FSA chief executive Hector Sants is today accused of making "completely contradictory" statements on the issue of dual pricing in an open letter from mortgage adviser Stuart Duncan.
The FSA has already received a number of complaints from intermediaries that they are not able to offer their clients the best mortgage deals as lenders have begun focusing on direct-only mortgages.
Under pressure from brokers, Sants last week responded to the issue at the Building Societies Association conference by saying direct-deals did not breach TCF and were a commercial matter for lenders.
However, intermediaries are not happy with Sants’s comments, and believe lenders are attempting to discourage customers from seeking advice.
Stuart Duncan gives a detailed criticism of Sants’s speech, which follows:
Dear Mr Sants
The following two paragraphs are taken from your speech to the The Building Societies Association Conference on may 7th. I quote it in full as it is completely contradictory and I feel the need to explain why that is so and to use it to highlight the FSA's inappropriate response to the dual pricing approach taken by lenders in the current "Credit crunch".
"I would also like to mention that we are becoming increasingly aware of changing market dynamics that are putting pressure on mortgage intermediaries as some lenders are only offering certain deals directly to customers. We have been approached by a number of intermediaries asking whether this practice is fair under TCF. Our response is that lenders are not obliged to deal through brokers. How they choose to price and distribute their products is a commercial matter. There have always been certain lenders who choose not to offer their products through brokers, and others who differentiate pricing depending on the channel, for example those offering ‘exclusives’ to certain mortgage clubs or special interest-only rates. It follows from this that not every product on the market will necessarily be available to any one broker – something which our definition of whole of market takes into account. If certain lenders decide to offer their direct customers cheaper deals, we do not see that customers’ best interests would be served by preventing this.
However, we believe that a healthy market is one where consumers have a choice in how they purchase a mortgage, either direct or via an intermediary who can shop around and advise the customer to help get the right deal. We hope that the current market developments do not make it harder and more expensive for customers to get advice on what is one of the most important decisions of their lives."
Dual Pricing as a Commercial Decision
Lesley Titcomb and Sarah Wilson, two of your senior staff, have been quoting the "Commercial matter" approach and even referring directly to your speech and there are a number of issues that are being ignored in the FSA response to the current situation.
Lenders do not have the absolute right to make decisions on pricing and distribution on a purely commercial basis. They are entities who fall under several statutory regulatory bodies, of whom the FSA are one of the most powerful, perhaps the most powerful of all. If the policies they are following are in breach of regulatory rules and principles, then they are not allowed to justify an unfair approach simply by saying that it is based on the needs of their members or shareholders to make profits. If my own firm ceased to obey regulatory rules and principles in order to make more money, or to ensure my liquidity or simply because I felt like it, then I would be de-authorised in no time. Your comments above simply give a green light to lenders to do what they please by publicly supporting dual-pricing as a "Commercial Matter".
There is, furthermore, an argument that the approach of the major banks is short-sighted in the extreme. There is already downward pressure on house-prices and upward pressure on inflation due the increased cost of food, energy and fuel. The self-imposed "Moratorium" on inter-bank lending at reasonable rates is an additional ingredient in a dangerous cocktail that is already leading to growing arrears, increased repossessions and the potential collapse of the housing market. If the banks fail to act in support of the mortgage market, the assets under-pinning much of the UK economy will drastically reduce in value and endanger the banking system itself. Increasing numbers of consumers are being left stranded on variable rates due to lenders' increasingly tough criteria as well as by increasingly onerous regulatory restrictions to ensure "Responsible lending". My view is that the current approach amounts to "Irresponsible non-lending". Normalisation of the lending market is not just desirable, it is essential; a matter of life and death for the UK economy and for the long-term liquidity of the banks that finance our very existence. Crisis may turn into a disaster of such magnitude that it could make Northern Rock's near-collapse look like a minor blip.
Dual Pricing and TCF
It is important that you understand why dual pricing is in breach of lenders' obligations to treat customers fairly. There is an implicit contradiction in your second paragraph. You seem to acknowledge that it is intermediaries who are best-placed to provide impartial advice to a client and that it should not be made harder nor more expensive to obtain this advice. This is exactly what dual-pricing is doing, so it seems duplicitous to make this comment immediately after supporting lenders' right to do precisely that. Most brokers are either paid via procuration fees or by fees that can be offset by procuration fees, either explicitly through commission refund or through paying lower fees that recognise the availability of procuration fees.
It is therefore obvious that intermediaries will be forced to charge higher fees (or to start charging fees where they did not do so before) if lenders are marketing products that do not pay procuration fees. Worse still, formal responses from the FSA seem to state that we are not even allowed to provide formal advice to clients unless we are able to follow a formal advice protest, including a Key Facts Illustration. If a direct product is significantly cheaper than an intermediary product, then the FSA are forcing mortgage brokers to use uncompetitive and, therefore unfair products. There was even a comment from Sarah Wilson that we should advise based on "Broker products", but make clients aware of better direct deals if we know about them. I see that as leaving intermediaries with the option of pleading ignorance or saying goodbye to their income, which is a no-win situation for us (and the former is dishonest anyway).
It is unavoidable that the client will pay more for advice, either by purchasing a "Broker product" with higher arrangement fees, interest charges or higher exit charges (or even all three) or by paying the broker for guidance through a market that has become drastically more complex in the past few months. It is important to understand that this is not simply a case of lenders removing commissions, as some of the differentials are three or four times more than the procuration fees (which were partly a processing payment anyway); it is about capturing clients to enable the unchallenged sale of the lenders' ancilliary products and to avoid the scrutiny and security provided by independent advice, and that is the main issue in the view of myself and many of my contemporaries.
The real problem is that the consumer is being encouraged to avoid comparison, except through the FSA's comparative tables, and to avoid advice. The job of a mortgage broker is to compare the various products on the market and to apply scrutiny to those products to ensure that they meet the needs of the client. The recent move to direct deals prevents proper independent scrutiny, discourages expert research, over-complicates the market and incentivises execution-only and non-advised sales. I have recently observed a client making a direct application for a Halifax mortgage product (a five-year fixed rate). The terms were only vaguely stated on the website and she was not provided with a point-of-sale KFI. She had to accept a "Non-advised" initial disclosure document in order to apply and there was no opportunity to seek advice from the lender. The rate differential was around 0.5% (2.5% over five years). I would receive 0.4% gross procuration fee from Halifax for marketing and processing a similar product, as an aside. I truly believe that this is a typical example of an unfair approach to the consumer and, in my view, reflects a failure to regulate a major provider. I was told that the role of the FSA was to regulate lenders and intermediaries in the interests of the consumer, but failure to condemn or even address properly the current lender free-for-all at the expense of the intermediary market and to the detriment of the consumer is a severe failure. We are clearly subject to different regulatory principles compared to those that apply to lenders or, at the very least, to different definitions and interpretations of those regulations.
Dual Pricing and Intermediaries
To say that dual pricing is a danger to a healthy intermediary market is to drastically understate the problem. It is absolutely deadly. It is like a super-market opening in a village, cutting prices to the bone to bankrupt local businesses and then hiking up the prices again when the competition has disappeared. It could be said that this is not an accurate metaphor as we are not the lenders' competitors, but we are seen as that and the current events bear this out. Lenders have, in the past, paid us for marketing their mortgage products, but their ideal scenario is to provide non-advised mortgages (from a single lender, of course), sole-supplier protection products (usually at higher prices) and tied General Insurance products. Many brokers have access to comparatively low-priced product ranges for General Insurance and protection products, providing choice and value to the consumer and ensuring healthy competition between providers, which has also been the case with mortgage products in the past. The current "Crunch" is being used to promote uncompetitive ancilliary products and to act as an experiment to see if lenders can function without broker "Interference".
There are many whispers and rumours running through the mortgage industries about cartels and anti-competitive practices being agreed between lenders. I am just an ordinary man in the street trying my best to make a living through helping my clients to achieve their financial aims, so I have no way of knowing how true these rumour are. I only know that the behaviour of lenders is redolent of many situations that have ended up being investigated by the OFT and other bodies involved in trying to prevent anti-competitive practises. If it is not yet being investigated it should be. It is no help to act retrospectively in a couple of years time, nor even in a few months. It will be too late for many in our industry if it is left that long. I honestly believe that there is a great sense of denial regarding this matter; competition and fair dealing are a matter of law, so to apply the law selectively, or to obey it selectively, is a scandal that will keep lawyers busy for years.
Failure by the FSA to ensure a level playing field for intermediaries, and therefore failure to enable the consumer to access fairly-priced products through this route means that intermediaries have to refuse to provide mortgage advice for many clients because, if we do so, we will be failing to treat customers fairly. It is iniquitous to suggest that we should be recommended mortgages at inflated prices and still be calling ourselves "Whole of Market" advisers. It is promoting a falsehood and you must either explicitly instruct us not to provide advice in the current market conditions (and implement a compensation package, in my view) or insist that dual-pricing ceases immediately. Dual pricing is not the same as the situation in the past and should not be compared to it. It is a deliberate policy of attracting direct business at basement prices with inadequate advice (or no advice at all) and marketing expensive deals through brokers at a massive mark-up. If you agree with factory-gate pricing, then support it, but remember that we are not talking about cars or fridges and you should not present the FSA as a champion of independent, comprehensive advice to the consumer if it is not the case.
The Moral Dimension
Mortgage Intermediaries are, surprisingly, human beings. We pay taxes, we have the right to vote, we have families and commitments. Perhaps the only way in which we are different from the rest of the populace is that we carry immense potential liability and financial risk, as well as the possibility of prosecution if we do not obey the various edicts under which we operate. We have obeyed, to the best of our ability, and have, in my view, allowed the FSA too much latitude in terms of reducing consumer choice to make informed decisions (not that we have had much choice in the matter). We pay for our own regulation and tens of thousands of mortgage intermediaries contribute significantly to the financial health of the nation as a whole, through taxation and the support staff to whom we provide employment, and to that of individuals through the help and guidance that we provide. The same lenders who are endangering this whole sector of the industry have always said, and are still saying, that they are committed to intermediaries and the FSA claim to support the existence of a healthy intermediary market.
It is, frankly, malodorous to make these statements when the actions of both lenders and regulators reduce these phrases to mere platitudes. We clearly have no legally-enshrined right to fair treatment, but we do have the right to expect our regulators to apply regulation consistently and not to just use it to push small businesses towards bankruptcy whilst allowing financial institutions to massacre a whole industry through unfair dealing and, conceivably, anti-competitive behaviour. I will not go as far as saying that the FSA is "Not fit for purpose" but I think it is time to show that you are prepared to act on behalf of the consumer, rather than risk being accused of simply enabling the current lamentable state of affairs to continue. The credit crunch is a challenge to all of us, but it should not be accepted as an excuse from financial institutions for betrayal of a useful and productive sector of the financial services industry.
I know that some of my contemporaries will not support all that I am stating in this letter, but I am sure that many of these points are an accurate reflection of the comments being made on industry forums. I will be copying this email to my local MPs (work and home), to the relevant minister and to the trade press, and I stress that I am writing this letter in a private capacity as a tax-payer and a citizen of a country that still allows free speech.
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Have your say:
"I for one will be seeking legal advice if this and the 15 year long stop is not accepted/resolved by the time annual FSA/FOS/FSCS fees are due to be paid (in August?) with a view to making acceptance of my cheque for payment contingent on the FSA/FOS/FSCS confirming they will ensure all actions they take in future are legally tested (including the 15 year long stop, dual pricing, agency law and legal definitions of words such as 'whole of market'.
Like Duncan I have taken the FSA to task on this issue and have spoken to many like myself who are not particularly focused on the mortgage market who consider the FSA plain wrong! I am trying to point out to the FSA with regard Independent advice (or lack of with mortgages in the current market) and the FSA failure to acknowledge there is a TCF problem developing.
I also agree with what others have said about “a business must be allowed to deal with who it will”. The issue is really with regard an adviser acting as agent for their client. If an adviser is the agent of their client, the refusal of any party whether that be a provider or lender to acknowledge and accept them as the clients agent is discriminatory and potentially an unfair contract term. The argument is also applicable to advises acring as agents for members of Group Pensions and I have an ongoing disagreement with both the FSA and at least one provider on this issue.
It is fine for the lender/provider to not deal with a client because it is not the market group they want (unless stakeholder, in which case, that is the market they have opted for, like it or lump it) to deal with (that is their prerogative), but to deny the client access to their adviser (whether legal or financial), is surely an unfair contract term and having originally come from branch banking and done a little of my banking exams including a bit of law, I suspect in legal cases, the lenders and providers would not have a leg to stand on, yet the FSA are letting them get away with it with both Mortgage deals at present and Group Pensions until legal action is actually taken!
Ironically, my firm whilst regulated for mortgages, do very few, yet I don’t think firms like mine and others can afford to let the FSA’s flawed actions on mortgages bring the whole industry in to disrepute as it will affect both Investment/Pension business and Protection business, hence why we all need to take issue now, before it is too late and leaving our supposed representatives to discuss matters behind closed doors (over lunch) with the FSA is not acceptable." Phil Castle, Financial Escape
"We totally concur with the sentiments expressed by Stuart Duncan in his letter to Hector Sants and would welcome any information you are able to supply, whereby we can add our names to any concerted joint-effort being made to the FSA on this matter." Geoff Griffiths, Partner, Shire Financial Management LLP
"Fantastic, about time someone stands up to the FSA and it’s high powered buddies (or seems that way) of lenders." Alan Townley, Dave Alan Financial Services
"Thank goodness someone has spoken out loud about 'dual pricing' and the FSA. Three cheers for Stuart. I am confident every small mortgage advisory firm will be totally behind his comments." Karen Sharp, Principal, Sound Financial Services
"Stuart Duncan's letter is magnificent! Too many of us, me included, are frightened to put our heads above the parapit, for fear of "reprisals" from the FSA. His accurate and articulate arguments are a masterpiece, and I applaud him for it. I totally and wholeheartedly agree that the FSA is failing in its duty, and wrong in its stated opinion over the matter of dual pricing. To say that we should advise a client to go direct is an absolute nonsense. Stuart has hit the nail on the head when he challenges the FSA to either ban us from advising, or the ban dual pricing. PLEASE can you start a Financial Press campaign to put this very challenge to the FSA, on behalf of brokers generally. You must appreciate that it is difficult for us, but you could do it as a campaign. You know you have got the support." David Nicholson, D&D Consultants Limited
"I completely and utterly, 100%, agree with what Stuart has written. When we started this business, we knew we were never going to be millionaires but we thought we were set for life. We've had to put £60,000 of our own money into this and, well, that can't continue. We've also had to sell our holiday home." Kevin Bower, director, Stockport-based Mortgage Mechanics
"A very long letter, but it is absolutely spot-on. Congratulations to Stuart for saying what we are all thinking. The FSA are not seeing the wood for the trees on this matter." Sheila McCombie, Mortgage Doctors (Scotland) LtdIFAonline
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