Just how many freebies and extra services is a principal allowed to tempt you with before it becomes guilty of offering inducements? Does a trip to the races count, or throwing in a free sourcing system as part of your membership package? What about so-called 'volume overrides', which encourage you to submit a certain amount of business?
If you ask the FSA you will not get a direct answer. You will instead be politely referred to MCOB 2.3, which deals with inducements, and left to work it out for yourself. The stated purpose of these rules is to “ensure that a firm does not conduct business under arrangements that might give rise to a conflict with its duty to customers or to unfair treatment of them”.
The definition of an inducement is “a benefit offered with a view to bringing about a particular course of action”. In the context of mortgage advice, it means something that persuades an adviser to place business with a firm they would not otherwise use and which may not be in the best interests of the client.
It is also worth noting that in the FSA's guidance the rules do not prevent any regulated firm assisting an intermediary such that the quality of the intermediary's service to customers is enhanced – this could include things such as technology if the result is better quality advice.
So, for example, a mortgage sourcing tool would be fine, as Andy Young, head of mortgage services at Sesame, explains. “We do not believe that the offer of free mortgage sourcing tools to our advisers gives rise to any conflict with their duty to customers or leads to unfair treatment,” he says.
“Neither would it lead to an adviser giving different advice than if they had paid for the sourcing tool themselves. Provided there is no conflict of interest and the customer gets a better service as a result, the MCOB rules allow this.”
The rules also allow giving or receiving indirect benefits such as gifts, hospitality and promotional competition prizes. So, however much you may be dreading regulation you can at least rest assured that you can still look forward to the occasional rugby game or dinner after Mortgage Day.
However volume overrides will not be tolerated – a mighty blow to some less scrupulous brokers, packagers and indeed lenders. The rules state that “a firm must not operate a system of giving or offering inducements to a mortgage intermediary or any other third party whereby the value of the inducement increases if the mortgage intermediary or third party, such as a packager, exceeds a target set for the amount of business referred (for example, a volume override)”.
This should make the market fairer for smaller intermediaries and is to be applauded.
As the FSA is unwilling to enter into individual discussions on the rules, each firm will have to work out its own position. It's a point made by Sally Laker, managing director of Mortgage Intelligence.
“Each firm will establish its offering in light of their interpretation of the rules,” she says. “It is not simply a case of looking at the headline offerings but also understanding the systems and controls that underpin them. We are confident our offering is compliant with the rules and is in the spirit of the principles on which they are based.'
All your network questions answered by the industry's leading experts
Q: Are the new mortgages networks better than the IFA or life company networks?
Richard Griffiths is managing director at Network Data
IFA and life companies carry a lot a historical baggage. Many face a growing barrage of complaints about the mis-selling of endowment policies. For brokers who are focussed on mortgages and insurance only – including term assurance – the new mortgage networks have the advantage of starting with a clean sheet.
Stephen Atkins is group compliance director at Freedom Finance
I believe they are equal. The IFA networks have more compliance experience although this has not meant them avoiding pensions and endowment problems. The new mortgage networks have a lot to learn in a short time but at least they are familiar with the mortgage business.
Nick Battersby is group compliance diretor at Trustguard Credit Services
I think the new networks will be more responsive to the needs of their members. More competition will bring about better services and drive down prices. But as to whether they will be better in terms of the quality of the regulatory and compliance support they provide I can only suggest that potential ARs evaluate each network thoroughly before proceeding.
Chris May is director at Mortgage Times
Definitely. I believe a lot of the IFA and life networks do not understand the mortgage market and are only investing heavily in this sector because margins have been cut on investment products.
Andy Young is head of mortgage services at Sesame
Networks will differ on the choice they offer and in the quality of their offerings but the thing that IFA networks have is their experience and record in dealing with FSA regulation. Many will look to extend this to cover mortgages and general insurance.
Ian McIver is managing director of Whitechurch Mortgage Network
On one side mortgage networks have the experience in dealing with mortgages and on the other IFA/life networks have the experience in compliance with the FSA. Perhaps a mix of both is the answer – select a network with both proven mortgage experience and compliance experience.
Richard Coulson is director of Zurich Mortgage Network
The new mortgage networks could be perceived as being better than the old IFA or life networks for brokers but this may not be the case. Many established networks have radically altered their approach to mortgages in order to remain at the forefront of the financial services industry.
Martin Cave is managing director of Home Loan Partnership
Life company networks restrict you to their own (often expensive) products and fees charged by IFA networks can be costly. The best choice is a network that is well established, has significant corporate backing and has a variable pricing structure linked to the size and scale of your business.