The FSA has published a speech by Dan Waters (Director of Retail Policy & Conduct Risk, FSA) entitled Mortgage distribution - What are the right outcomes for consumers and how do we achieve them?
In his speech Mr Waters discusses some of the key issues and questions around the role of brokers in the mortgage market during the run-up to the financial crisis. Mr Waters adds that brokers “have become a significant part of our market and their role and influence are something we cannot ignore if we are to address the market failures the financial crisis has brought into stark relief.”
Mr Waters then provides a brief overview of some of the important issues relating to mortgage distribution that will be set out in the FSA’s Discussion Paper which is due in September 2009:
- The significance of brokers as a sales channel, especially for higher risk products.
- The significance of the non-advised sales channel.
- The lack of regulatory compliance.
- Mortgage fraud and keeping track of brokers.
- Exaggerated product complexity.
The many different distribution labels and overly complicated distribution landscape.
The remuneration of brokers and the creation of incentives that may not serve the consumer.
With regard to the lack of regulatory compliance Mr Waters sets out the FSA’s main concerns. These are:
- Inadequate affordability assessments.
- Self-certification being recommended without a clear basis for that advice.
- Inadequate assessments of suitability.
- Churning – that is, recommending remortgaging before the end of a tie-in period when, for a significant number of consumers, the brokers are unable to show that the benefits of doing this outweigh the early repayment charges the consumers have to pay.
- Ambiguity around who is responsible for the affordability assessment, where both lenders and borrowers play a role.
- On the remuneration of brokers Mr Waters states that there are concerns, particularly on the high street, that many unaffordable and unsuitable mortgages have been advanced by some brokers who were thinking more about their own remuneration rather than their customers’ best interests.
Mr Waters states that the Retail Distribution Review aims to reduce the conflicts of interest inherent in remuneration practices in the investment market. He states that 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. We must consider whether such a structural intervention in the mortgage market might deliver similar benefits to consumers.”
At the end of his speech Mr Waters briefly looks at four high level concerns. These are:
- The role of advice.
- The complexity of the market.
- Issues around regulatory compliance.
- What consumers expect of brokers.