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A consumer’s view

There has been a recent debate about whether procuration fees for mortgage brokers should be standardised across the industry.

It throws the spotlight once again on the vexed question of commission and in particular on the old debate about the maximum commission agreement which used to operate between life offices until it was abandoned in 1989 when the Office of Fair Trading ruled that it was a cartel.

It was a cartel but not all cartels operate against consumers interests and this was one that held commission down, to the benefit of consumers. Indeed, it is arguable that one step towards pushing IFAs reluctantly down the fee-charging route to remove product bias and turn them into true professionals would be to set maximum commission by law.

Mortgage brokers voting for differential procuration fees argue that some mortgage cases are more difficult to deal with than others, usually bec-ause of poor credit ratings, and that there should therefore be a differential in commission paid for these more complicated cases. Fine, nobody would dispute that but within a fixed commission regime it ought to be possible to have a maximum commission for straightforward, run of the mill cases and another higher fee for the more difficult cases.

At the moment, average procuration fees are around 0.35-0.5 per cent for straightforward cases – largely borrow-ers wanting 75 per cent loan to value or less which can be dealt with by the broker online through the fast-track mechanism – and up to 1 per cent for more difficult cases.

It probably would not cause much disruption to the vast majority of mortgage brokers if the maximum commission was set at 0.5 per cent for standard cases and 1 per cent for the more difficult clients, with a flat maximum fee for bigger loans of, say, 1,500. If a broker felt the work involved would make the maximum pro-curation fee of 1,500 earned from the lender uneconomic, he could always retain the option to charge an hourly fee to the client.

Where investment and protection products are concer-ned, the only consideration is the level of service offered by the IFA. It takes no more time to work out whether a 35-year-old client needs a 150,000 mortgage protection policy at a premium of around 20 a month or a 100 a month savings policy with life cover but commission rates vary widely.

Under the old Lautro maximum commission agreement still used by many as the benchmark for setting commission, indemnity commission on a 25-year 150,000 mortgage protection policy with monthly premiums of 20 might be around 168 compared with as much as 950 for an endowment savings plan with a 100 a month contribution level. Which one did the adviser recommend? No wonder so many endowment-linked mortgages were sold in the 1980s.

These huge discrepancies in the amount of commission paid on different types of policies cannot be justified in terms of the amount of time spent advising the client. Before recommending any product, the IFA is supposed to conduct a full fact-find.

The FSA and the OFT have both backed away from banning commission for IFAs although privately some believe that charging fees is the only way to totally wipe out any risk of product bias which commission inevitably produces.

But setting a standardised commission by law would force many IFAs to rethink their business and in particular their charging structure, with many opting for fees rather than commission as being a fairer way to charge clients.

Clients would get genu-inely impartial advice, including recommendations for non-commission-bearing investments such as deposit accounts and National Savings products.

They would also build up a long-term relationship with their IFA because fees would encourage IFAs to maintain client relationships and IFAs would at last become a real profession along with accountants, solicitors and other fee-charging professionals.

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Julian Gibbs

Simon Edwards and Alan Borrows set up Midas Capital Partners around three years ago. They own a substantial amount of the company themselves and have performed exceptionally well with their balanced growth and balanced income funds.

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