Government Back-track on Loan Commissions

Government u-turns used to be as rare as hen’s teeth; indeed, back in the ‘old days’, politicians and Prime Minister’s in particular could pretty much guarantee they would have to fall on their sword sooner rather than later if they back-tracked on a key policy.

 

I’m reminded of Margaret Thatcher’s famous Conference speech in which she met calls for her to u-turn with the comment, “You turn if you want to; the lady’s not for turning.” Indeed it was somewhat ironic that later it was her refusal to u-turn quickly enough on the poll tax which eventually saw her ousted from office.

 

Now, of course, Government u-turns are all the ‘rage’. You must remember George Osborne’s ‘omni-shambles’ Budget of 2012 in which (it seemed) most of the announcements made were rolled back on within a matter of days. And many of us might wish that David Cameron’s decision to hold a referendum on the UK leaving the EU, could be overturned so quickly.

 

To err is human, and there is not a person alive who hasn’t made a mistake. On that note, I’ve taken a real interest in the situation ‘Down Under’ with regards to the payment of commission to advisers and the recent ‘u-turn’ announced on this very matter.

 

If you’re not aware, just recently it was announced by the Government that it would stop the payment of commission for all new loans from July 2020. Uproar ensued. Then it said it would ditch the payment of trail commission for loans – a practice we do not have for mortgages in the UK although many have called for it over the years – and this too has now been overturned with a new ‘decision’ that eventually kicks this into the long grass for at least three years.

 

The Australian Government appeared to believe that commission could simply be replaced by the payment of fees by clients and – as I believe would happen in the UK if such a decision was made here – there was plenty of push back suggesting consumers would not be ‘up for this’ and that many businesses would be decimated as a result.

 

Interestingly, there are a number of strong comparisons between the UK and Australian mortgage intermediary market – similar numbers of advisers (16,000 there/12,000 here) and the advisory sector place 60% of all residential mortgages there compared to 75% here.

 

Looking at this u-turn in Australia, one wonders how this might impact on any thoughts of ‘banning mortgage commission’ in the UK. Clearly, in the past, we’ve had a regulator willing to go down this route for investments, pensions, etc, but so far the mortgage market has been allowed to plough its own furrow. Indeed, last year’s Mortgages Market Study Interim Report rightly received a lot of criticism but it did say our procuration fee system works and neither was it somehow anti-consumer.

 

And I think this is a major plus point for our sector and the ability of consumers to access advice. The fact that many firms do not require an upfront fee clearly has its advantages for many consumers, and I suspect if any potential proc fee ban was reviewed, than any sort of consumer behavioural insight analysis would see that the UK consumer was similar to their Australian counterpart in not being particularly enamoured of paying upfront for their mortgage advice.

 

Now, this might not chime with many in the industry; indeed it’s often been said that those who are completely reliant on a procuration fee model could be storing up trouble for the future. However if you are also supplementing this with the trail commission available in the protection and insurance spheres, plus you are looking at other areas of the market – such as equity release – where the charging of a fee is much more ingrained, and you’re looking at other opportunities such as conveyancing or legal, then you are getting to a model which certainly isn’t of the ‘eggs all in one basket’ variety.

 

For what it’s worth, I think the procuration fee system for mortgages continues to be the best option available but would encourage advisory firms to also look at how they can secure income from other sectors and perhaps via other methods – including fee-based work. Many have successfully adopted a fee model and it works for them and their clients – procuration fees might not last forever but I suspect it will be a brave Government/regulator that would be willing to u-turn on the existing status quo. And perhaps, currently, we should all be grateful for that.

 

Richard Adams is Managing Director of Stonebridge Group