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News Analysis: Regulator under fire after ‘unnecessary advice’ warning

Brokers accuse FCA of moving the goalposts amid potential change of direction

The FCA ruffled feathers in the broker community when it commented in its latest Mortgage Market Study that “some consumers are being channelled unnecessarily into advice”.

Given that the Mortgage Market Review focused so heavily on ensuring that almost all home loan sales would become advised, many in the industry feel the latest paper marks a step-change in the approach from the regulator.

The dynamics of the market have shifted dramatically since the MMR, as before those rules came into force, 70 per cent of mortgage sales were advised, whereas now the figure stands at 97 per cent, according to the FCA.

While the FCA said in its latest report that “the harm from this does not appear to be large”, brokers say the paper seems to pave the way for the watchdog to change the advice rules back, to allow lenders to do a greater proportion of execution-only sales.

Association of Mortgage Intermediaries chief executive Robert Sinclair questions where the problem lies, given that advice is now typically inexpensive and quick.

He says: “If the FCA wants to go back and rewrite the advice rules from MMR then that is such a fundamental shift from a two-year project that got us from A to Z.

“What MMR did was very, very carefully set out what suitability should look like. If you wanted to not go through that process, it was framed very clearly what you had to know in order to go down the execution-only route. It was a very clear, binary process.”

Sinclair is concerned that those pushing for changes to the advice and execution-only dynamic within the FCA are not as close to the coalface as he would like.

He says: “If I talk to the supervision side about the mortgage market, they have no particular concerns that would cause them to either want to change the rulebook or undertake significant work. If I talk to the policy side, they think their rules work reasonably well for most consumers, but they are being asked to make changes in order to help promote competition, but within competition you have not got mortgage specialists.”

Thistle Dhu consultant Lynda Blackwell, who was one of the original architects of the MMR while mortgage director at the FCA, believes the regulator has been too swayed by the arguments of large lenders.

She says: “The big banks would like to do execution-only mortgages because it is easier and it is something they can do within their legacy systems. Lenders also have an aversion to advice risk, something they lay off on to brokers. But it comes at a cost.

“So the obvious route for them is to lobby the regulator to reduce those instances where advice needs to be given and to maximise the use of an execution-only process.

“The worrying thing is that the regulator seems to be listening to the lobbying from the big banks.”

FCA director of competition Sheldon Mills says: “We recognise that advisers play a key role within the mortgage market and can be really important for certain types of customer, particularly the vulnerable.

“Some consumers will be able to quite clearly pick out a mortgage without advice, while others may not be able to search the market to get the best deal for themselves and will value the experience of working with a broker to give them confidence, and allow them to gain access to a range of quality features.”

But Mills does acknowledge that the regulator’s thinking has moved on since the MMR.

He says: “[At that time] we felt that we needed to ensure that mortgage customers were gaining advice on suitability and criteria. But as with any regulator, we base our changes on the evidence we observe and we have seen that there has been a cautious approach taken to advice, almost giving advice in relation to every mortgage application, and that advice may not be necessary for all consumers.”

He adds: “The MMR was at a particular point in time where we saw some particularly poor practices, and it was quite belt and braces around advice and responsible lending.

“As time has gone on, we have had time to reflect that the responsible lending rules are still in place and that takes away a large proportion of the harm that we identified in the MMR, and now what we can see is that while advice is still very important to some customers and does mitigate a proportion of harm, arguably they are stifling innovation with distribution as well.”

Sinclair remains disappointed in some of the conclusions drawn by the regulator in the latest paper.

“There has been an element of reverting back to the original May 2018 paper, rather than reflecting the excellent dialogue we had within the working group,” he says.


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