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How the mortgage map is being redrawn

Regulation has finally arrived for the mortgage industry but we will have to wait to find out how much the distribution landscape has changed.

Several of the traditional IFA networks have planted their feet firmly in mortgage distribution territory. As the dust settles after M-Day, Sesame reports it has 4,500 advisers ready and waiting to do mortgage business.

Bankhall is also now a significant presence in the mortgage market. Although member firms do not have to inform the group of the total number of advisers they have who are regulated to do mortgage business. marketing director Tony Murrell estimates the figure at 2,560 member firms representing 5,000 intermediaries.

The Tenet Group spent the run-up to M-Day building up its formerly non-regulated side as well as bringing Premier Connections under its wing in June. The group says it has more than 1,000 advisers regulated to do mortgage business.

Burns Anderson chief executive Ian Parsons has steered the group back towards profitability after a difficult period of cost-cutting and reworking of the group’s business plan. The network now has 410 RIs for mortgage business.

Millfield Group’s mortgage operation has 320 advisers.
Many of the IFA groups feel they have the upper hand over new mortgage networks because they have experience and knowledge of the compliance requirements needed to operate an FSA-regulated business.

With tried and tested systems in place, it is easy to see how some mortgage advisers may veer towards joining a more experienced network.

Although Purely Mortgages chief executive Mark Chilton thinks there will be further consolidation, he does not think that mortgage advisers will inevitably join IFA groups. He believes that the compliance experience IFA groups have does not necessarily translate well to the mortgage environment.

Regulation has also seen a plethora of pure mortgage networks spring up. Network Data claims the title of biggest new mortgage network with 288 appointed representative firms, well ahead of nearest competitor Mortgage Next which has 108 AR firms, included the 48 ARs it has gained from Ethical. In third place is Professional Partnership Network which has 66 firms.

The other front-runners include Optoma Inter Partners with 65 firms, Enable with 61, Mortgage Times on 53 and Solution Network with 50.

Network Data managing director Richard Griffiths says that in addition to the 288 AR firms, he has a further 225 in the pipeline, making a total of 513 firms employing a total of 725 mortgage advisers.

In joint eighth place are Blue Pearl and Mortgage Intelligence which both have 49 firms signed up. MI managing director Sally Laker said recently the group hoped it would have 78 appointed representatives, 62 directly authorised with support services and 2,300 members of mortgage network Elan on M-Day.

But Chilton emphasises that size is not everything. He says that looking purely at appointed representative firms is misleading as one network could have 50 firms with two advisers each and another firm could have 30 firms with four advisers each.

Network Data managing director Richard Griffiths says: “Our ratio of advisers to firms is 1.4. There could be some firms with 12 or more advisers each but, because mortgage advice is not a controlled function, these individuals will not be registered. I daresay some will exaggerate the number. If anyone said that they had an average of more than two or three I would certainly raise an eyebrow.”
Griffiths agrees that this lack of information represents a significant gap in the regulator’s knowledge of the industry’s activities.

He says: “Big investment advisory firms are taking money away from the consumer while a mortgage adviser is arranging a loan which needs to be paid back. This is the big difference in terms of looking at fitness and propriety requirements.”

There are many problems that regulation could bring for smaller mortgage networks, not least the possibility of not getting enough appointed representatives to keep the business afloat.

Chilton says: “I think it is going to be very tough for these smaller firms to build up numbers of ARs. When this sort of thing happens, there is a natural polarisation to the bigger players. Would I transfer my compliance risk to any where other than a substantial business? The answer is no.”

He believes that there will be consolidation between the smaller mortgage networks over the next few months.
Many groups will have built business plans around getting a certain number of appointed representatives and some have been left out in the cold, failing to gain authorisation.
Recent research from Huntswood Outsourcing indicates concern at inconsistencies in mortgage regulation compared with the regulation of investment business.

Huntswood senior consultant Lucy Farrow points to the lack of individual registration for appointed representatives, which she says means these people will not meet the same fitness and propriety standards required of IFAs.
The one-off cost of regulation, according to the FSA’s CP186 in May 2003, was estimated at £83m for lenders and £51.1m to intermediaries.

The ongoing cost of regulation is forecast at £27.8m to lenders and £39.9m to intermediaries and this does not include the estimated£8m that will be spent on financial promotions.

Although most firms are positive about the benefits that regulation will bring for the industry, some regret the fact that so much money has been redirected away from bottom-line business during a boom period for homebuying.
Mortgage regulation has already turned the market upside down but the distribution carve-up in a tough competitive environment looks set to bring yet more surprises.


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