Nov 15 – Stormy Waters

One of the biggest issues facing advisors following MMR is managing their potential conflicts of interest. This issue is only going to be emphasised following the arrival next year of the Mortgage Credit Directive and then the dawning of the new Senior Persons regime in intermediary space in 2017.

MMR and MCD both make it abundantly clear that the adviser must act in the best interests of the customer. Neither regulatory intervention defines this but it undoubtedly means that careful consideration must be given prior to allowing any action to be embarked upon. Any recommendation needs to reflect the wider consumer circumstances and these need to be recorded in the file and in any suitability letter.

Many advisers approach their role feeling that they are working for the customer and some may consider that legally they are close to being agents of the customer. Care must be taken however to stand aside and not act purely for the customer to secure either the property they want or the mortgage they need. Whilst the adviser has an undoubted duty of care there are a significant number of competing interests that need to be managed.

In most cases the lender will feel that the broker owes it a similar duty of care and diligence in proposing a customer who meets its criteria. In paying a procuration fee for the introduction and the broker having made application to be on panel and entering into a contract with the lender there are commitments that might compete with their duty to their customer.

In undertaking their job the adviser either works for a firm or is an appointed representative. In either case there will be a duty owed to the firm principle to act in accordance within the advice and policy guidelines set down by the firm. Under the new Senior Persons regime, the firm principle will have to certify each year that all their advisers are fit and proper and that they are competent to advise. In doing this the duty each adviser will owe to their firm principle is likely to be made more formal.

The area that is undoubtedly the most complex is where the broker operates In the area of new build and estate agency. Here the demands of the builder or estate agent to ensure that each customer whose offer is accepted on a property is able to get the mortgage they need are significant. The broker in this circumstance needs to take care that they still consider carefully the boundaries they operate within.

Finally there is the regulator who has an expectation that the advice not only meets the best interests test but also the advice requirements for suitability and that all appropriate disclosures are met.

Of course none of this is new. However MMR moved the landscape from recommending the most appropriate product to wider suitability and best interests requirements. The real difficulty is that there is no blueprint for advisers on how to balance all these competing interests. For many, the driving force is getting the customer the mortgages they want at the lowest possible cost. However their other responsibilities mean that they cannot only be on the customer’s side. It is this complexity that makes the job of advising more difficult today. The solution is to be aware of all the competing requirements and not allow any one of them to take priority. Balancing these competing priorities gives the best chance of avoiding the obvious risks.