Dec 20 – Paying for poor advice

As a trade body head representing the mortgage intermediary community the last few months have been tough.  The isolation of Covid has not suited me well.  I am not looking for sympathy but it has changed our approach to lobbying and how we have to work to influence regulators, lenders and firms.  New tricks.

At the start of Covid we saw FCA invoicing their fees with increases in their costs married to a step back by FOS from larger increases and the FSCS applying huge charges to investment and pension advice firms whilst mortgage brokers got off relatively lightly.

Last month however saw the FSCS advise that they were going to have to trawl the “Retail Pool” and ask for another £51m to add to the £41m they were taking from providers and the Life Distribution and Investment Intermediation (LDII) class to be paid in January 2021.   This brought the total compensation bill for 2020/21 for bad advice or products from failed firms to £712m.

It is anticipated that firms in the Home Finance Intermediation class will be required to pay an additional £2.3m contribution (circa 150% of the original payment for FSCS Home Finance Intermediation as per their 2020 FCA invoice) and firms within the General Insurance Distribution class will pay an extra £29.4m (circa 160% of the original payment for FSCS General Insurance Distribution as per firms 2020 FCA invoice).

What is more frightening is that the more than £300m compensation required in the LDII class shows no sign of abating.  The investment and pensions advice sector is up in arms and wants something done.  They blame the FCA for nor supervising the market properly; they blame FSCS for not being robust in defending cases and they blame the poor way that the costs are allocated.  Many want a product levy, but some want the expensive cake sliced differently.

I am very unhappy that the level of compensation in this LDII sector is again being visited on mortgage brokers.  It is not our game.  Anyone thinking of adding any undeserved liability to the mortgage and protection world will find myself and AMI standing in the way.

Let us be clear.  FSCS pays out on firms that have been declared in default.  Firms that no longer trade and have been wound up.  Not all such firms create a liability.  It is only where a bad product or poor advice is demonstrated that the scheme pays out.  These are firms that have done manifestly bad things.  Some end up in the scheme having lost cases at the Ombudsman and do not have enough capital to pay the compensation due.  But most close in an orderly manner and the liability only becomes obvious much later.

Over the last fifteen years, mortgage lenders have taken significant responsibility to monitor the quality of broker distribution.  We have had to see many brokers asked to leave the market as they have not been sharp enough dealing with fraudsters.  Or their network has had concerns over the quality of their advice or the type of business they wanted to focus on.  Our lender partners have helped train, monitor and feedback.  It has not been painless.

I have recently heard of one insurer who has been removing brokers from panel as they cannot demonstrate sufficient competence on their products and processes.  I see that as good news.  The investment and pensions sector needs to step up to the plate on this as well.

The manufacturing sector be it life companies, investment providers, pension schemes and administrators need to take more responsibility.  The industry needs to root our poor practice and behaviors and not just point the finger at the FCA.  They are not blameless, but if the industry is going to wait for them to sort themselves out, there may not be much industry left.

Robert Sinclair
Chief Executive, AMI