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FCA ‘could probe rising proc fees’

The FCA has threatened to intervene in the mortgage market if it believes rising procuration fees are influencing which products brokers recommend for their clients.

Several mortgage lenders, including NatWest Intermediary Solutions, Skipton Building Society, Accord Mortgages and Leeds Building Society, have recently raised the fees paid to brokers for completed mortgage deals.

Last week, Virgin Money increased its procuration fee by 10 basis points to 0.5 per cent gross – significantly higher than the average fee paid by Lloyds Banking Group subsidiary Halifax for Intermediaries, which currently sits around 0.35 per cent.

Start Financial Services manager Tom Cleary says: “Before the crisis, there were a lot of brokers directing clients to some of the sub-prime lenders – and their higher rates – simply because of the massively higher proc fee they paid out. We’re not in the same market anymore but the FCA should be looking out for such activity to make sure clients are always being treated fairly.”

A FCA spokeswoman says the regulator will investigate if evidence emerges suggesting rising procuration fees are leading to bad consumer outcomes.

She says: “We regularly monitor market developments and would certainly want to investigate further into this area if we feel increasing procuration fees are influencing product choice.”

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Ridiculous.

    We cannot EVER advise a client based on procuration fees – it’s a bit of an insult to advisers to say that anyone would do that anyway.

    Sub Prime is irrelevant – I would suggest that any brokers who were involved at that time probably didn’t survive the recession and are no longer trading.

    It was a niche market even then, and one which no longer exists so I don’t think the comparison with the mortgage market in 2015 is relevant.

    Blimey, I doubt many brokers have even been paid any of these enhanced proc fees yet, and already they’re talking about ‘clamping down’?

    The danger is I guess, we may get paid in relation to the work we put in??

  2. Why would they investigate companies that are willing to pay a fairer prop fee? Why wouldn’t they investigate companies that do not pay a reasonable proc fee taking into consideration the extra work involved nowadays?

  3. Why not investigate us getting paid to do a job? Get rid of broker fees, get rid of proc fees, get rid of commissions in fact stop us earning a living. Oh…that’s already been done. I would suggest an investigation into the CCL fee structure needs investigating as a priority.

  4. Contractually anon 9th January 2015 at 1:03 pm

    It should be quite easy to gather data on where businesses send client to and what the rates are. Any business that dramatically changes around about time the proc fees change is probably worth a visit.

  5. ‘the regulator will investigate if evidence emerges suggesting rising procuration fees are leading to bad consumer outcomes’.

    We live in a commercial world ?? Not if we are regulated by a ‘quango’ like regulator who does not !

    Try investigating MMR then you will really find some IMPORTANT ‘bad consumer outcomes’

  6. Tom Cleary is in a different mortgage world to mine. In mine the sub-prime market and high proc fees died some time ago.
    Who or what is he trying to impress with his sanctimonious bleating.

  7. Why are proc fees/commission any different to commission on sales of investment products? It is somewhat inevitable that a principle that the FSA/FCA applies in one area will make its way into others.

    As we know on investments, the FSA only needed a trifling amount of evidence of commission bias (based on a small Australian study) to justify its perceptions – even in the face of its own advisers saying it wasn’t the case – and implement RDR.

    Statements like the ones reported here suggest that MDR is just a matter of time.

  8. I didn’t see the regulator jumping on lenders who squeezed brokers to the point of extinction when they reduced proc fees or dual priced their products to encourage direct dealings. They’re now faced with a situation of having to give advice on every mortgage instead of ‘cascading information’ as they did in the past. Yeah right…. They need to keep the introducers, introducing and dare I say it; help them actually stay in business or they’re totally stuffed. Unless of course they’re going to train and regulate a mortgage adviser sales force of their own, but with the time its taking to complete fact finds, produce illustrations et al, complete paper and online application forms and deal with all the other information required to support an application will this ever be cost effective?

    The FCA seem to want to dive on to anything in an attempt to justify their existence.

    Seriously, who would have used the example of sub-prime these days? Sub-prime, dear me……!!!

  9. As said above, bad consumer outcomes = MMR (Have a look at that Mr FCA)

  10. We're all doomed!!!!! 9th January 2015 at 3:21 pm

    Oh, for goodness sake!! – Why all the negative comments?

    What the regulator has said, is if anyone recommends a product over a more suitable one, because they are earning a higher proc fee, then they will investigate further. – Who in their right mind would not expect the regulator to do this?

    Saying that it does not happen, is extremely naive. It has happened, and it is possible that it could happen again. The regulator will want to ensure that if it does happen, those responsible will have some explaining to do. This seems perfectly reasonable to me.

  11. Jonathan Treliving 9th January 2015 at 4:02 pm

    If commission bias really is their concern, then perhaps they should continue to audit suitability of advice with broker firms before considering intervention. Which is implicit in what they have said here anyway, so I wouldn’t say this announcement is cause for the broker community to get too excitable.

    That being said, I don’t think the difference between a 0.33% and a 0.5% gross proc fee on a prime mortgage is something most brokers today would stake their credibility over. And recommending a sub prime mortgage (if you can find one) to a prime client in this market is not only unethical and idiotic, it’s nigh impossible given the regulation that already exists to prevent this happening.

  12. this does not make any sense – as above who does sub prime? – probably only packagers or non regulated firms -I bet a Lender has stirred this up with the FCA through fear of loosing market share to higher paying competitors.

    When the Cov. announced there increase I actually felt valued by the lender for a change- a pat on the back and a thank you for the business from others just doe not cut it –

    Other lenders now following suit is a much needed welcome – To hear lenders keep saying how valued we are well show it please – put you money where your mouth is.

    How much should process fees be anyway ? well in line with inflation – rising regulation – rising admin etc. etc. a darn site higher than they are now.

    Alos – How do you advise based on highest procs ? even if you tried it would probably be a non starter on criteria grounds.

  13. There shouldn’t be too much surprise about the FCA saying this, but I think that they should really just watch what happens. It seems to me that proc fees are rising due to increased regulatory requirements and a recognition that lenders need brokers more than they have in recent years.

    Virgin Money may even be recognising that they have to pay brokers a bit more because of all the hoops they make us jump through, whilst Halifax may consider that their less onerous processes do not dictate such high fees, but I would expect to see lenders aligning their fees at the new levels during 2015.

  14. I don’t see 0.5% as excessively high at all, by the way. As Jinker said, the FCA didn’t probe falling proc fees or dual pricing. The latter should have been a source of shame to the regulator – I would have been too embarrassed to defend such an awful anti-consumer practice.

  15. OMG The regime (FCA) are already getting the boot in to brokers heads (again)when we haven’t even down anything wrong. So lenders want to pay us a little more for the additional work we have to do Sort out MMR and look at how high street lender branch kids are selling mortgages You have to accept one day that the intermediary sector is doing a good job so GIVE US A BREAK!

  16. We re all doomed ! Brown nose

  17. We're all doomed!!!!! 12th January 2015 at 1:07 pm

    So, Amir Kharkower, I’m a brown nose, eh?

    If a mortgage is sold purely because a higher price fee is earned, but there is no real difference between the alternatives, you have absolutely nothing to worry about.

    However, if a mortgage is sold where the proc fee is higher, but the client is disadvantaged, then the regulator will be interested. It’s as simple as that! I think all intermediaries will accept that the FCA is going to want to know if a client has been ripped off. If that’s brown-nosing, then I am am guilty as charged!
    If a slightly higher proc fee is earned, there is usually a simple enough explanation that can be documented in the client’s paperwork – lenders service levels being an example.

    As I said, this is really nothing to worry about if you are doing a good job for your clients.

  18. Grey Haired Underwriter 12th January 2015 at 1:59 pm

    I have always been unsure as to the validity of a percentage proc fee. There is the same amount of work in a £100,000 mortgage as there is in a £200,000 so why should there be double the fee. A broker in the North East is more likely to be disadvantaged by a percentage fee than a broker in, say, London simply because of the size of the average loan amount. Would it not make more sense to Offer a flat rate fee that represented the work done rather than use a %age. I’d be interested in a broker’s viewpoint.

  19. Grey Haired Underwriter | 12 January 2015 1:59 pm

    Simple economics. The larger loan is worth more to a provider than a smaller loan on a property say in the North East. No different to the commission paid on a larger life case than a small life case.
    This isn’t that hard to work out. Bringing something of higher value to a provider means they can afford to pay introducers more. It’s pro rata and works.

  20. GHU tricky question I don’t think a flat ‘per case’ procuration fee system would work. Yes a broker in the North East would have lower income due to lower average loan amounts, but so would estate agents, solicitors, car salesman. Likewise the cost of living for the broker in the Northeast would be lower too, so surely its all relative.

    Complex high net worth cases can often involve lots of work (& stress!) in getting the applications well presented and through underwriting (as can £100k mortgages!!). The lender is the one that benefits from more interest generated by larger loans therefore the broker should also benefit from introducing larger loans by being rewarded by larger procuration fees.

    I’m not saying that a £100,000 mortgage isn’t worth doing but perhaps brokers should be rewarded more for getting to grips with criteria and submitting a fully packaged case each time that has no issue with underwriting due to mishaps with criteria / delays in sending evidence etc e.g. a broker submits 10 cases per year with no problem then the proc fee increases for that particular broker… but surely that would be a nightmare for the regulator?

    Charge your clients a fixed fee upon issue of a mortgage because proc fees are simply too low!

  21. The other issue is potentially higher liability risk with a larger case in a more litigious world and higher earners/borrowers tend to be more demanding.

  22. Grey Haired Underwriter 12th January 2015 at 4:41 pm

    Jinker

    Thanks for your comment but it’s all relative. The higher the value of the property the more susceptible it is to a higher deviation in value. The return on funds lent remains the same whether we do 10 x £100,000 or 1 x £1m – although our admin costs are a lot greater for the 10. The proc fee is the same as well inasmuch as we pay out, say 4%, of £1m whether it be in one lump or in £10 separate amounts. It could be argued that 10 smaller loans are less risky than 1 large loan but I don’t intend to go down that route. Thanks for your comment though.

    Joe, thanks for your comments as well and I could probably argue the toss about some issues I do take the cost of living issue as being very valid – although whether it should be is an interesting debate.

  23. There are no new arguments in favour of proc fees here – the exact same points were made by investment advisers about percentage commissions too but it didn’t cut any ice with the FSA/FCA.

  24. It doesn’t mean that the regulator was correct though, but that is a whole different issue.

    What is certain is that proc fees are broadly the same and it is not akin to the massive difference between one investment and another, where the difference in adviser earnings would vary dramatically depending on the product type recommended.

    I can’t think of any adviser mad enough to risk advising one mortgage over another in order to make a minimal extra proc fee, so the mortgage equation is simple. We work solely for the client until we select and recommend a mortgage and only then do we work for the lender in terms of preparing, processing and submitting the mortgage.

    If you think that providers shouldn’t pay for that labour then you are letting politics win over pragmatism and client service. There is an argument that the client should pay us for the advice and the lender should pay us for our work on their behalf, but that is a different issue too.

  25. …and I believe that client charging makes allowance for a % charge as well, so how did all that pain and sorrow benefit anyone apart from providers in the end?

  26. @Stuart Dugan – I don’t think we’ve spoken since you and I took Lesley Titcombe to task over the Dual pricing issue pre MMR.!
    The simple solution K suspect is to quote completion fees to the client of 0.5% offset by the proc fee actually paid with a signed authority addressed to the solicitor to facilitate payment on completion. That way no pro fee bias can be claimed and consumer knows you will recommend a non prod fee paying product if you think it best suits the client.
    As to the comments critical of the FCA on here, I suspect it was NOT t FCA who phoned MM, but a journalist who asked a question and got an answer thus making a story which results in lots of posts and SELLs advertising.

  27. @Phil Castle
    Unsurprisingly, I have been thinking along similar lines and I sometimes do that i.e. charge a fee to bring the income up to standard levels when using lenders with low proc fees (or none at all). I would see that as best practice in some respects but, in other cases, I just don’t bother if it is a very straightforward case.

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