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Brain strain

The purchase by Halifax, Nationwide and Alliance & Leicester of a

controlling interest in the mortgage sourcing and packaging company

Mortgage Brain is yet another fascinating twist in the progress of the

mortgage market towards electronic trading.

I fear, however, that while there may be sound commercial logic in this

acquisition, for all the lenders involved and particularly the Hali-fax it

may turn out that they have bought a curate&#39s egg – good in parts.

My reasoning for this is that it puts them on a regulatory tightrope that

will be difficult for them not to fall off.

If they can walk this tightrope, their move may be an excellent move for

the industry and for consumers.

Several other players have been trying for some time to establish

electronic trading platforms for the mortgage market so it will be

interesting to see how they react to this alliance.

The practicalities of a commercial market are that from time to time any

organisation may choose to offer preferential terms to business partners

with which they find it attractive to do business.

There is nothing wrong with this. The problem comes when they have a

financial interest in such partners.

At the time that the deal was announced, Mortgage Brain was quick to tell

Money Marketing it is prepared to offer “every assistance” to other

electronic systems to enable them to link their software to the platform.

While this is a move in the right direction, I fear it might not be enough

to satisfy the alternate trading platforms which have already established

direct links into many lenders&#39 systems. They may well object if they are

only given the opportunity to link to such a key group of lenders through

the competing Mortgage Brain platform.

In order not to be seen to be giving a commercial advantage to a platform

in which they have a financial interest, the Mortgage Brain investors may

feel they must give equal access direct to their systems to the other

service providers which are competing with the company in which they have a

stake. This would be a very good thing.

Last week in Money Marketing, Mortgage Brain managing director Mike Green

described this as the establishment of an industry-owned trading platform.

But while his new shareholders represent a big part of the mortgage

market, they do not represent the whole market and other lenders may be

reluctant to support a platform that is majority-owned by a number of their

biggest competitors.

Many smaller lenders have been keen to see electronic trading as they

believe it will give them the opportunity to level the playing field,

increase competition and give them greater access to a wider market. One of

the great things about e-commerce is it has the potential to make it far

easier for consumers to gain access to information and compare products on

price and other terms rather than on brand strength where the biggest

organisations always have a significant advantage.

There must be a risk that intermediaries may find themselves forced to

deal with multiple platforms if non-shareholding lenders are not prepared

to join the Mortgage Brain platform because of the changes in their

ownership.

There was a previous attempt by the Intermediary Lenders&#39 Association and

then the Council of Mortgage Lenders to establish an “industry” mortgage

trading platform.

Readers may recall I was highly critical of this initiative. Presumably,

Halifax was not entirely satisfied as it was one of the first lenders to

withdraw from the service.

It is easy to think of instances of similar services that have attracted

the attention of the European Commission&#39s competition regulators. This

acquisition can be seen as bearing many similar traits to the previous

situation when The Exchange was originally owned jointly by a big group of

insurers and AT&T. Several years ago, long before it launched its own

m-link platform, Misys complained to the European Commission that such an

arrangement was anti-competitive.

As a direct consequence of this complaint, the insurers involved decided

that ownership could present difficulties in the long run. The result was

the insurers disposed of their interests in The Exchange, which was sold to

its management which later floated the business.

Another parallel must be the scrutiny of Microsoft because of its decision

to distribute its Explorer browser free. Although the action by the US

Department of Justice has attracted most publicity, it is well known the

European Union had also been conducting an investigation.

One of the suggestions was that Microsoft had been involved in “predatory

pricing”, offering its product at a subsidised rate to drive competitors

out of business. I can envisage a situation where Mortgage Brain may find

it difficult to introduce very low levels of charges to lenders or others

for fear of being accused of similar practices.

It is not just necessary to be doing the right thing but also to be seen

to be doing the right thing. It is clear that even Microsoft has found it a

burden to meet such obligations. There are many in the IT markets who would

suggest that much of the decline in the fortunes of IBM during the 1980s

was due to it having to spend time fighting a similar court action in the

US.

If Halifax and the other lenders can maintain a fully open position where

they can allow a whole raft of other competing initiatives equal access to

their systems, to compete with the organisation in which they have a

financial involvement, they may make a real contribution to electronic

trading in the mortgage market.

But I fear that, without questioning their intention or ability to do so,

the practical issues in demonstrating such impartiality in the long term

means they may end up being hamstrung by the need to keep regulators and

competitors constantly happy.

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