In the second of this two-part series, Richard Northedge reports on the FCA’s Financial Lives Survey, the role of IT in mortgage broking and asks whether consolidation may be the answer for smaller mortgage advice businesses.
Getting the right home loan is important.
Apart from the fact that most people will live in the property financed, it is probably the biggest transaction the customer will undertake until their next mortgage – possibly bigger than their pension pot. And first-time buyers are also first-time borrowers, unfamiliar with the complexities.
Low interest rates may make a mistake less expensive but the Mortgage Market Study that preceded the review found that about 30% of borrowers could have had a cheaper loan on terms at least as good – with customers advised by lenders just as likely to be overpaying as those using intermediaries.
So advisers are not perfect. Their knowledge is limited and they tend to recommend products with which they are familiar. Some are tied to specific lenders. Some have limited lists. Better loans may be available only to direct customers.
FCA’s Financial Lives Survey
The FCA’s Financial Lives Survey found that 45% of recent borrowers used only one source of information and 22% did not compare mortgages from two or more lenders. Some 23 per cent went to an adviser recommended by an estate agent (even though the agent acts for the seller, not the buyer/borrower). And many homebuyers using a non-advice mortgage source wrongly believed they were receiving advice.
The Money Advice Service thus suggests talking to a number of independent mortgage advisers as well as direct lenders. Some brokers charge a flat fee, some by the hour, others levy a percentage of the loan and some receive commission from the lender.
There are now firms advising bewildered borrowers on which adviser to choose. Perhaps next there will be an app to advise which website is best for choosing brokers to advise on loans.
Clever IT ought to be an answer, but while the current systems and price-comparison sites can resolve simple enquiries, they cannot cope with the complex demands of non-standard loans, borrowers and properties – the very group that turns to brokers. Nor do all sites contain data on all loans.
And the Mortgage Market Review is blamed for the slow development of better tools. Lenders fear that a customer website using search and filter facilities could trigger the requirement to give advice.
New rules are coming
The FCA now concedes that the Mortgage Market Review has hindered the development of IT solutions and, therefore, hampered execution-only loans.
Consultation this year is expected to see the rules eased so that providing factual information, or a rudimentary interaction, need not constitute giving advice. Brokers will also have to explain why a recommendation is not the cheapest if it is not. A policy statement late in 2019 will set out the new rules.
Who will develop the websites?
Brokers might like a site for internal use but making it public effectively makes them redundant. Disrupters in other industries – travel, flying, supermarkets, take-aways, banking, insurance comparison sites, for instance – are mainly new entrants to the market, not established providers.
Ready for consolidation?
Third-party mortgage advice remains a highly fragmented business – firms independent of each other as well as independent of the lenders. Small firms have difficulty mastering a large market fully, but their size also deters technological development.
While investment advisers have built brands, mortgage brokers remain less well-known than the products they sell – even though the broker is the public’s point of entry into the lending labyrinth. Mortgage advice looks like a sector ready for serious consolidation.
There are 5,200 directly authorised mortgage intermediary firms employing just over 34,000 approved people, according to the FCA. But there are also more than 14,000 appointed representatives.
The Mortgage Market Review originally proposed extending the approved-persons regime to all mortgage intermediaries but this was considered too expensive. Instead, the regulator is backing a directory that will show whether individuals work for an authorised firm.
Of course they all have to hold approved qualifications such as the Institute’s Certificate in Mortgage Advice and Practice – CeMAP – and can take more advanced and specialist qualifications.
The Money and Pensions Service is expected to produce the directory next year but its main use is likely to be as a “yellow pages” for the public to find local firms. However, the “newly-designed user interface” promises to be easier to use than the current Financial Services Register.
Thinner slice of a bigger cake?
But just lowering the existing barrier that diverts would-be execution-only borrowers into advice should encourage an increase in do-it-yourself loans.
It might not seem much if the 97% of people taking advice falls to, say, 91%, but that would treble the proportion of execution-only customers. And the whole advice market is getting bigger as short-term fixed-rate loans require frequent refinancing, and switching becomes more common.
Also, the booming equity-release market requires owners to take advice. The advisers may, therefore, have a thinner slice of a bigger cake.
Read the first part of this series, Mortgage broking and the Mortgage Market Review
Richard Northedge is a former banking journalist of the year and was deputy City editor of The Daily Telegraph.
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