Responses to the recent consultation paper from the FCA on advice and selling standards will now be being sifted through by the FSA. It is possible this will lead to the regulator loosening those rules a little to encourage more use of execution-only, in line with the conclusions of its Mortgage Market Study report, published in March.
The current rules and guidance, introduced following the 2014 Mortgage Market Review, have drastically reduced the number of new mortgages being sold without advice. The MMS states the FCA’s belief that the current regime helps most consumers to buy mortgages that suit their needs, but also concludes that they do not always end up buying either the cheapest mortgage available to them, or the mortgage that is the best match for their specific requirements.
With almost all new mortgage sales (98 per cent) and about half of internal switches currently bought through advised sales, the FCA also suggests in the MMS that some consumers “are being channelled unnecessarily into advice”. Its research suggests that, on average, consumers who bought a mortgage without advice are no more likely to experience measurable negative outcomes, such as falling into arrears, than are those borrowers who did take advice.
In addition, some of the lenders and intermediaries who responded to the earlier consultation on which the MMS is based said they thought some of the current rules and guidance restrict innovation. They cited the perimeter guidance, which states that any firm giving a consumer generic information that leads to the identification of a particular mortgage contract may be considered to be giving regulated advice; and the interaction trigger, which requires any firm interacting with a consumer in a new mortgage sale to provide advice.
These barriers, the FCA suggested in the MMS, “appear to restrict lenders’ and … intermediaries’ ability to innovate to meet consumer demands for information and guidance in a non-advised, digital environment”. The FCA said it wanted to identify changes that would remove barriers to innovation and encourage more use of execution-only, although the document did also stress that this should not restrict access to advice for “consumers who can benefit from it”.
In its May consultation paper focused on advice and selling standards (CP 19/17), the FCA proposes changing the perimeter guidance to make it clear that tools that allow search and filtering based on “objective criteria”, such as interest rates, are not necessarily giving advice. It hopes this will encourage the development of more of these tools by mortgage lenders and intermediaries to help consumers find the mortgage best suited to them.
The consultation also proposes modifying the interaction trigger to allow more “interactions most obviously unconnected with advice” before lenders are required to divert a consumer to an advised sale. It also proposes the introduction of a requirement for advised sales whereby an adviser who is not recommending the cheapest suitable mortgage available for a consumer will have to provide and retain a full explanation for that recommendation.
From the broker’s perspective, I still feel that when the 2014 review was implemented, the regulator made a good decision when it introduced the interaction trigger, because, as the FCA’s research prior to those changes had showed, many consumers believed they had been given advice when they had only actually received information.
The regulator suggests that some consumers are forced to obtain advice when they already know what they want to do. But I suspect many people working in the mortgage industry will feel, as I do, that there are some questions that it is often be a good idea for borrowers to ask (such as, ‘what happens to the rate after two years?’, ‘what happens if I want to redeem within the first few years?’, ‘what fees do I pay up front?’, or ‘can I pay lump sums off the mortgage?’)
Advised sales offer important benefits to both borrower and lender, with the borrower then protected by the Financial Services Ombudsman and the FSCS, while the lender knows the borrower has purchased a product that is suitable. If the customer goes direct and the application is processed on an execution only basis, the borrower may find it harder to make a claim for compensation.
Although the execution-only option is of course a good choice for some borrowers, the FCA must take care not to throw the baby out with the bathwater in its eagerness to ensure consumers are not forced into unnecessary advised sales.
This raises another question on an additional point the FCA made: pricing advised and execution-only products differently. The real issue here would be encouraging consumers to forgo advice and take the cheaper product, when this may not necessarily be the right option. Intermediaries have been vocal in ensuring that the regulator takes a step back on this before the final rule changes are published.
More innovation and better use of technology can enhance the customer experience and help to ensure that borrowers buy the products best suited to them. But the FCA must safeguard the valuable work intermediaries do, helping consumers find the right product. The regulator should continue to bear in mind some of the other key findings of the MMS: the current system leads to most consumers buying suitable mortgages that they can afford – and many of those consumers really value the experience and expertise that intermediaries provide.
David Copland, director of mortgages, TMA