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Capital crunch for mortgage brokers

Are mortgage intermediaries under-capitalised? The FSA is pondering this question and if it decides to take action, a rise in professional indemnity cover or changes in capital adequacy requirements could have a big impact on mortgage firms and networks.

Any increase in capital adequacy could lead to more consolidation as
many small brokers would have no choice but to go to networks.

The FSA says it is always looking at capital adequacy for mortgage
intermediary firms and spokesman Robin Gordon-Walker says: “I could
neither rule in or out any increase of capital adequacy for mortgage
intermediary firms.”

Mortgage Intelligence managing director Sally Laker says the FSA
would have to consult with the industry and go through a consultation
paper.

She says: “The overall message though is that the financially strong
in this situation will be the ones to survive. This also applies to
the networks. Consolidation of networks will happen over the next 12
months. Those with strong financial backing will survive and brokers
need to be aware of this.”

Charcol senior technical manager Ray Boulger says the FSA has tried
to be accommodating with PI but any rise would put pressure on firms,
particularly smaller companies. He warns that if there is an increase
in PI or capital adequacy, mortgage firms may not find it easy to
join networks.

Theoretically, networks are better placed for PI and Boulger believes
that they will not jeopardise this by taking on any intermediaries
who could change that favourable position.

Boulger says: “The wrong sort of intermediary could lose the
credibility that a network has on PI. Firms who have difficulties in
any way with PI must not think that just going to a network will
solve their problems. Networks will not put their business plans at
risk.”

Laker says any rises in PI will lead to consolidation and small
brokers may seek help from networks but networks will have to be
choosy to protect themselves financially.

Association of Mortgage Intermediaries director Chris Cummings
believes it would be to the detriment of the mortgage industry if the
FSA were to make changes to PI and capital adequacy.

He says that the trade-off for firms of capital against PI has
resulted in inexpensive PI but it would be unfair if the FSA were to
hold both higher capital and higher PI cover over mortgage firms.

He says: “There would be more mergers and acquisitions, a migration
to networks and more people would simply leave the industry, which we
certainly do not want. Changes like these that just to make the
industry easier to regulate is not at all the right thing to do. That
is not what the FSA is here for.”

Companies dealing in PI insurance would not confirm whether changes
are being discussed with the FSA although all the firms spoken to by
Money Marketing said if there were to be alterations in requirements
from mortgage firms, they would not be imminent, considering the
amount of regulatory change the financial services industry has and
will be going through.

Magian Mutual principal Glyn Morris says the company had initially
steered clear of dealing with mortgage firms due to their
non-regulatory status before October but it is now looking at firms
which have been set up since M-Day.

He says: “We are looking at mortgage firms which have been
established very recently which have been working under the FSA’s
regulatory environment. Part of our underwriting process is to look
in some depth at the overall income, retained profit and capital
assess as part of the underwriting process.”

PYV managing director Ian Boscoe warns that the relatively low-risk
environment that mortgage intermediaries have been operating in may
come to an end. He says: “I would hope that we can place PI
insurance for mortgage intermediaries at a low cost. It is much
cheaper for them than IFAs and insurance and terms are much better
for them because of the low adverse claims’ experience.”

“However, this is only the current status and it could change
overnight. Issues surrounding self-certification and negative equity
are creeping in, coupled with the deterioration of the property
market, according to some lenders. The whole situation could change.”

But until then, Boscoe recommends that mortgage intermediaries could
opt for the current cheaper option and buy more PI insurance.

Hamptons International Mortgages managing director Kevin Duffy says:
“Mortgages are now regulated and we have had to jump through
due-diligence hoops so the cost of PI insurance should be coming down
but we have been tarnished with an IFA brush.”

“Hopefully within the next two years, the impact of regulation and
the way that it protects the consumer will start to manifest itself
and this will be reflected in PI insurance.”

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