Michael Nicholls is relationship director at LIBF
The recent Financial Conduct Authority (FCA) Consultation on mortgage advice and selling standards appeared to roll back on its own 2014 regulations.
One of the key suggestions was that the previous FCA rules discouraged innovation and led to some consumers overpaying for mortgage advice.
There has been speculation that the rules on what constitutes giving mortgage advice will be amended.
It is thought they may no longer include simply providing factual information or forms of initial communication.
But we will have to wait for a policy statement later in the year before we know exactly what the new regulations will entail.
In the meantime, let’s consider one of the most interesting findings of the FCA Consultation – at least as far mortgage advisers are concerned.
That is, the suggestion that a significant percentage of customers who are looking for an execution-only mortgage, are currently being diverted to advice.
Why? Because execution-only sales channels are not always easy to use and potential customers end up making a phone call anyway.
Regardless of conjecture that the FCA may be trying to accommodate online mortgage providers, the most striking thing about the new proposals is the drive to increase take-up of execution-only mortgages.
This in turn could lead to a glut of market comparison websites to encourage borrowers to go for execution only.
Obviously, another consequence is likely to be less business for mortgage brokers, and for the sector as a whole, that inevitably means that it will be a case of survival of the fittest.
The first hurdle is the competition. Market comparison websites are already well established. If the current status quo is to be disrupted by new innovations, it’s unlikely to be from smaller mortgage advice firms.
This may sound harsh, but a comparison can be seen in other industries. The disrupters – in banking, travel, take-aways and more – have been new entrants to the market, armed with tech skills rather than existing providers with knowledge and experience of their industry.
The second problem in a highly fragmented market with so many small firms, is size matters.
Small firms may not have the budget to invest in developing new web-based business models and slick comparison websites, or the PR and advertising they would need to bring them to the consumer’s attention.
These problems are compounded by the transactional relationship that mortgage brokers usually have with their customers.
Once a mortgage has completed, customers don’t usually have to return to the broker for at least two years.
No matter how well the broker has performed in obtaining a mortgage for the client, the customer may well switch to an execution only online service next time.
While banks, insurers and pension providers can rely on the reputations of their brands, mortgage brokers are not as well known as the providers whose products they sell.
If the customer has lost the details of the broker who arranged their mortgage a few years back, there’s a danger they may not even remember the name of the brokerage firm either.
So how will the smaller mortgage brokers survive in this new market?
One answer could be for mortgage brokerage firms to band together and pool resources to take on the competition. Another could be to merge with independent financial advisers (IFA).
The value of an IFA business is in its funds under management which generates an ongoing income.
IFAs are facing challenges in their industry too, which could provide some options for mortgage brokers looking to expand what they do.
In June this year, the strategy and acquisitions director at Quilter Private Client Advisers, Dominic Rose, cited a shortage of qualified advisers and paraplanners, coupled with a rise in demand for services.
Around the same time, research from IFA firm Succession Wealth found IFAs and wealth managers are increasingly looking to leave the industry, with 51% saying that increased regulation was a factor. It seems many small IFAs are selling to the bigger players.
There are many IFAs and mortgage brokers who already enjoy good relationships. Mergers would not only formalise any existing introducer arrangements, they could provide better opportunities for both sides of the new business.
One of those opportunities is in later life planning, which brings together mortgage and equity release advice with pensions, investments and savings.
In a rapidly changing market, IFAs and mortgage brokers could do well to work together.