The recent announcement by the Financial Services Authority (FSA), confirming its Retail Distribution Review has prompted a huge response from the industry, with serious concerns raised that the implications will see hundreds of directly authorised (DA) intermediaries forced to reconsider their position in the market. Although focused on the investment sector, there is a growing belief that the review will also encompass the mortgage market.
With the Retail Distribution Review set to take a look at the financial sector, it has been claimed that networks will prosper, with the increased regulation making it nigh on impossible for small firms and DAs to keep up to speed with the changes. When margins are being squeezed tighter due to increased competition in the market, any time taken away from the primary focus of dealing with clients will undoubtedly be viewed as time lost.
Small firm demise?
While the move to a principles-based approach had been mooted by many as leading to the growth of networks, the unveiling of the FSA’s Retail Distribution Review could push this even further, leading to the evolution of the ‘super network’, and possibly the demise of small, independent brokerages.
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As part of the proposals speculated, the FSA is said to be considering dividing advisers into categories. As part of the proposals, intermediaries could be forced to choose between offering generic advice; using direct sales forces who can use factfind information but cannot offer any other advice; and whole-of market brokers who charge a fee, but have to negotiate wholesale products directly with the lender or large IFA firms.
Alan Lakey, senior partner at Highclere Financial Services, said: “This is the most dangerous review in a long while. Within the review is the announcement that firms may have to consider working on a fee basis but this won’t work. Firms that can do this already do, but you can’t expect those people on £10,000 to £30,000 a year spending £250 plus just to hear me talk at them for an hour about their options.”
Speculation has also mounted that the changes being mooted could lead to a greater reliance on networks, a factor that Linda Will, managing director at Accord Mortgages, indicates could have a detrimental impact on the market. She said: “The discussions started off around insurance and investment. It would be a bad idea if it was applied to the mortgage market.
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“It could push DAs out of the market for the benefit of branch networks. Alternatively DAs could decide to become IFAs, changing their fee and advice structure. It could definitely mean that DAs are forced into mega-networks.”
However, Lakey dismissed suggestions that intermediaries would consider networks as a way of coping with the changes. He added: “There is a lot of speculation that the FSA doesn’t like small firms and would much rather they were part of a network or wider organisation, but brokers don’t want to be told by networks who they can do business with. People enjoy their freedom and however onerous the implications are, I can’t see that firms will be any better off in a network.”
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Gemma Harle, managing director of Mortgage Next Network, disagreed with the belief that brokers would lose their independence if they joined a network. She added. “There is a misconception among brokers that they will lose their independence if they join a network. This couldn’t be further from the truth. Networks don’t own the firms – it is up to them if they join, remain with the principal or leave.”
Period of caution
While the industry has speculated about the possible implications of the proposals to be discussed as part of the Retail Distribution Review, Rob Griffiths, associate director at the Association of Mortgage Intermediaries (AMI), called for a period of caution. Despite Chris Cummings, director-general at AMI indicating that the review could lead to the regulation of the mortgage sector in 2004 looking like a ‘storm in a teacup’, compared to the possible implications for the review, Griffiths said: “It is important to remember that the Retail Distribution Review is still at the discussion stage. The review is looking at financial advice, with suggestions that there will be some read-across, but until the paper is made available we cannot respond.”
He added: “In previous FSA reviews, the regulator highlighted concerns specifically related to small intermediary firms. The FSA needs to go back, and it is then up to firms to decide if they can comply and if they can’t then it is up to them to decide if the network is the right route for them.”
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A spokesperson for the FSA emphasised: “The review is still ongoing and we are looking for an industry-led solution. However, it is still a discussion paper which won’t be published until 27 June and once it has come out, and if there is some read-across for the mortgage and insurance sectors, there will be a consultation process which will allow for further industry views.”
There is no doubt that the Retail Distribution Review discussion paper will throw up a number of findings that the industry will have to respond to. We will however, have to wait with baited breath until these are announced.
