Regulation currently muddies the waters by setting out the market in a manner that promotes silos with retail lending, retirement interest only and lifetime mortgages each having different rules and competency requirements around them, and the majority of specialist businesses typically only engaging with one of these markets as a result of this.
This is most likely to result in customers being fitted to products that an adviser has available to them. Comments about controls are all well and good, but history and experience demonstrate that this scenario will eventually lead to poor customer outcomes for some. Bearing in mind how long it took for the later life lending market to recover from its poor contracts from the ‘90s, a potential distribution failure in the market should be a top priority to avoid.
A big step in resolving this is likely to be removing the iceberg in this market that the Regulator has appeared to ignore, that of the remuneration model.
Some readers will remember the former market distortion effects between bonds and collectives, where sales of collectives attracted 3% commission, but those of bonds often up to 10%. The RDR put paid to that after the market had apparently failed to self-regulate. When we look at today’s lending market, we are seeing the same sort of market distortions, unchallenged by the FCA.
Here a lifetime mortgage can offer an average 2.5% up-front procuration fee, versus a retail or retirement interest only mortgage offering sub-0.5%. Take into account that many firms charge a consultation fee on top, it really does beg the question why has the Regulator not tackled this?
My further concern is that this remuneration model is not aligned to the ongoing support of the customer. Whilst some contracts have introduced a remuneration fee as customers draw down further monies from a facility, there isn’t an ongoing income for servicing the customer, and it is still related to actual activity on the loan, where a better outcome may have been inactivity. This is an aspect that really needs some careful consideration as with many customers in this market now aged between 55 and 65, there needs to be a sea change in how the advice is provided and paid for, so that necessary ongoing support is available to these customers. This should also address many of the issues arising around vulnerability in this market, giving family members support, and incentivise firms to align their business models around good advice provision rather than product sales. There are challenges around how this impacts the rates in the market, but with advances in adviser back office solutions, management of cost bases should be more within the grasp of the modern practitioner than ever before. There is the challenge around low value releases, but this is technically already an issue in some areas where charges are out of proportion with loans being arranged on behalf of customers. The model however, and how it is serviced, can bring this into the realms of affordability to my mind.
In one of the more complex markets, it seems ironic to me that we have gotten it right in getting people to receive advice, and avoid the iceberg of ill informed customers making long lasting errors as we are potentially seeing from pension freedoms, but replace this with a further obstacle of a market that isn’t running efficiently to support the end customer need – isn’t it time for the regulator in the form of look out to inform the captain and facilitate the market’s helm charting a better course?