If there is a silver lining in PS25/11, it is that refinancing borrowers have a chance of more easily securing a better rate.
When the Financial Conduct Authority first consulted on the idea of removing the advice ‘trigger’, I warned in these pages that it could be a worrying mistake. Now that PS25/11 has confirmed that change, I doubt I am alone in feeling disappointed. Removing the requirement for advice significantly increases the risk of borrowers making poor decisions. Mortgages are complex and most borrowers simply don’t have the knowledge or experience to navigate the wide range of products. A wrong decision can be extremely costly and long lasting.
The question is: how big might the problem become? Even the FCA admits it is unsure how many borrowers will choose the execution-only route, but it has modelled up to a 7.5% fall in advised sales. Based on those figures, brokers stand to lose £116.5m in lost fees and commission. But my concern about the shift is absolutely not about protecting revenues for our sector.
The bigger concern is that consumers will not receive professional and insured advice on what is, for most, the largest financial commitment of their life.
While that risk is real, there is one change in PS25/11 that could genuinely benefit borrowers — and might just soften the blow for brokers. From now on, lenders will be able to use a ‘modified affordability assessment’ when a borrower wants to switch to them and when the new mortgage is cheaper than their current deal or the deals on offer from their current lender.
This seemingly small tweak could have a big impact on the refinancing market.
Product Transfers
At present, product transfers (PTs) dominate, accounting for 83% of the 1.6 million refinancing transactions last year. The attraction is understandable. PTs are quick, usually involve no affordability check and often carry lower fees. However, the trade-off is that borrowers may miss a better deal on the open market and bypass that all-important security of advice that is backed by protections such as networks and indemnity insurance.
If switching to a new lender becomes easier, more borrowers are likely to shop around. That, in turn, could spur greater competition among lenders in the remortgage market, which would ultimately benefit borrowers.
There is also a knock-on effect for brokers. Advising on a PT often takes almost as much time and effort as arranging a full remortgage, yet PTs typically pay around half the proc fee of a remortgage, as we all know. If even a modest proportion of advisers’ PT market share became remortgages, brokers could recover some of the advisory activity (and income) otherwise reduced if the number of advised sales were to fall in general.
The maths is clear. There was roughly £224bn of PT lending last year, with brokers’ share of that market estimated to be around 40% (£89.6bn). If just 10% of those advised PTs became remortgages, it would have generated around £17.7m more in lender payments for the advice provided by brokers. If 50% of brokers’ PT share instead became remortgages, the number of consumers getting advice would obviously increase, as would the proc fees to the tune of nearly £90m.
This seemingly small tweak could have a big impact.
A positive byproduct of acting for a client by remortgaging is that brokers will be more fairly rewarded for their advice and work. Of course, the reward for both borrowers and brokers would be larger if advisers had a larger share of the PT market.
While brokers dominate purchase and remortgage business, accounting for nearly nine in 10 cases, the intermediary share of the PT market is just 40%. That is a huge opportunity for helping more customers make informed decisions and get protected advice.
Closing that gap means demonstrating value beyond the transaction. It means becoming a trusted, long-term partner so that customers instinctively turn to us instead of going it alone or direct to their lender.
When it comes to refinancing, the evidence is clear: those who take advice stand a far better chance of securing a better rate; and a hugely important layer of protection in terms of insured advice.
So, yes, I agree with those who see the removal of the advice trigger as a mistake. But, if there is a silver lining in PS25/11, it is that borrowers who are refinancing stand the chance of more easily securing a better rate — if lenders choose to adapt to the new rules.
That change could be a genuine win for borrowers — and, just possibly, for advisers too if both lenders and brokers grasp the opportunity.
-Rob Clifford, Chief Executive, Stonebridge
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