Should packagers be brought into line with the rest of the industry and be forced to disclose fees?
JM: In my view, defining “packagers” in the mortgage chain is the first requirement for the industry to resolve. Within the definition of packagers, the industry includes mortgage design, outsourcing, master broker and introducer, etc, but clearly some are providing different services to the marketplace.
If any element of the packager's function encapsulates the mortgage code, whether it be for product/lender selection resulting in normal or additional procuration fees or other payments such as share and other incentives, then all these payments should be disclosed.
With statutory regulation on the horizon, lenders will have a legal obligation to ensure all those acting on their behalf in this capacity fully disclose all payments deemed in conjunction with the code when dealing with the consumer.
RV: It all comes down to whether the packager is the agent of the customer or the lender? Where packagers also provide customer advice and act as their agent, then it is entirely appropriate to disclose third-party fees.
However, packagers typically undertake activities normally associated with lend-ers such as product design, marketing, brochure printing, advertising, etc. None of these costs are disclosed to customers when they are a function of the lender. Therefore, why should they be when they are contracted out to a third party?
GB: No. Generally speaking, a packager undertakes work on behalf of the lender, work that the lender would otherwise have to do themselves such as processing of new applications and marketing. To disclose such fees would only add to the confusion of the borrower and would not create a level playing field with those IFAs who prefer to go directly to a lender.
However, should the packager also be providing advice to the client, then, of course, there should be disclosure of the fees they earn for this action but not for the packaging of the case.
The Government looks set to let the present system for regulating mortgages run until 2003. How do you think this will impact on the market-place, in particular, the issue of regulating advice?
JM: Since the announcement was made by the Government earlier this year to exclude advice from statutory regulation, a lot of comment has taken place within the industry to change the Government's mind.
It is quite clear the FSA will not include the responsibility for mortgage advice and this activity will still be covered within the sales process under the mortgage code overseen by the MCCB. With the above in mind and the code now well entrenched, I see minimum change within the marketplace.
RV: We should welcome the opportunity presented for the MCCB to reinforce its commitment and ability to police the industry effectively by continuing its programme of improving the fit & proper and training & competence regimes for mortgage intermediaries.
GB: I think the result will be determined by exactly how lenders decide to police intermediaries. Can a lender be 100 per cent confident that an adviser has given correct advice by selecting its products? Yes, we can check processes but can we really check choice of recommendation?
Do you think the move by Skipton to buy a leading stake in packager Pink Home Loans constitutes a good strategic fit? Do you envisage other lenders taking similar action?
JM: Skipton Building Society has over a number of years “invested” in a variety of businesses related to the financial services industry. John Goodfellow and his experienced team have a successful track record in the selection of companies benefiting their core business and their members (witness the recent payment to members as a result of the acquisition and sale of Dealwise).
This investment in Pink Home Loans comes at a time when consolidation in the mortgage industry is taking place and acquisition by lenders of large broking organisations such as John Charcol and Chase de Vere, plus the purchase and reorganisation of Private Label and RFC earlier this year, demonstrate a keenness by a number of lenders to diversify into a related business supporting their main business operation.
RV: This is not the first move by a lender to purchase a packager (Private Label & GMAC RFC). The success of these ventures lies in the packagers continuing their function of offering a wide range of deals from a variety of funding sources without undue pressure from their owners/shareholders that could lead to limiting choice from their panel competitors.
GB: Vertical integration, where a company purchases a supplier, is common across many industries but is relatively new to financial services. Where there is a good strategic fit, it can be beneficial to both parties. For example, the len-der has greater control over distribution and the broker or packager can, I believe, benefit from access to capital.
In the above example, it is not so much of a strategic partnership geared towards distribution but more of an investment for Skipton. Pink are a well run profitable organisation with a strong brand.
With more capital available, they could expand and diversify, maximising any future changes this market throws up. I think this acquisition is intended to provide long-term benefits to the society's members by making a positive contribution to the group's profits. Yes, I certainly believe there will be more transactions of this kind in the future.
What is your reaction to the News that Bradford & Bingley is gearing up to launch a new sub-brand incorporating the John Charcol mortgage broker services under the banner The Market Place at Bradford & Bingley?
JM: Bradford & Bingley has provided independent financial advice since polarisation. Therefore, to launch a new mortgage advisory service into the market further promotes the importance of the IFA in the high street.
RV: Bradford & Bingley has a commitment to independent financial advice and its move to extend the philosophy of customer choice into its branches for mortgages represents a new and innovative progression for Bradford & Bingley.
Both Bradford and Bingley and John Charcol are respected brands. The decision to promote them jointly is inevitable given their strength and appeal. Legal & General believes the provision of mortgage choice has always and will continue to service both customers and the market generally extremely well.
GB: This makes very good business sense. It maximises every opportunity to earn additional fee income on cases they would not norm- ally have been able to underwrite. It is also good News for the consumer as they should get a better product as a result of having access to a wider selection of mortgages. B&B could potentially earn more by taking a fee rather than funding “negative margin” mortgages and, of course, have no lending risk.
Do you agree with some brokers that mortgage lenders should abolish the “outdated” mortgage indemnity guarantee?
JM: Outdated it may be in the minds of many involved in the mortgage market but a number of lenders, especially the building societies, are curr-ently covered by the Building Societies Act 1962 and 1986, which requires additional security over 80 per cent loan to value lending.
Should pressure be applied from mortgage brokers and consumerists and lenders are forced to change their current stance, bearing in mind some are already underwriting part of the costs themselves, then the cost of providing this cover may well be charged either in higher lending rates to reflect the risk to them or the maximum loan amounts could reduce from 100 per cent to only 90 per cent, affecting many first- and second-time buyers.
RV: Risk-based funding is an inevitability of the mortgage market.
It is, therefore, simply a question of whether the pricing is overt or covert. Borrowers have always had the choice of avoiding the charge in any guise by saving a deposit so that the risk of lending to them is sufficiently diminished.
GB: Yes, I believe this is now an outdated insurance cover. However, there is a need, especially in our sector of the market, to price for risk, particularly for borrowers who require higher loan to values. It is a far better alternative to either charge a one-off fee or charge a slightly higher interest rate.
Do you believe infomediaries are in direct competition with intermediaries or can they co-exist happily?
JM: Infomediary/aggregator covers a number of services and facilities within the technology information marketplace. I am sure their initial primary function was to provide up-to-the-minute information to lenders and fin- ancial advisers.
New consumer sites, packaging and mortgage broking are all additional services being provided, often in competition with the original sourcing facilities intermediaries signed up for originally.
Moving forward, regulation and lender responsibility for the accuracy of their (infomediary) information online may well rationalise this sector of the market, reducing some of the potential conflicts and creating a better working relationship between the infor-mation provider and the int-ermediaries dependent on their facilities.
RV: The challenge for intermediaries today is one of making sure they keep up with technological advances and in so doing keep one step ahead of today's more informed customers.
Technology is one of the keys to the future success of intermediaries. Those that harness it have nothing to fear, those that ignore it have everything to fear from the self-styled infomediaries.
GB: Yes, infomediaries are in direct competition with intermediaries but I do think they will co-exist in the future. The biggest challenge for the new wave of infomediaries is trying to make money. Providing free mortgage product search wizards is one thing but securing the mortgage transaction, which brings in the revenue, is another.
Some infomediaries already have packaging and direct to consumer arms but then again so do many life insurance companies and they seem to co-exist happily with the intermediary market.
John Malone, National mortgage manager, Scottish Amicable
Richard Verdin, Head of business development, (housing & protection), Legal & General
Guy Batchelor, Sales & marketing director, Platform Home Loans