Recent research from Mortgage Trust revealed 96 per cent of advisers received commission from lenders, pocketing on average £428 per case.
Procuration fees can range between flat fees per case of £150 to £500, or percentage fees of anywhere between 0.2 per cent of the advance up to as much as 2.25 per cent for some sub-prime deals and deals are often negotiated.
With less than a fifth of IFAs operating solely on a fee-based revenue, a major source of income for many advisers will be procuration fees paid by lenders. At what point does a procuration fee become a consideration in the advice process?
With almost 3,000 prime mortgage products to choose from and 7,000 sub-prime deals, it can be a daunting prospect for a consumer to look for the best deal.
Since the launch of MCOB in October 2004, the intermediary has become further entrenched in the application process, taking on board a raft of regulation and the possibility of providing automated valuation models at the point of sale.
There is a healthy cycle of competition in the mortgage arena, with brokers competing for clients and lenders for brokers but does this competition always benefit the consumer? Competition between lenders will lend itself to more competitively priced deals but as lenders also compete for brokers, not by the competitiveness of their product but on the income paid, there seems to be a conflict of interests.
Regulation prevents abuse of the system but if there was no impact on the level of business generated by offering a higher procuration fee, why are lenders continually increasing their fees? The table here shows how some of the major lenders have changed their procuration fee over the last 10 years (table only includes fees for standard mortgage deals, different fees may also be payable).
Other major lenders, such as Nationwide, Halifax, Woolwich, Coventry BS, Standard Life and Chelsea BS, also pay commission but the structure will depend on the relationship with the broker introducing business.
The results show a distinct move from flat per case fees to percentage fees, which at a time of rising house prices and mortgage advances, appears to indicate broker income has been increasing at a healthy rate. But the mortgage market has been very changeable over the last 10 years.
The competitiveness of the market increased and so too has the complexity of mortgage cases and products but the biggest impact will have been M-Day. We have seen broker fees rise and so have their costs, as compliance has meant increased processing, documentation and additional training.
Retention fees have been a hot topic, with two very different views on their place in the market. As long as the adviser still completes the full fact-find and the existing lender remains the most competitive deal, then they should not be penalised by not offering this to their client. With rising up-front fees, staying with a provider may become a more costeffective solution for many more borrowers. Research by Troika says 79 per cent of lenders believe retention procuration fees will become an industry standard.
The sub-prime market is growing in number of clients and lenders. These cases are more complex to fact-find and assess the best deal so it is fair to assume a bigger fee is paid to an adviser. But while sub-prime fees will understandably be greater than for a prime case, fees which increase in line with the adverse level are perhaps more questionable.
There is also some talk of other strategies. Lenders that do not pay commission but pass on this cost saving by way of better rates, can only be a source of good news for clients. There are also lenders which reward mortgage accounts that do not fall into arrears,paying commission over the longer term for good account conduct.
Lenders are taking broker business seriously, with new intermediary-only lenders entering the market, and big lenders such as RBS and West Bromwichlaunching intermediary arms.
But I wonder how many consumers completely understand the intermediary market. Are they aware of the variety and level of fees paid by lenders or that their adviser will normally only select products from a panel of lenders, not the whole market? Are they paying the adviser fees for their advice? Are they aware they do not necessarily get a preferential rate by using an adviser and that sometimes better deals are available directly from the lender?
For any consumer considering taking advice, it is wise to have a fair idea of the market to begin with. Using sites such as moneyfacts. co.uk will give a good indication of products available.
On a marginal case between lenders, the difference between receiving commission of, say, £150 or in excess of £650, could potentially be the factor that swings the deal. The fact that the FSA is investigating this topic indicates that procuration fees are interfering with advice and choice. Lets hope when its discussion paper is published later this year, the FSA finds a solution and quickly. Surely, a flat fee or even a cap would be great comfort to the consumer?
Clive Briault, managing director of retail markets at the FSA, says : “We are keen to understand how far commission structures between provider and the distributor influence the decision of the distributor. To what extent does commission lead to detriment?
The fact that major product providers increase their commission levels to gain business share suggests that commission influences business flow. But do all commission arrangements result in detriment to the end customer? And if so, what are the alternatives?