It is thought that many lenders will restrict access to their products to tied brokers and big networks. Do you think this will happen? What will be the effect on small brokers?
Mountney: This has yet to ratified and frankly it would be a dangerous game for a lender to play. At this stage, we still have no idea as to the final split of brokers on DA or AR and, as importantly, how many existing advisers will switch to introducers or simply leave.
We will not know for some time as to whether the remaining networks will survive beyond a certain timeframe. The shape of the market in 12 months is a guess for everyone. With that backdrop, why would a lender cut links with any broker upon whom he may depend in the future?
Jannels: This would certainly smack of a determined approach by lenders to distort and marginalise the market and could be considered anti-competitive. What about the big independent brokers? However, it is not unreasonable for lenders to consider promoting specific product ranges through known sources of volume distribution where mar- gins are easily identified and consistent with the general quality of packaged business.
Aitken: Mortgage clubs and networks may be looking to restrict their lender panels but I think the opposite is true for lenders. Any lender which has aspirations to maintain and grow market share will be eager to access a wider market and will be looking for ways to achieve this wider distribution.
What impact will the Abbey/ Banco Santander Hispanic Central deal have on the rest of the market?
Mountney: I read this as one more step on the road to the influence of international entities on the UK market. There is nothing really surprising with this. Overseas players have envied the dynamism of the UK for some time. The only surprise is that the European players have taken so long to move. The Americans are here is numbers. Others will follow.
Jannels: My first impression is that it is a shame that a long-term typically British institution is seeking to sell out to a foreign bank. That said, Abbey has been trying to reinvent itself for a long time without success and this might turn out to be the fillip it needs to get back on track.
Traditionally, Abbey has not been overly user-friendly to the intermediary market and it will be interesting to see what the new owners will do to enable it to capture volume business under new FSA structures. Networks will play a large part in the delivery of mortgage business to lenders and Abbey will be ill advised to miss out on this. The new owners must quickly ensure they have the right management team in place to engender confidence from prospective borrowers and investors alike. We need to wait and see what impact the proposal will have on the market as these deals have a habit of floundering and there are other potential predators surfacing.
Aitken: Whichever of the major contenders acquires Abbey, they are unlikely to want to dismantle such a strong brand within the mortgage market. Consolidation of administration functions will give the combined operation a lower cost base, allowing for more competitive products. With no retail outlets in the UK, presumably the Banco Santander option will be the most favourable outcome for branch-based staff who will not be facing the level of downsizing that is likely to take place if a UK-based take-over succeeds.
Do you believe the FSA will demand full disclosure of all packager and distribution fees in the new key facts illustration? If so, will this make mortgage packagers less competitive?
Mountney: I hope not, for the client is going to be confused enough already with the present content of the KFI. I am of the opinion that you do not fix what is not broken, so the suitability letter was sufficient transparency and there is no evidence to suggest that a further level of disclosure in relation to packagers is warranted or will be understood by the client. The FSA has shown that it is capable of listening to reason. Let us hope it listens in this respect.
Jannels: If the FSA does not want to regulate packagers then why should the fee paid to them be relevant? If the packager is acting purely as a third-party administrator/ distributor for the lender, there is no need for the packaging fee to be disclosed. If disclosure is required, then it might be considered anti-competitive as, if the client were to go direct, via a broker, the lender is not required to disclose administration costs to the client. In most cases, the product is no different so there is no advantage or disadvantage to the client.
Aitken: The FSA is only stipulating fee disclosure to borrowers by packagers which are carrying out a regulated activity. Packagers which are not carrying out a regulated activity have no obligation to disclose their fees in the key facts illustration or anywhere else. I believe that borrowers will, quite rightly, be interested in the competitiveness of the mortgage product rather than an administration fee paid to a third party by the lender. Some customers may not like the idea of the packager fee but most will understand that it is being paid for a separate service. It remains to be seen whether consumer resistance will drive down the market price for packager services in the long term.
Will lenders pay packagers a fee to pass on to intermediaries or will they pay two separate fees – one for the packager and one for the intermediary? Who will packagers be working for – the lender or the intermediary?
Mountney: The problem is that a certain element of the payment to the introducer can be individually negotiated, that is, preset formulas are of no use and cannot be applied in reality.
Packagers have obligations towards their clients (introducers) but also to the lenders that they package for. This dual responsibility puts them in a difficult situation sometimes and I would have thought that, in relation to the question of earnings and transparency, they would prefer to be removed from being the piggy in the middle and simply have all income disclosed, whether you argue this is right or wrong. It then shows them as the middle man, which is exactly what they are.
Jannels: Given the stated requirement for transparency and clarity, it makes sense for payments to be separated to the intermediary and packager. This will clearly identify respective roles and remuneration in the transaction.
Compliance and audit trails will be more easily followed and understood leading to better corporate governance from the prospective of all stakeholders. Branded lending aside, packagers will work for the lender on distribution and administration and the introducer on product provision and packaging.
Aitken: Within the mortgage offer document (which must contain the same information as the KFI issued by the broker) the lender is obliged to state the total sum paid in procuration and administration fees, and to name the recipients of the fee/s – although the apportionment of the total fee does not need to be disclosed. It is up to the intermediary who is earning the procuration fee to state its value on the original KFI. The packager function will not change – packagers will continue to provide an outsourced administration function for lenders as well as information and support for brokers, and brokers will continue to pass cases through packagers who give them the best service.
What do you think will happen to the plethora of mortgage origination websites,a source of many leads for brokers, after regulation?
Mountney: Looking at the position in simple terms, if these sites do not negotiate with end-user entities (such as PMM) to encompass the express request (ER) requirements of the FSA, they will have nowhere to go come November 1. I am surprised that many of these sites do not appear to understand the massive changes that the ER restrictions will make to their business and that, even at this late stage, some are simply unaware of what they must do. PMM has used the ER regulations as an opportunity and has gone out to look for these lead providers. After all, a problem for one person is a possible opportunity for another, which is exactly how brokers should be addressing the issue.
Jannels: Either, they will, of necessity, become totally and completely synchronised with lenders' KFI production in every aspect, with lenders guaranteeing their accuracy, or the introducing source will not be able to rely upon them and the platforms will become obsolete.
Aitken: As long as these mortgage origination websites comply with the marketing rules and collect their information in a compliant manner, then they should continue to thrive. With cold-calling for mortgage sales disappearing after October 31, lead generation will begin to depend more heavily on advertising for inbound responses from interested borrowers. As consumer confidence in webbased information sources continues to grow, then properly conducted mortgage origination websites should expect a bright future.
Mark Mountney,managing director, Premier Mortgage Management
Vic Jannels,group managing director,ATom
Stuart Aitken, director of credit, Southern Pacific Mortgage Ltd