Competitions and giveaways are everywhere. You can’t read the newspaper or watch the television without coming across a company offering some kind of promotion in a bid to entice you in.
When it comes to financial firms offering incentives though, businesses need to be mindful that they are playing it by the book.
Giveaways and competitions have been a common feature of the second charge mortgage market over the years under the Office of Fair Trading.
Now the sector falls under the Financial Conduct Authority and the regulator has made no secret of that fact it wants to crack down on any promotions it deems inappropriate.
So where does this leave secured loan firms looking to run competitions and giveaways for mortgage brokers?
Secured loan firms are still in limbo awaiting the FCA’s publication of its final rules for the sector, but since April 1 they have had to abide by the regulator’s Principles for Business and the rules in the new consumer credit chapter (CONC) of the FCA’s handbook.
Bill Warren, managing director of Warren Compliance, says: “The secured loan market is subject to the wider FCA rules and principles; and in this context Principles 1 and 6 are key, i.e. that the firm must operate with integrity and treat customers fairly.
“The rule CONC 2 states that a firm must not ‘inappropriately offer a financial or other incentive or inducement
to a customer to enter, immediately or quickly, into a credit agreement or consumer hire agreement.’
This rule would also apply to a master broker offering an incentive to a mortgage broker.
Warren says given that the secured loan market is so closely aligned to the mortgage market, the sector should also look to the current Mortgage Conduct of Business Rules for guidance.
When the final rules for the sector are formed, it is widely expected that the secured loan market will also be subject to these.
Under MCOB, the FCA stipulates that firms are allowed to receive indirect benefits such as gifts, hospitality and promotional competition prizes, providing ‘it is not likely to give rise to a conflict with the duties that the recipient owes to the customer.’
The rules state: “A firm must not operate a system of giving or offering inducements to a mortgage intermediary, or any other third party whereby the value of the inducement increases if the intermediary or third party, such as a packager, exceeds a target set for the amount of business referred (for example, a volume override).”
It goes on to say that the provider must also quantify, in cash terms, any material inducement it offers to a mortgage broker or a third party and this will need to be disclosed to the customer.
Warren says: “Firms which do offer incentives and inducements will find themselves having to justify them to the FCA – which is not an easy task.”
Incentives and inducements have been a hot topic for the FCA over the last twelve months. It recently published the findings of a thematic review it carried out into what firms in the retail investment arena are offering in this respect. Its salient finding was that many firms were offering inappropriate incentives, and as such it has published new guidance.
This guidance may be for retail investment firms but in its consultation paper, the FCA hints strongly that those in the mortgage industry should not turn a blind eye to the new rules.
It states: “Some respondents to the guidance consultation pointed out to us that our guidance does not apply to mortgage or protection business.
“Payments provided in relation to mortgage and protection business are still subject to the Principles for
Businesses including Principle 8 (Conflicts of interest), and so similar considerations apply to such payments as outlined in this guidance. We expect firms to act responsibly and not attempt to circumvent this guidance by soliciting and making excessive payments for other product lines.”
In its advice to retail firms, the FCA takes its rules about incentives one step further than MCOB and also restricts what a firm can offer in terms of hospitality.
The final rules state that a provider may give; and an advisory firm may receive hospitality, gifts and promotional competition prizes but they must be of ‘a reasonable value’.
Its guidance states: “As with other payments, any such payment should enhance the quality of the service provided to the client.
“Our review identified a range of events that involved providers offering hospitality and providing gifts/prizes to advisers. In some cases the amounts paid by the provider appeared to us to be of ‘an unreasonable value’ in the specific circumstances in which they were made and could have led to a channelling of business to that provider.”
In its findings, the FCA says things such as hospitality trips in the UK which are designed for business purposes and not based on the volume of business generated by that person are generally fine.
The key message from the regulator is that any incentive must not be of ‘an unreasonable value’.
Love them or Hate them
Financial firms offering incentives and competitions was commonplace pre-credit crisis with foreign holidays, extravagant giveaways and what seemed like endless hospitality on offer.
Since the end of the crisis, competitions and giveaways have been scarce – whether this is firms being mindful of the regulator or simply because times are harder is unknown.
Earlier this year, The Lending Wizard, Freedom Finance’s secured loan sourcing tool, launched a promotion offering brokers the chance to win an iPad Mini, Kindle Fire or iPhone 5.
Brokers using The Lending Wizard also receive a bottle of champagne if they complete a secured loan within 30 days, while the top introducer each month takes home another bottle of champagne and the broker of the year gets a grand prize. Brokers will also be given £50 cash for referring friends to the system.
The scheme received some criticism in the trade press.
Darrell Walker, head of intermediary at The Lending Wizard, says it reviewed the scheme in April to ensure that it complies fully with current market regulation by the FCA and as such it has not withdrawn the promotion.
He says: “The broker reward scheme we offer is designed to increase the awareness of secured loans among brokers and to help us build strong relationships with the broker community.
“Our broker of the month and year awards are based on the broker providing; proactive customer support, accurate information, high quality supporting materials and showing the greatest improvement in knowledge about secured loans.
“To take an example, April’s ‘broker of the month’ has not completed any business with The Lending Wizard, however he was nevertheless able to demonstrate a very high quality service to his customer and so qualified for a bottle of champagne.”
He says all brokers that sign up to The Lending Wizard have a duty of service to their clients, something that it supports absolutely and will continue to do so in all of its activities.
Some firms in the secured loan market however do not think firms should be offering any kind of incentive.
Rob Jupp, chief executive officer of Brightstar Financial, says: “As a business we don’t believe in incentives whatsoever. My view is that any incentives are almost always paid by the clients via larger fees and may not be disclosed to the end customer.
“Brokers should be extremely nervous about receiving any incentives, as by doing so they could potentially leave themselves open to a claim that the product choice, or fees charged were influenced by the delivery of a gift.”
Do They Work?
Incentives may not be to everyone’s liking but do they work? Tony Sutton, managing director of Specialist Financial Services, says not.
“We have found competitions and giveaways tend to make very little difference, as our introducers far prefer to receive a higher percentage of the income generated and receive their payment on the day of completion,” he says.
Sutton says that some firms which offer incentives may end up paying a lower commission to introducers.
“With the FCA’s recent publications relating to incentives, I also have concerns for both the recipient and the provider of prizes. Are these declared within the provider’s terms of business with the customer?” he asks.
Secured loan master broker Access 4 Finance, is currently giving away a free international World Cup shirt with every loan completion that is submitted in May.
Scott Thorpe, director of Access 4 Finance, says the shirt is not being added to the client fee.
“Regardless of what giveaway or prize we reward an introducer with for the completion of a second charge loan, their client is charged in line with our competitive fee scale – meaning that they will pay the same whatever promotion we run,” he says.
“The introducer doesn’t pay for it either, on completion of any product we provide a copy of all our invoices and commission statements giving them the peace of mind that any promotion that Access 4 Finance organises is paid for by Access 4 Finance. Transparency governs our ethos.”
Thorpe says as a master broker it is choosing the best lender for the client’s needs not just a particular lender for higher commission.
He adds: “If the latter happens this should really be clamped down on by the FCA and anyone found guilty banned from the industry. The client should always be put first and not the packager’s bank balance.”
With some mortgage brokers still reluctant to consider second charge loans, Thorpe says giveaways can be a great way to draw attention to the products on offer.
“There are still some mortgage brokers who choose not to consider second charge loans over a remortgage under any circumstance, and so providing that the promotion is relevant and has no detrimental effect on our industry, giveaways are a great way to let them know about the advantages available to their client,” he says.
He says the firm recently had a call from a broker who may not have considered a second charge in the past but called them due to the promotion it was running.
“His client couldn’t remortgage due to the LTV and a CCJ 18 months ago, they were able to consolidate £35,000 at a third of the rate that they were currently on. The client was ecstatic and the introducer now always considers a second charge loan on a re-mortgage, whether that’s with us or another packager.
“I am all for incentives wherever it’s us or a competitor; as long as it’s not trying to get business to one particular lender as you then have a conflict of interest.”
He says the more the industry as a whole can entice introducers in to open dialogue the more it can educate them and show them the products on offer.
Proceed with Caution
Like a lot of guidance the FCA offers, its rules around incentives are open to interpretation.
There may not be much in the CONC rules about incentives but MCOB and the FCA’s latest guidance offers firms more of an insight into what the regulator expects of them.
The FCA does not seem fundamentally opposed to incentives or it would have banned them altogether for the financial industry.
Any incentive offered though must not cloud a broker’s judgement when it comes to what is best for the customer and must not lead the broker to choose one product type over another. When it comes to offering incentives, the FCA’s message is clear – while it is prepared to tolerate them, firms which decide to do so must be able to justify what they are offering and demonstrate that they do not influence the customer’s decision making.