The industry has long awaited the announcement of planned changes to the market in the FSA’s Mortgage Market Review 2012. The consultation papers, released in late December 2011, provide a hint at the content of the review which may affect brokers’ business in the coming year. With the planned reforms expected to come into effect in early summer, B&C highlights some of the main adjustments brokers will potentially need to accommodate.

 

 

Central to the paper is thorough fact-finding, with an overall focus upon ensuring consumers have a guaranteed ability to repay their loan. Calling for a more “…rigorous assessment of affordability”, the consultation maintains that affordability should additionally be demonstrated on “…a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.”

 

 

 

Brokers may be required to provide lenders with more in depth evidence of borrowers’ earnings and an extensive demonstration of their exit strategy at the introduction stage because the review stipulates that, “Lenders must obtain evidence of the repayment strategy at the application stage before they enter into an interest-only mortgage.”

 

 

 

And so, going forward the FSA proposes responsibility for assessing affordability to be shared between brokers and lenders, leading to a requirement for brokers to offer their clients an advisory service.

 

 

 

Consequently, Compliance expert Ray Cohen of Jackson Cohen Associates Limited observes: “The aspect of the review that will have the most profound effect upon the way in which the intermediary community operates is the requirement for an advised instead of a non-advised sales process.”

 

 

 

Currently, brokers are able to sell a mortgage to their client on a non-advised basis because they are not authorised to give financial advice. A distinction between giving advice and merely giving information to borrowers is key to the changes in the coming year.

 

 

 

Such revisions in the sale of mortgage products resulted from the FSA’s research which “…shows that consumers do not recognise or even value the distinction and therefore may not appreciate the different regulatory standards applying between the two [advised and non-advised sales].

 

 

 

“By requiring that firms assess whether a mortgage is appropriate to the needs and circumstances of a consumer, we are in effect making all sales ‘advised’ and we believe that terminology should be applied to all sales to avoid any confusion. We are therefore proposing to remove the non-advised sales process.”

 

 

 

Ray added that, “The review will require all intermediaries to sit 

CeMap 

exams, for example, in order to become compliant with the advised sales process.”

 

 

 

Ray believes that the requirement to sit additional exams may mean that, “Many brokerages will be competing with those who are already certified to give advice, which may require some brokerages to alter their business plans.”

 

 

 

Institutions operating within the mortgage market, such as the Institute of Financial Services, have observed: “Standards for professionalism across the regulated advice sector are undergoing significant change and there has never been a better time to enhance individual credentials by demonstrating competence in providing mortgage advice.”

 

 

 

To accommodate the planned changes, the Institute of Financial Services has launched the ‘Diploma in Mortgage Advice and Practice (DipMAP®)’, which may be hugely beneficial to brokers in the coming year.

 

 

 

However, Ken D’Cruz, Commercial Director at The Money Man brokerage, believes the proposed changes shouldn’t have a profound effect upon how brokers currently operate. He said: “It should be common sense to give advice on the most suitable deal when doing a fact find.”

 

 

 

He continued: “Brokers should take shared responsibility for educating clients and I am happy the MMR is enforcing an advised sales process. Brokers already should immediately begin a line of questioning – you don’t need to have vast experience to know you must be doing this.”

 

 

 

Similarly, Andrew Montlake, Director of Brand, Marketing & Communications at Coreco Group, commented: “The planned changes are really positive and nothing anyone should be too wary of.”

 

 

 

Andrew believes that this should already be a main part of a broker’s job and shouldn’t take a deal where they haven’t sufficiently assessed affordability. He believes the Review will ultimately be good for the industry in setting guidelines which will allow brokers to follow a clear structure, whilst allowing for maximum flexibility in each case.

 

 

 

He agrees with the FSA’s proposals, stating: “I think everyone should be qualified to give advice - we won’t have to change our business plan as Coreco are already qualified to do so.”

 

 

 

He added: “The review will take away guesswork from a broker’s perspective, making for a much more stable market.”

 

 

 

Summarising the proposed changes from a lender’s perspective, Richard Deacon, Sales and Marketing Director at Masthaven Bridging Finance, is confident about the upcoming review.

 

 

 

He said: "The Mortgage Market Review has been a breath of fresh air for the bridging finance industry. What it has done is reiterate what should be a common sense approach to both broking and lending.

 

 

 

“The bridging arena in this last 24 months has been a hectic place, seeing new lenders come and prices tumble. What many people seem to have forgotten in that time is that an open and educated mind is required to place the right deal for the right client with the right lender.

 

 

 

“The requirement for bridging should always be first on our minds, "Why does the client require bridging finance?". Providing there is a sensible and constructive reason that the client requires this type of finance, then there is a plethora of lenders only too willing to help.”

 

 

 

He continued: “The question for the broker to then answer is: Which lender should I use? …The fact that all bridging finance will be regulated sooner rather than later is a debatable point, but one which the broker should look into more closely.”

 

 

 

And so, the Mortgage Market Review 2012 is unlikely to bring drastic changes to how brokers currently carry out their business because affordability assessments already appear to be central to existing deals.

 

 

 

In respect to the compulsory requirement to perform advised sales only, the FSA recognise that “…it may be appropriate in some limited cases to allow the option for execution-only sales” which acknowledges that there may be some deals that require this rule to be waived.

 

 

 

The fundamental aspect that may be taken from the consultation papers into the New Year will be an increasing focus on sound and quality advice, paving the way for a much more stable market in coming years.

 

 

 

However, brokers may benefit from taking advisory exams now in order to avoid competition further down the line and ensure sustainability in their business well into the future.

 

 

 

 

By Alexandra Jones