During the coming weeks mortgage brokers will face some of the toughest decisions of the year – which matches will they watch, where are they going to watch them and whose corporate invitations should they accept? On top of this, clients will have to be taken care of. If only house buyers would take the month off we could all enjoy the World Cup in peace.
Corporate hospitality has its part to play in any market and the mortgage world is no different. Around big events such as the World Cup, social occasions are organised with varying degrees of grandeur, from beer and sandwiches in pubs to trips to Germany to watch the games. But what of the cost involved, the return it generates for the host companies and the implications of such schmoozing in light of mortgage regulation?
The more extravagant the event, the higher the cost and some companies will be picking up bills for tens of thousands of pounds when the last ball has been kicked at the World Cup.
There is no doubt that relationships have to be nurtured in business and meeting in relaxed surroundings provides a good opportunity to do that. It’s also easier to deal with certain situations away from the office in informal tones, and corporate hospitality provides an excellent opportunity to do this.
So what do corporate hosts get for their money? The underlying purpose is to generate more business, but if the relationships a company has in place are well established, would it lose out by cutting its hospitality budget?
Some may say it is such investment which has delivered these relationships in the first place, but are business partnerships so shallow nowadays that they rely on time spent watching football and drinking eternal flutes of champagne?
Every company has its own view of corporate hospitality which will be coloured by the personality of the people heading it. But at another level there is the question of whether corporate hospitality amounts to an inducement and whether it should be declared to clients.
At extreme ends of the spectrum it is easy to decide what does and does not amount to inducement but problems arise when looking at areas where the events involved do not involve huge sums of money. Questions also arise about the ways business relationships and remuneration policies are set up. Deciding what should and should not be per- mitted is difficult when looking at the middle ground of spending.
The Financial Services Authority is astute enough to realise that conflicts of interest exist in the mortgage market as they do in all aspects of life. It has not sought to rule on what is allowed, but rather insists that companies manage these conflicts effectively to ensure they are not detrimental to their clients.
In terms of corporate hospitality this means the decision is left to companies whether they should declare a monetary value for the non-financial gifts they receive. Most would accept that where such entertainment is reasonable to the average observer there is no need to do so but the question remains whether or not the broker is influenced in the advice they give.
Brokers are unlikely to go out of their way to place cases with lenders if they do not fit. But equally the temptation is to place all similar cases with a lender when that relationship is well rewarded and familiarity has brought ease to the application process.
Any evidence that this might be going on is anecdotal but there’s no doubt brokers have their fav-ourites and there must be a question over what role the hospitality they enjoy plays in this. Borrowers may end up losing out to the tune of 0.3% so the sums involved are not huge, but you have to wonder how far the point is stretched in certain cases.
One area that does not sit quite so innocuously is that of profit commission and the role it plays in the protection market. Remuneration is based on the amount paid out in claims from the premium pool so it is in the interest of intermediaries and insurers to deny claims.
There is no doubt that this raises a conflict of interest and again the question is how well companies manage it. Looking at the amount paid out in claims, it seems they don’t manage it well, so not only does such a commission arrangement fly in the face of the regulator’s inducement rules, it also makes a mockery of the concept of Treating Customers Fairly.
In setting up its framework for dealing with inducements the FSA has been careful not to be overly prescriptive. But it has fired a number of warning shots across the industry’s bow in the form of letters to chief executives. What it must do now is crack down on a few examples of poor practice. These can then be seen as markers for the future. By doing this the regulator will dissuade some companies from questionable dealings and keep others within the parameters of what is acceptable.
But if England repeat their feat of 1966, all reasonable notions of corporate hospitality are likely to go out the window as the country celebrates.
What the FSA says on inducements
- An inducement is a benefit offered with a view to bringing about a particular course of action.
- A firm must take reasonable steps to ensure that it and any person acting on its behalf does not offer, give, solicit or accept an inducement.
- The FSA does not prevent firms from assisting mortgage brokers so that the quality of brokers’ service to customers is enhanced. Neither does it prevent firms from giving or receiving indirect benefits such as gifts, hospitality and promotional competition prizes, providing these are not likely to give rise to a conflict with the duties the recipient owes to the customer.
- A firm must not operate a system of giving or offering inducements to a broker or any other party whereby the value of the inducement increases if the mortgage broker or third party such as a packager exceeds a target set for the amount of business referred – for example, volume overrides.
- Mortgage lenders must quantify in cash terms any material inducements they offer to intermediaries or third parties in the mortgage chain.
- In quantifying the value of material inducements companies must include subsequent payments such as trail fees, made when customers continue with regulated mortgage contracts.
Source: Financial Services Authority