Despite the fact that we have a well regulated mortgage market, prudent lending practices and a healthy demand for housing, investor confidence in the UK mortgage sector is still facing difficulties, and the securitisation market remains all but closed.
The one saving grace however, is that the quality of collateral in the UK is fundamentally different from the US, and the default risk is by no means comparable.
Furthermore, investors will find the yield presented by cash and bonds will not be sufficient forever, and it is inevitable that appetite for mortgage assets will return and liquidity will eventually be restored to the market.
However, up until then criteria amendments, increased product rates, and deflated purchaser sentiment looks to be par for the course.
Consequently there has been an impact on lending volumes and industry experts expect conditions to remain tough, at least for the first half of 2008.
In this environment it is not surprising that up until recently the Retail Distribution Review (RDR) proposals presented by the Financial Services Authority (FSA) have passed many in the mortgage industry by.
However, at the end of last year, Stephen Bland, director of small firms at the FSA, announced that a wider application of the RDR review’s findings might be considered and he called for a debate on how the mortgage market could be affected.
Alterations and proposals
The RDR proposals suggest numerous alterations to current adviser working practices; from fee structure to qualification requirements, the potential reforms could see far-reaching changes in adviser working practices.
In short, the review suggests two forms of financial advice.
The first, ‘professional financial planning and advisory services’, represents a full range of financial planning and specialist advice. The second, ‘primary advice’, provides more straightforward advice on less complicated needs using simple products.
The ‘professional financial planning and advisory’ form of advice could in effect see two types of adviser, ‘professional financial planners’, and those that have been termed ‘general financial advisers’.
Under the proposals, professional financial planners would separate the costs of their advice from the cost of the product.
It is suggested that this might best work through ‘fees’; ‘fees’ meaning any advisory remuneration arising from a client discussion without influence from the product provider.
It has been suggested that the term ‘independent’ would only be able to be used by advisers paid through client fees. General financial advisers meanwhile would continue to use the full range of commission-based arrangements but would not be able to call themselves independent. Under the new proposals, only those taking a fee from their client would be able to describe themselves as ‘independent’.
Key area of reform
This issue of commission and its relation to impartiality is one of the key areas of reform. If there were to be RDR read-across to the mortgage industry, the potential impact on the sector should not be underestimated.
It is probably safe to say that the vast majority of brokers in the industry would be against it and the fact remains that most would agree that it is simply not needed.
Aside from other issues, procuration fees in the mortgage industry do not create product bias. Furthermore, the mortgage market is FSA regulated already – brokers are simply unable to switch clients without proper justification.
The assumption that brokers who receive commission are not as independent as those who charge fees is widely refuted across the industry.
Thankfully the current RDR proposals are not set in stone and it was recently announced that the position regarding the definitions of generic and independent advice are to be re-evaluated.
Head of the RDR, Amanda Bowe, said that the regulator was considering suggestions that the division should instead be between independent advice and sales from tied advisers.
Myriad of changes
The fact of the matter remains that the RDR proposals indicate a myriad of changes to basic adviser practices. ‘Churning’, ‘Treating Customers Fairly’ issues and professional standards are all under the spotlight and as such there is potential for dramatic reforms.
The Association of Mortgage Intermediaries (AMI) recently submitted a formal response to the FSA highlighting its concern that the review could be incorrectly applied to the mortgage sector.
In its response AMI argues that intervention should only take place when warranted by cost-benefit or market failure.
The RDR proposals are clearly not justified by either of these factors, and the industry needs to ensure that any reform is not to the detriment of our sector.
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