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Does rising proc fee chasm create mortgage misselling risk?

Experts have raised the alarm over the widening gap between lenders’ procuration fees after the FCA warned it could intervene in the market.

Several lenders including Accord Mortgages, Leeds Building Society, Monmouthshire Building Society, National Counties Building Society, NatWest Intermediary Solutions, Skipton Building Society and Virgin Money have increased the fees they pay brokers for completed mortgage deals.

Last week the FCA said it would monitor developments in the market and could take action if it believes the fees being paid by lenders are influencing where brokers place their business.

MAC Consulting chief executive and regulation expert Mark Chilton says regulatory intervention will be necessary if rising proc fees lead to poor consumer outcomes.

“If advice is influenced by proc fees, that is just wrong,” he says. “Largely the market has cleaned itself up but there will be elements that are doing this and it would most likely be some of the larger broker firms who often earn a greater proc fee from lenders when submitting business in volume.

“There are going to be individual cases now and then, but it will tend to be the volume deals from large brokers that could be driven by the fees they are earning.”

Earlier this month, Virgin Money raised its proc fee 10 basis points to 0.5 per cent gross – significantly higher than the market average of around 0.35 per cent.

Chadney Bulgin mortgage partner Jonathan Clark says rising proc fees reflect the the greater workload facing brokers post-MMR but admits the growing chasm between lenders’ rates is a potential cause for concern.

He says: “If Halifax is paying 0.3 per cent, but Virgin is paying 0.5 per cent gross – that’s a huge difference; it’s over 50 per cent more. It’s good news obviously but it does worry me slightly.

“If you have an adviser deciding between the two lenders as to where to place his client, and one pays 50 per cent more than the other, is the person always going to be giving proper impartial advice? I think it’s an interesting question to ask.”

Start Financial Services manager Tom Cleary says similar conflicts arose in the pre-crisis market.

He says: “Before the crisis there were plenty of incidents where brokers would place a deal with specialist or sub-prime lenders that pay a far higher fee – in some cases around 1 per cent – even though the clients were not being given the best deal. That is something the FCA should be monitoring to make sure customers are being treated fairly.”

While conflicts of interest may have influenced brokers and advisers in the past, Cleary argues the financial crisis largely flushed out the more unscrupulous elements in the market.

“Of course it is a different landscape now, and by and large it is the straight-shooters that have survived the crisis,” he says. “However, we do not want to forget what has happened in the past. It’s absolutely right that the FCA is monitoring this. If it is coming out and saying its whole ethos is about improving customer outcomes, it needs to be making sure at the very least that customers are being directed to the right products.”

London & Country associate director of communications David Hollingworth argues proc fees are simply shifting back towards pre-crisis levels, when lenders cut the payments to control volumes.

“I think lenders are simply getting back closer to where we were on fees before the crisis,” he says.

Lenders say it is brokers’ responsibility to keep their clients’ best interests in mind when choosing where to place their business.

A Halifax for Intermediaries spokesman says: “Our fees are clear, transparent and in line with the market, and we work hard to ensure that we provide competitive products alongside high levels of service.

“Ultimately, it is a brokers responsibility to ensure products are fit for purpose and suit each client’s needs.”

Nationwide managing director for group intermediary sales Ian Andrew says: “We regularly review our proc fees to ensure they are competitive in the market and have no plans to change them at this time.

“With the FCA focus on customer outcomes, their view on this is as expected, but we are confident that the vast majority of brokers will continue to recommend the most appropriate product for their customers, as opposed to being overly-influenced by the amount of proc fee payable.”

A spokesman for Woolwich says the lender has no immediate intention to raise proc fees, but will continue to review this periodically. The lender would not be drawn on the FCA’s warning, however.

NatWest Intermediary Solutions says its fees are in line with the market, while Santander for Intermediaries declined to comment.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. In answer to your question, no it shouldn’t do because the professional mortgage advisor has to justify the lender and product as most suitable from his market place and the procuration fee should be irrelevant.

  2. We have a fee structure that does away with provider bias – it’s simple, clients understand it when explained and whatever comish is received, we send them immediately we get it. Our charge is for the advice, recommendaiton and application processing.

    We don’t describe the comish as an offset. They agree to our terms at outset or not. In the event we do the wok and the loan doesn’t complete, for whatever the reason, we will still be paid by the client. This is a far better way of working and removes wasted time, time-wasters & smart alecs; whilst recognising we should be paid for what we do. The risk is in the recommendation, not arranging the loan.

  3. So there you have it, both Halifax and Natwest pay fees at a different level but when asked to clarify their position they both pay ” in line with the market”

    Why bother asking?

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