As the saying goes, ‘every cloud has a silver lining’, and this could not be more true for the mortgage industry. No one needs reminding that the last two years have been dramatic, but almost all lenders (90 per cent) agree that these two years have also acted as a catalyst for change and that it will directly impact on the way mortgages are distributed in the future.
Currently, the RDR does not include mortgages; however the FSA’s recent announcement indicates that they are reviewing this position. Ahead of this, most lenders (84 per cent) believe they should be included within its remit, and 85 per cent of lenders believe that mortgages will be included at some point in the future.
Analysis
These figures, and much of the analysis that I will go on to discuss, comes from N4’s desire to understand the future dynamics of our industry and how it will impact on distribution and the technology that underpins it. To this end, earlier this year, we commissioned the N4 mortgage distribution in the 2010’s survey, which incorporated the views of banks, building societies and specialist lenders.
Although most lenders believe that the RDR will include mortgages at some point, the majority, 63 per cent, thought that the mortgage sector had ignored the potential implications of RDR, albeit, as this article goes on to show, the implications are positive. Anything that increases transparency, fairness and the competency and skills of advisers is a positive step in re-establishing consumer trust and confidence.
Positive implications
There are also positive implications for increasing holistic advice which could have significant effects, not just on the lender’s bottom line. The social benefits could also be dramatic as the RDR seeks to address the disconnection between customer needs and customer knowledge of financial services products, meaning that more customers gain access to products that protect their financial security including basic pensions, protection and saving products.
My personal view is that RDR is a long-term errand for the FSA, and adoption of mortgages within it is unlikely to be realised for some time - at least until after a ‘bedding in’ period of the current RDR initiative in 2012. But, in light of our research and the recent announcement by the FSA, I don’t believe that it matters whether RDR includes mortgages or not. What matters is that lenders see commercial opportunities coming from the RDR regime. And to this end perhaps the most telling statistic is that 75 per cent of lenders predict a significant increase in holistic advice. For many lenders this has been the Holy Grail, but achieving it has been almost impossible to date.
Holistic advice
It’s probably worth looking at a few reasons why holistic advice has been difficult to achieve. Firstly, whilst mortgages are a relatively frequent purchase every 3-4 years, the advisers have been limited in the scope of products that they could advise on. Conversely, for the average person, investments and pensions are bought much less frequently.
But the dynamics of the proposed RDR lend themselves to a lender’s mortgage adviser: firstly, it is already cost effective to provide face to face advice for most mortgage transactions, secondly, and unlike the general IFA offering which tends to concentrate on mid to high net worth clients, mortgage advisers usually accommodate everyone regardless of the size of loans, hence the population covered is much, much broader.
Our research suggested that, as a direct result of holistic advice, lenders predict an 85 per cent increase in the cross-selling of savings and a 75 per cent increase in investment products.
Broader range
In the last few years, many lenders have been moving their mortgage advisers towards offering a broader range of products. But, for some, this took them outside of their comfort zone and potentially created compliance issues. It is for this reason that I would envisage why 85 per cent of lenders felt that more sophisticated point-of-sale technology would be required to manage cross-selling and to provide checks and compliance processes within the sales process to ensure compliant sales.
Our survey also indicated another major change - the basis of broker remuneration. Over 85 per cent of the lenders we questioned believed that the way brokers are remunerated will change, but perhaps surprisingly, only 10 per cent of lenders thought that trail commission would be prevalent.
Remuneration
Whilst this research was conducted prior to the FSA announcement stating that it may scrap the payment of mortgage proc fees and introduce adviser charging instead in a bid to stamp out product bias; it fully reflects the FSA sentiment. As the FSA’s Dan Waters said: "The Retail Distribution Review aims to reduce the conflicts of interest inherent in remuneration practices… the proposal we have put forward and expect to consult on is adviser charging, which ends the setting of commission levels by providers and is intended to deliver a knock-out blow to product bias.”
Benefits?
The question is how will lenders benefit from the RDR? My view is that lenders should consider investing in their mortgage advisers, training and re-skilling in order to deliver RDR-compliant advice. This will enable them to service the majority of their customers for the majority of their needs.
I also believe that competition for mortgage business will intensify as the new breed of general RDR adviser will see opportunities adding mortgage advice to his suite of products. Point-of-sale technology will facilitate this, as discussed before, as it can provide a very structured environment in which the adviser can operate. We will therefore see lenders’ advisers competing directly against RDR advisers, who are working at other firms, for the same mortgage customers on similar terms.
Finally, at some point in the future I would anticipate that the RDR will cover mortgages, and I don’t necessarily see why it should stop there. Given the current public perception of the financial services sector, a common regulatory regime for all personal financial products may benefit the whole industry and help create a landscape which is fair, transparent, robust and free of scepticism.
The research found that:
90 per cent agree that the past two years have acted as a catalyst for change and that it will directly impact on the way mortgages are distributed in the future
• 84 per cent) believe they should be included within the RDR remit
• 85 per cent of lenders believe that mortgages will be included in the RDR at some point in the future
• 63 per cent thought that the mortgage sector had ignored the potential implications of RDR
• 75 per cent of lenders predict a significant increase in holistic advice
• Lenders predict an 85 per cent increase in the cross-selling of savings and a 75 per cent increase in investment products
• 85 per cent of lenders felt that more sophisticated point-of-sale technology would be required
• 85 per cent of the lenders believed that the way brokers are remunerated will change; but
• Only 10 per cent of lenders thought that trail commission would be prevalent
