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A closed run thing

The commercial viability of networks, as well as their directly-authorised counterparts, continues to dominate the trade press. If you can read beyond the puerile and self-obsessive hubris being exhibited by some businesses, you may notice that a common denominator in these debates is the expression “closed businesses”.

This now wholly anachronistic term has come to mean the supposed ability with which an intermediary can control and influence its membership’s mortgage placement in such a way that lenders are willing to pay higher proc fees for the near certainty of its custom.

My view is that the definition and resulting lender behaviour have become ambiguous and inappropriate. Not unconnected, I also believe that the recent history of lenders and insurance companies investing heavily in some intermediary propositions in the name of distribution has added further mystery to this matter of what constitutes a closed distribution source. Certainly, the investment plays made of late by Friends Provident and Axa make curious reading for many intermediaries whose businesses are long-profitable, efficient and well-managed and yet, almost because of this, some lenders elect to pay them a lesser fee than other overambitious, undercapitalised and wholly unproven distributors.

Equally unproven is the theory that an appointed representative distribution model is any more reliable and secure for a lender than that of a directly-authorised one. Since regulation, that particular landscape has not changed so dramatically that any lender can say with real conviction that one model is more predictable than another.

Surely, even though restricted panels do apply (and thereby assist a given panel lender’s objectives), in an age of treating customers fairly it is the individual consultants and not their bosses who have to determine where business is placed? It may not be long before the FSA looks more closely at the width of some intermediaries’ lender panels.

Thankfully , I sense that some lenders are now starting to assess their value chains in different ways, anyway. One approach is to look at the longevity of previous loan business submitted and to assess whether an intermediary’s performance record determines the lender’s consequent bespoke proc pricing.

Additionally, loan sizes can play a part . Some lenders will covet thousands of small loans on which they can cross-sell other products but others may be interested purely in shifting volume business from highly reputable broker sources where the prospects of a disrepairing loan asset are very slim.

The discussion inevitably leads on to the matter of trail commission but to little avail. Comparisons with the financial services industry are disingenuous, not least because once a 20-a-month protection policy is in place, the justification for a rebroke is limited due to such a small cost differential and the thorny challenges of fresh medical under-writing. Conversely, mortgage borrowers have every right to expect a review of their debt arrangements every two years, particularly if interest rate movements have been marked and the potential savings are significant. This alone will inhibit the extent to which mortgage churn ( a daft and unfair term) will be defeated.

Undoubtedly , it is the alignment of interests between broker and lender which is the way forward. Both need to be more concerted and mature in sitting down around a table and discussing frankly what each party needs and wants. From there, more equitable proc models can be conceived.

Kevin Duffy is managing director of Hamptons International


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