January 17 – Considered Choice

2017 has started with good news from Santander on procuration fees. For many years now intermediaries have been at the heart of the Santander mortgage business. In keeping with their developing automated solutions that allow customers to transact both directly or via an intermediary, paying a fee where the broker takes responsibility for the advice is the right thing to do. It is to be hoped that as the year progresses more lenders see that by making such a payment this enhances and supports their service offering and supports good consumer outcomes irrespective of the route they select. It is to everyone’s mutual benefit.

However there are two big issues facing the intermediary community this year. The first is the FCA Mortgages Market Study. This will look at how the tools available, including advice, help consumers make effective decisions and if there are commercial arrangements between firms that act to the detriment of consumers. The main focus will be on those two issues with a sub-text asking if digital solutions could help deliver better information or advice.

What is becoming clear is that there is a real agenda within the FCA to assist technology based new market entrants. Many new firms are arguing that the regulatory rule book, capital requirements and the need for adherence through the permissions process is acting as a barrier to entry and slowing their ability to innovate. This is caused in part by the time it takes to understand and adhere to complex rulebooks and the need to deliver complex reporting to the regulator. These start-ups, often run by non financial services experts, have a different view of the world. In trying to promote innovation and competition the FCA wants to help them.

To assist we are likely to see Artificial Intelligence being employed to interpret the rule book potentially making many policy based compliance experts redundant. Also by allowing straight-through flow of product sales, the need to accumulate complex reports may be obviated. This will work really well for start-ups with no legacy or back-book. However for complex multi-product firms with legacy systems this may prove impossible creating a real edge for new firms. I wonder if the regulator has fully thought through a market led by virtual boutique systems, with no offices, staff or capital that can evaporate quicker than the England cricket team. I hope that we will not see reasoned stability based on decades of learning sacrificed on the altar of innovation.

The second challenge is on the new Financial Services Compensation Scheme. We will have to decide what scheme we would like. What is clear is that the steady avalanche of claims hitting all parts of the advisory community will continue. With an FCA that appears incapable of spotting poor products and advice until far too late, the real debate has to be on who pays and when. At the moment this appears to be free for consumers as they can take risks that are obvious and be indemnified against fraud by good firms.

We need to have a robust debate about the quality, exclusions and cost of Professional Indemnity Insurance, whether unregulated investments should be captured at all under the Compensation Scheme and government and regulators need to explain better why a product levy is not the fairest and most appropriate way to protect consumers. Such schemes operate and control the travel and aviation industry very effectively, so why not ours!