I have long argued the case for the full regulation of mortgage advice and prophesied this will lead to a significant consolidation within the world of mortgage distribution. Well now regulation is coming in full and we have the added bonus of the revised outlook for multi-ties.
The obvious implication is that the industry will reform in a similar pattern to the mainstream of financial services where the advent of regulation empowered the development of the networks as consolidators of the fragmented IFA market. Will we see lenders buying up distribution among the broking community to protect their market position?
The problem with this analysis is some fundamental differences between the two markets. Lenders have found it impossible to co-operate across the industry in the way that the life companies have. Witness their inability after at least three initiatives to deliver a common trading platform. Why? Because their products are price-driven rather than feature-driven and CTPs make price comparisons transparent.
In a world where our customers will demand the best rate with rapid execution, this fragmentation makes the job of packagers and master distributors in providing significant market coverage increasingly difficult.
In a market where the consumer is driven principally by price and lenders' new business appetites at marginal pricing swings dramatically, you need pretty broad coverage as a packager to ensure you are always competitive.
The real issue, however, is the cost of regulation. Recent history suggests that the new mortgage regulatory regime will be another triumph of form over substance.
This means that, in addition to professional advice, the documentary burden on advisers will increase. The only cost-effective solution is dramatically improved systems support that few in the industry will be able to afford.
Consolidators and packagers will no doubt try to provide this but their track record in this area is poor. Their standardised solutions rarely fit individual advisers.
Similarly. with the long-term trend in decreasing lending margins, there will simply be too little in the pot to remunerate the adviser, the consolidator and the packager.
Don't be fooled into thinking that fees are the answer. With the broker market relying heavily on remortgage products in a low-interest-rate environment, fees will significantly reduce the attraction of price-led remortgaging.
The economic impact of regulation will be the main driver of change. This predicates the emergence of one or more non-fee-based superbrokers who will be aiming at significant market share. This will enable them to be a powerful force in product procurement while benefiting from the economies of scale by significant systems investment.
None of the existing brokers fulfils this model as for the most part their cost infrastructure is based on fee charging and legacy systems. Just as Standard Life Bank took the market by storm, these new vehicles which will leave no room for the packagers, stand to gain volume business quickly. There will be other winners, notably the specialists in sub-prime and super-prime where the role of a fee-based broker who is broking rather than product selling will continue to thrive.
The mainstream small broker will find life too tough, just as financial advisers did with the advent of regulation. The killer blow will be that they will not be able to access competitive products.
The final piece of the puzzle is whether these superbrokers will become multi tied to a panel of lenders. Multi-tie panels are already effectively in operation with most of the big brokers so the likely answer is yes. However, when we see the first lender brave enough to invest in a broker remains to be seen. I think it far more likely that the life companies will be in the frame as investors again recognising what a strong source of new clients these businesses can represent.
Mark Chilton is an independent mortgage consultant