus 80 per cent of their energy on the 20 per cent of deals that will complete.
This rule may make commercial sense but it is not good enough in today’s world.
Not about churn
Being a broker cannot be about churning transactions. It is about providing the most suitable and appropriate advice, even if that advice is that you cannot help. However, critical to this is that advisers actually know why they cannot help clients.
‘I don’t do that sort of loan’ does not really cut it for the regulator or ombudsman any more, especially when you consider specialist finance is usually provided by lenders that sit within the regulated space.
Technology systems developed for this market are useful. But technology alone cannot replace personalised advice from a qualified broker when it comes to specialist finance. Indeed, the other day I came across a deal that completely foxed the technology, making me realise how little it should be relied on by brokers as evidence of advice given.
The client wanted to buy at auction a derelict garage in London and develop the site into a three-bedroom house. His planned exit was to sell on completion of the development. Entering this information into any existing sourcing system would have resulted in a resounding ‘Computer says no’. However, when we got under the skin of it, this was a deal that made good commercial sense. The questions a specialist lender needs the answers to are specific to each project, which is why experience and understanding are critical.
Does the site have planning permission in place? Is the borrower an experienced developer or someone with extensive refurbishment experience? Are they employed or self-employed? What other assets do they own and what other debts exist? A sourcing system, however sophisticated, could not handle this enquiry because of the number of variables and general complexity.
I am not sure if there are any concrete precedents of clients complaining about advice they were not given but it is something all advisers should be mindful of. When your network has a referral relationship in place with a specialist distributor that could find an appropriate solution for clients who do not fit the usual mould, what is your excuse for turning away legitimate borrowers?
Lucy Hodge is managing director at Vantage Finance