The number of mortgages arranged has tripled in the past 30 years, and supply has gravitated overwhelmingly towards banks, with the top 10 lenders cornering around 90 per cent of the mainstream market.
The growth in advances in the last six years, with falling nominal interest rates, has been spectacular. At the same time there has been a change in the distribution of mortgages with the number of bank branches diminishing and the number of mortgages arranged through brokers/direct selling, growing rapidly.
The introduction of statutory regulation with mortgages having to meet suitability criteria including affordability and the matching of features/product range to the individual placed more power in the hands of the intermediary. On the face of it, the relationship between the lender and the intermediary should be simple. Lenders are keen to get their products in front of prospective customers and intermediaries act as the middleman – for a price. And, as is true in other markets, some providers will pay more for access to distribution than others. Some may even be prepared to pay additions where exclusivity or limited access is provided. However the relationship is not as simple an issue as volumes and margins and the relationship between lenders and intermediaries is one that is potentially full of tension and fraught with dangers.
Holding the power
For example, intermediaries may, for one reason or other, favour one product over another. Commercial terms may come into play here, or the quality of lender service standards may affect the propensity to push one product over another.
The intermediary, in this instance, wields a lot of power and the product distributors are therefore in a very strong position to negotiate favourable terms with lenders. The most productive working relationships depend on both sides having a mutual understanding of each other’s business objectives and genuine desire to share information and be honest and open with each other – and that means having proper lines of communication and making sure that those lines remain open.
However, the advent of regulation has flagged up some stresses in the lender/intermediary relationship, especially as a failure on some issues could lead to a fine that could even threaten the viability of the business.
Treating Customers Fairly
Nowhere is this more evident in than in the realm of ‘Treating Customers Fairly’ (TCF) and at what stage of the mortgage process does responsibility for the suitability and sale of a product fall into the realm of the product provider or the intermediary that closes the deal.
TCF failings?
The regulator has said that it wants to see the fair treatment of customers addressed at any of four stages in the mortgage process – product design, marketing and promotion, sales and advice, and after sale care (including complaints handling).
It wants to see ‘marketers’ sit down with the product designers to identify the target market for a product or to develop a new product fit for a particular group of consumers, e.g. first-time buyers.
Crucially, the Financial Services Authority (FSA) believes those responsible for designing and marketing mortgage products should take account of the information and training needs of those selling and advising on them.
But it would appear that some product providers are failing in this task, with ‘inadequate information and training for staff and distributors – so potentially putting consumers at risk’. This is according to Sarah Wilson, the director responsible for TCF at the FSA.
The fact is some product providers are not taking their responsibility to the customer seriously enough – especially where they have no direct contact with the retail customer and therefore wrongly believe that the TCF initiative does not apply to them.
Monitoring progress
The FSA is currently monitoring progress on its TCF initiative and has sent out a strong warning that it will be taking enforcement action on those firms that are lagging behind in adhering to the regulator’s stated aim of putting consumers at the heart of the business.
Its thematic work suggested to the regulator that much remains to be done. Thematic work showing poor compliance with disclosure rules, poor sales practices for some products, etc, at the very least suggests that senior management good intentions are not always being translated into an appropriate attitude on the ground.
Senior management need to take responsibility for embedding TCF into the processes, procedures and most importantly into the culture of a firm, at all levels.
Smaller firms
How firms translate the principle of TCF into practice, and the amount of resource required will vary – especially when it comes to the intermediary and the product provider.
Smaller firms may have significantly less management resource to devote to governance arrangements and less financial resource to devote to systems and controls.
However, small firms still need to have adequate controls over their staff and, where relevant, appointed representatives (ARs). Many smaller firms are advisers, so various practical aspects of their operations will already be shaped by the requirements of the FSA’s conduct of business sourcebooks for investment, insurance and mortgages. But sourcebooks do not cover every aspect of a firm’s operations and management needs to consider if TCF is properly reflected in their businesses and put in place a system of review.
All smaller firms should at least review whether the structure of the firm positively supports the principle of TCF as well as compliance with detailed rules.
The FSA’s priority in relation to mortgage and general insurance firms is focusing on the standard of disclosures to consumer and the Key Facts Illustrations (KFIs) are the bedrock of this policy. However, standards of disclosure by some mortgage intermediaries were found by the regulator to be unsatisfactory.
Product information
But it is up to product providers to provide clear and relevant information about their products to distributors. Equally it is important for distributors to consider the information they are given by lenders. Advisers should also be able to make an informed judgment on whether they agree with opinions expressed in providers’ literature and that includes Financial Promotions of any sort. If the origin of this material is the lender, it is the duty of the intermediary to check that it is clear, fair and not misleading. It is not an understatement to say the FSA was shocked when it discovered on one of its recent market sector mystery shopping exercises that, in a few instances, borrowers where being persuaded to take on a non-conforming mortgage when a prime mortgage would have been most beneficial to their circumstances.
Advisers shouldn’t have to second-guess the actuarial assumptions underlying the design of a product, but they should be able to form a judgment about, for example, whether the material is suitable for use by their clients.
And it is important that accurate and timely record-keeping is adhered to during the selling process. This is an area that can suffer at firms with few staff, especially at one-person operations. It is nevertheless important that firms maintain adequate records of customer profiles and instructions, and on each stage of the sales process. This is essential for management to be able to respond fairly when disputes arise, and will help if they have to provide evidence to the Financial Ombudsman Service (FOS).
Smaller firms need to attach the same importance to the fair and effective resolution of complaints as lender firms, which in all likelihood will have dedicated complaint-handling functions. Smaller firms are often closer to their customers and may be better placed to resolve any complaints; but they need to be aware of any potential risks.
General insurance
When it comes to selling and advising on mortgage payment protection insurance (MPPI) and related insurances, intermediaries have shown a desire to be decoupled from any relationship with the mortgage lender.
The Association of Mortgage Intermediaries’ (AMI) census on payment protection insurance (PPI) revealed that 92 per cent of respondents support ‘de-linking’. This means it must be made clear to customers that MPPI is not compulsory with a mortgage and they are free to choose a MPPI provider that is separate from the lender. That is unsurprising as some lenders tend to use single premium accident sickness and unemployment policies that run for the length of the mortgage and end up costing the client far more than a renewal monthly premium plan. In most cases, selecting a policy not linked to a lenders’ offering would normally lead to a massive saving for the client – and that means intermediaries would be complying with the TCF initiative. Mortgage intermediaries are increasingly looking to outsource the whole general insurance process to a general insurance wholesaler where they know that the client will get the best policy to suit their situation and they get a commission. In such a scenario the lender is cut out of the loop altogether.
