The Financial Services Authority’s (FSA) Retail Distribution Review (RDR) has proved a contentious issue from the moment of its publication in June.
Focused on improving the advice given to investment customers and increasing the sector’s professionalism, one of the RDR’s main proposals is the implementation of three levels of adviser – professional, primary and general.
Yet while the paper relates to retail investments, there has been vocal concern that the proposed reforms could transfer into the mortgage market, causing a dramatic shift in how brokers work.
Of course, the FSA has and continues to allay such fears, denying that there will be an automatic read-through from the RDR to mortgages.
Nevertheless, in a speech to the Mortgage Masters Conference, Stephen Bland, director of the small firms division at the FSA, said the regulator had ‘an open mind’ about where the review went and would certainly consider a wider application of the review to mortgages if it were needed.
Not without fault
Yet, while drawing numerous comparisons between investments and mortgages to prove how disparate the sectors are, Bland highlighted that the mortgage industry is not without fault and concerns which could drive an RDR-style review must be addressed. He cited such issues as the increasing complexity of specialist products, and the commission-based nature of mortgage fees potentially working against clients’ interests and causing churning.
Bland said: “What I do know is that, while many mortgage firms are treating their customers fairly, too many firms are currently operating in a way which is unacceptable – and risk bringing the industry into disrepute and damaging consumer confidence in it. And this risk gets more and more acute in times of a market downturn.”
He warned that many mortgage brokers will inevitably face the affects of the RDR. FSA figures show that of the 6,406 directly authorised firms able to give mortgage advice, 3,048 also advise on investments and will have to get to grips with the RDR. Just 419 directly authorised firms concentrate solely on mortgages.
Of course, Bland points out: “What we have to remember is that the RDR was a response to specific, recurrent problems in the investment market for and among not only intermediaries, but also providers, banks and consumers. And, to my mind, the jury is still out on whether there are aspects of the mortgage market that require an RDR-style review at some stage.”
Note of caution
However, Richard Farr, director for the Association of Mortgage Intermediaries, gives a note of caution over any potential worries mortgage brokers may have. He says: “Bland’s speech was certainly not a press release or policy statement. It was a thought-provoking speech delivered to a small audience, which reflected on why the RDR is not an automatic read-over to mortgage intermediaries.
“It is important that this speech is not taken out of context. We need to focus current thinking on ‘Treating Customers Fairly’ (TCF) rather than future developments that may never happen. There are two important TCF deadlines next year, and we can’t let anything detract from this.”
James Cotton, mortgage specialist for London & Country, adds that, while it is better to be prepared for cross-over, the industry is already doing much to improve its standards. He says: “2008 is the year for TCF. For 2008, the industry will be doing plenty to improve standards. For now, the industry is doing enough and standards will improve, as brokers are getting up to speed on implementing TCF and proving they are doing so.”
Solving problems for ourselves
Indeed, Bland pointed to the mortgage industry itself as the best source to solve problems. “The FSA looks first to see if the market itself is coming up with solutions. So I see this as being in the hands of you, the industry, so that market failures are addressed by industry solutions in the first instances and regulatory intervention is reserved for those failures that cannot be addressed, or have not been tackled by the market itself when it had sufficient opportunity to do so.”
Cotton backs the view, believing that letting the industry solve problems first is more efficient and warns that multiple reviews would merely lead to confusion. He explains: “Brokers have a lot to do to meet the TCF deadline the FSA has imposed. It has got to let current initiatives run their course and I think that will happen anyway. If there is a trickle-down effect, it will take a while.”
Where the RDR will lead the mortgage industry – if anywhere – remains wide open for discussion. Yet, it is apt to bring about a wide ranging debate to identify the issues the mortgage industry has and how they can be addressed by those in the business themselves. For the time being, it is the world of investments that will face the full effect of the RDR, but the mortgage industry must be willing to change and grow to prevent the FSA taking similar RDR action against it.
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