The winds of change are blowing – at least, they are for the retail investment market.
With the prospect of sweeping reforms to the sector courtesy of the Financial Services Authority’s (FSA) Retail Distribution Review (RDR), it is enough to cause both advisers and providers to become a tad anxious at how their businesses will be affected.
There is no doubt that there are some strident objections to the proposals, not least from a decidedly concerned mortgage industry, wary of further regulatory creep.
Of course, the FSA has reiterated on numerous occasions that the RDR pertains to and is limited to the retail investment market and not mortgages.
Yet, these reassurances have failed to alleviate the worries of mortgage professionals, who maintain that the RDR could have a detrimental affect on the industry, not least because the FSA has left the way open for the RDR to cross over by stating it remains ‘open-minded’ to the possibility, if feedback suggests it would be of benefit.
The prospect of further and extensive changes to regulation is naturally the last thing anyone in the mortgage market wishes to happen.
The very fact that such a major shift in the financial advisory model is on the borders of the mortgage sector has naturally unsettled many people.
Certainly, fears of increased regulation as a result of the RDR are already having an effect in certain sectors.
Tenet, the IFA network, has reported a 30 per cent increase in new business and a particular rise in the number of mortgage advisers joining the network as concern has grown about a RDR-style review of the mortgage market.
And for some of those on the ground, there is little doubt that the RDR will cross over to mortgages – it is just a matter of time. Tim Sutcliffe, managing director of pi financial dixon sutcliffe & co, states: “We’re talking about one sector, one market, one ethos.”
Resolving persistent problems
So what exactly is the RDR, and why has it got so many people worried?
Essentially, the review is meant to address and resolve persistent problems in the retail investment market – improving professionalism, cost-effectiveness for the consumer, and consumers’ understanding of the advice they receive.
The key aspect of the review that has caught everyone’s attention is the idea of creating two levels of adviser – ‘primary’ and ‘professional’ – with differing levels of qualifications and knowledge.
The review also suggested a redefining of what ‘independent’ can and cannot mean, and ‘customer agreed remuneration’ becoming a standardised practice to eliminate the concerns of bias from commission rates.
Presented to the financial industry last Summer, the RDR has sparked much debate. The consultation period has attracted a ‘significant’ number of responses, according to the FSA, necessitating the need to move up the timetable for presenting the feedback to give an idea of where the review is headed.
Reportedly the FSA has received thousands of responses, with more still coming in, and an interim paper is now set to be published in April this year.
The full feedback statement will appear in October and will set out not only the feedback in full from the discussion period, but reveal what future regulatory changes the FSA has decided to implement and the timetable for consultation on these. Clearly, these publications are going to generate a lot of interest from a lot of people.
Despite the shifts in publishing times, the FSA has made it clear that there will be no slowdown in the overall timetable for implementation.
Stephen Bland, the FSA director responsible for small firms, at the December announcement of the revised publication timings, noted: “We want to give the market as much information as we can, as soon as we can, about what we have heard and what we have found both in the interests of transparency and to keep up the momentum.”
This concept of transparency for consumers and financial firms alike has been revealed as a strong element of the feedback and Bland hinted at the prospect that the RDR would reduce in complexity as a result.
Yet, the industry has been quite clear in its expectations, as Bland pointed out: “The overwhelming message we’re getting from all in the market is that if we are to make regulatory changes, we must get it right.”
Nevertheless, the time for debate with concerned parties is currently over, with the consultation period for the RDR formally closing on 31 December 2007.
Of course, this does not stop those against the RDR proposals from speaking out publicly, and several bodies have made the most of this fact.
Strong criticism
The Intermediary Mortgage Lenders Association (IMLA) has strongly criticised the regulator for failing to consider how the introduction of regulation off the back of the RDR will affect mortgages.
It slammed the proposals as ‘bordering on the irresponsible’ for the lack of assessment on how it could affect the mortgage market and that any changes without proper consultation represented ‘market change by stealth’.
It is this potential for read-across that has got so many in mortgages concerned and Peter Williams, executive director of IMLA, left no one in any doubt of his feelings over the proposals.
He said: “Given the current conditions in the mortgage market and the considerable uncertainties that exist, we are convinced that wholesale replacement of the existing commission based system could be disastrous.
"While recognising that some reform may be appropriate, we do not accept that the present system is broken.”
The criticisms of IMLA are backed by research from Navigant Consulting, which conducted interviews with senior executives from 15 of the largest mortgage lenders in the UK about their views on the RDR.
The research reveals that 60 per cent of these lenders do not believe the RDR should be expanded to cover the mortgage market and that it will mainly benefit lenders with a high street presence because of the RDR’s focus on mass-market customers.
Simon Kent, head of retail banking for Navigant Consulting, says that this demonstrates the lack of engagement lenders have with the proposals, and adds: “There’s clearly more work to be done if the FSA is to really sell the RDR to mortgage lenders. Many mortgage industry business leaders believe that the mortgage model works and that mass-market customers already get good quality advice on suitable products.
"While there are undoubtedly issues with today’s mortgage market, an automatic read-across from the RDR is not viewed as the best way to tackle these.”
However, Bland has spoken of the significant differences between the mortgage and investment market and why this means it is unlikely that regulatory creep will occur.
He described the mortgage sector as a ‘more complete market’ than investments, but did warn that it was up to the industry to find solutions for mortgage market failures to prevent the need for regulatory intervention.
But it is this prospect of a financial advisory market with differing regulatory and disclosure regimes that has certainly caused a considerable amount of concern.
Lenders responding to Navigant Consulting’s research called the RDR an ‘unnecessary complication’, with one particular comment being: ‘We can’t live with a two-tier advice regime – customers won’t understand it either.’
Huge upheaval
Advisers who deal with investments and mortgages also face huge upheaval. IMLA cited that 58 per cent of IFA firms handle mortgage business, while over 3,000 directly authorised firms can give investment and mortgage advice.
Sutcliffe is adamant that all financial advisers fall under the same remit, regardless of the topic. He explains: “There are three essentials: independence, professionalism, and customer-agreed remuneration. There is an overwhelming opinion that independent is ‘whole of market’ and not just because you’ve agreed the remuneration with a client.
Everyone wants a ratcheting up of professionalism – professionalism is about ethics, ethos and putting clients above your own interests. It is just as important in mortgages as in investments.
Do we break down into divisions? The sentiment is possibly not; there is enough confusion already about what a tied or multi-tied adviser is. Yes, we want to improve standards, but not in the way of segregating the market.
“I don’t think the model is broken, no matter what Sir Callum McCarthy says. Can the model be improved? Yes. Hopefully, we will see some very positive changes from the RDR.”
It is apparent that the mortgage industry is deeply suspicious of the RDR and the FSA’s intentions, despite continuous denials and reassurances from the regulator that they have nothing to fear.
Yet, it will be some time before it is even revealed what the FSA actually wants to implement in the investment world, let alone any implications for mortgages. It is certain that the mortgage industry will keep a keen eye on developments as they come.
However, the greatest pressure is on the financial services regulator – it must get this right or face disrupting a market essential to the UK’s economy. Criticism from the experts and commentators in our industry must be listened to and considered, and one can only hope the FSA has its ears well and truly pricked.
