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Kevin Duffy on mortgages

A delicious rumour has it that my ex-boss Mark Chilton may soon be back in the market with his latest venture. The mercurial architect of Savills Private Finance, where he made a lot of people financially secure, Chilton is an ex-PriceWaterhouseCoopers heavyweight who needs no lessons from me in how to build a dynamic business with healthy margins.

The dynamic of a brokerage has evolved dramatically since the mid-1990s. You could even say that Chilton&#39s earlier credits at First Mortgage Securities, which included a pioneering approach to the creative Treasury pricing of assets, marks this period as the origin of today&#39s species. Darwinist parallels do not end there. With N4 upon us, it is clear that the next three years for mortgage intermediaries will be characterised by a survival of the fittest.

Whether the Government&#39s obsession with regulation is justified or not, the whole process is going to turn what is admittedly a cottage industry into the UK&#39s most vigorously policed sector of commerce.

But it is the cost of regulation rather than regulation itself which is the pivotal issue. I am convinced that most MCCB-affiliated brokers harbour little anxiety about being held more accountable for their actions. It is simply a case of being able to afford it at a time when other commercial pressures are contriving to injure profit margins.

Compared with many pure IFA businesses, most core mortgage brokerages operate at profit margins ranging between 15 and 25 per cent. A pretty healthy picture. Bigger players such as Hamptons, Charcol, Chase de Vere and Savills are probably nearer the lower benchmark but still outperform their peer group IFAs.

Generally, smaller and less bureaucratic brokerages can touch 25 per cent margins. Many IFAs would die for these margins but regulation and its consequences may be about to bring this party to an abrupt end.

First, there is the rampaging cost of PI insurance. Second, any brokerage&#39s weightiest overhead is staff costs. Acquainting a consultant base with what the new rules necessitate is expensive, as is the appointment of an internal compliance invigilator, up until now a voluntary cost for some businesses. Third, the increased time to be spent on transactions will impair productivity. Online applications help but do not shorten the time it takes to prepare for a client meeting, execute the business and personalise what is quite often a five-page suitability letter.

There are also clear mutterings among our lender friends that procuration fees are only headed one way. The FSA has already established its position on overrides, which for the bigger brokerages has ominous portents. All this at a time when frenetic competition and widening consumer choice are deflating client fees.

Not quite a case of “I&#39m a mortgage practitioner – get me out of here” but plenty of bushtucker trials are ahead of us and only the fittest will survive this jungle heat.

Kevin Duffy is managing director at Hamptons International Mortgages

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