The way lenders sell mortgages is set to undergo a radical transformation from the summer of next year, unless they have done enough in their submissions to the final Mortgage Market Review paper to persuade the Financial Services Authority otherwise.
Assuming the FSA does not do a U-turn on its proposal to ban non-advised sales and does not delay the implementation of the MMR, all mortgage sales – apart from high net worth clients and mortgage professionals – will have to be advised. However, customers will be able to proceed on an execution-only basis if they know precisely what they want to buy.
The MMR proposal requires lenders to offer advice where there is a spoken or interactive dialogue with a customer, meaning telephone-based and online sales will be the channels most affected, which the regulator estimates account for around a third of all mortgage sales.
The FSA argues the proposal will clear up consumer confusion about when they have received advice and when they have simply received information.
All submissions to the final MMR paper had to be in at the end of March, with a final set of rules expected by this summer and the implementation of the rules expected a year later.
In their submissions to the FSA, lender trade bodies issued stark warnings about the costs of implementing the proposal and said it could result in a reduction in gross lending.
The Institute of Financial Planning recommends 200 hours of study for those looking to take CeMAP and individuals can expect to pay up to £1,000 for study materials and tuition.
Some lenders will find the transition to a fully advised sales process harder than others but it will come at a significant cost. The Council of Mortgage Lenders and the Building Societies Association would not estimate the total costs to lenders.
But Richard Farr, director at management consultancy Telos Solutions, believes it will cost anything from tens of thousands of pounds for small to medium-sized lenders to millions for large high street players.
“When you move to a fully advised sales process, you need supervision and checks in place with every sale to ensure things are being done properly,” says Farr. “This is where the bigger cost is, as opposed to the cost of training staff in the first place.
“A small to medium-sized lender switching to an advised process will cost tens of thousands just in management time and getting the external resources in to make the switch. It could reach hundreds of thousands, depending on the structure they have in place already. A big lender with nothing in place to make the switch will be facing costs of millions.”
HSBC, the largest direct lender, says its telephone-based mortgage sales team has hundreds of employees, rather than thousands, although it could not give an exact figure. However, it sees clear implications on its model as a result of the proposal.
“It does have implications for our direct sales force and we have sent our response to the FSA,” a spokesman says. “It is not just a challenge to us but other lenders and new entrants to the market that wish to distribute via these channels.”
Cost aside, the CML argues that advised sales take around one hour and 42 minutes longer than non-advised sales and argues that the proposal will have a disproportionate impact on lenders that do not distribute via intermediaries.
Given the added cost and time an advised process would take, it would be reasonable to assume that some lenders would look to use intermediaries more in their distribution strategy.
John Heron, chairman of the Intermediary Mortgage Lenders Association, says it is more likely lenders will adopt a more broker-friendly strategy if the proposal is implemented in its current form.
“It remains to be seen whether that change in requirement would see a drive towards intermediary sales,” Heron says.
“But if this change comes in its current format, it is more likely to result in increased broker selling than the other way round.”
But Alan Cleary, managing director of Precise Mortgages, is convinced that any swing towards brokers will only be temporary while lenders train staff and get structures in place to make the change.
“I think lenders may need brokers in the short term while they get their staff trained but I do not see any long-term changes in distribution strategies,” he says. “This may take a year or 18 months for some of the bigger lenders.”
The proposal also captures lenders that offer any type of live chat option in their online sales process, where customers can ask questions, as well as covering any sort of interaction via social media.
Both the CML and BSA have raised concerns about the prescriptive nature of the proposal.
“This stifles innovation – especially online,” says Paul Broadhead, head of mortgage policy at the BSA.
“When you have any interaction on a website, the FSA deems that as an advised sale. If that has to be taken away then you are removing another way of doing things for customers and holding back innovation.”
The CML argues that lenders will be forced to adopt a homogenised approach to selling mortgages at the expense of innovation.
“All lenders will have to sell in the same way, no matter which channel they use,” a CML spokeswoman says.
“The restriction of choice and the need to follow a prescribed advice process creates a single approach to distribution, thereby restricting the development of new models, new technology or reacting to changing consumer demands.”
The BSA is also concerned that the banning of non-advised sales could result in job losses at some lenders, due to the cost of retraining staff, or some employees being unwilling to retrain to gain their CeMAP qualification.
“The proposal could lead to redundancies in some cases,” says Broadhead. “Not all the staff who have been recruited to carry out non-advised sales will want to go into advised sales or have the ability to upskill.”
“If that happens, they could be made redundant. What this doesn’t do is solve consumer detriment, which is what the FSA is aiming for – it just shifts it.”
So if lenders are concerned about the effects of this proposal on their business, what amendments are they suggesting? The BSA wants the regulator to bolster disclosure requirements to ensure customers are aware they are having advice.
“There are better ways of clearing up the confusion around when people believe they are receiving advice than to move to fully advised sales,” says Broadhead. “I think the better way to deal with the problem is disclosure and to be clear about the level of service.”
However, in its final MMR paper in December, the FSA said consumers do not understand the distinction between a non-advised sale and an advised one, no matter how many times they are told or are given written disclosure on this.
The CML, on the other hand, wants the proposal to place emphasis on encouraging advice but offering customers the option to opt out of the advice process if they feel it is unnecessary. But the CML says sale-and-rent-back, equity release, right to buy and debt consolidation cases should always be advised.
It also wants the new proposal to mirror the approved persons regime, the implementation of which has been postponed indefinitely. It states that those in administrative roles or acting in cases where no new monies are advanced do not have to be individually registered.
“The FSA should align the application of the advice proposals with the approved persons regime, which was finalised in 2010 and is limited to new monies,” says the CML’s response to the consultation.
Cleary argues that it is right for the regulator to insist on most sales being advised, but sides with the CML in calling for administrative roles to be excluded.
“I think you need to draw a distinction between what is an administration function and what is a sale,” he says. “But anyone who is seeing a customer about a mortgage should be qualified anyway. Just because a lender hasn’t invested money in training staff is not a good enough reason for the regulator to do a U-turn on this proposal. It is right that lenders’ staff should be held to the same standards as brokers are.”