Are rising procuration fees bringing broker bias in the mortgage business?
Moneyfacts claims procuration fees are influencing advisers over which products to recommend to clients.
In 1997, lenders paid a standard proc fee of around 100 but fees are now generally paid as a percentage of the loan and since the average loan size has jumped from 54,000 to 130,000 in the past 10 years, proc fees are reaching 1,500.
Moneyfacts mortgage analyst Julia Harris says: “As lenders compete for brokers, there seems to be a conflict of interest. Regulation prevents abuses but if there was no impact on the business generated by offering a higher proc fee, why are lenders continually increasing their fees?
“On a marginal case, the difference between receiv-ing commission of 150 or in excess of 650 could be the factor that swings the deal. The fact that the FSA is investigating this topic indicates that proc fees are interfering with advice and choice.”
Chase de Vere Mortgage Management director Nick Gardner believes there is commission bias exists but there always has been and always will be because some brokers rely on proc fees for a big chunk of their income.
Hamptons Mortgages technical director Jonathan Cornell says it would be much more tempting for brokers to recommend products based on the highest proc fee when advising sub-prime clients.
He says: “With sub-prime mortgages, if you have a client wanting a 200,000 loan, the proc fee would be around 6,000, which is an awful lot of money, whereas with prime mortgages, the range of proc fees that lenders offer is not that great, for example, 0.5 per cent on 200,000 would be about 100, which is neither here nor there.”
But Mortgages plc head of marketing Julian Wells says the FSA’s regime would make it very difficult to get away with recommending products based on proc fees.
Hamptons Mortgages managing director Kevin Duffy predicted in Money Marketing recently that lenders would move away from proc fees, favouring a model where brokers are rewarded on performance for not churning and writing loans that do not default.
Duffy says: “The value chain does not reflect what intermediaries contribute. I envisage alterations to lenders’ procuration models in 2008 and beyond. By 2009, we will have seen an alignment of interest between brokers and lenders so intermediaries will enjoy profit participation in line with the longevity, performance and integrity of the assets.”
Baigrie Davies director Amanda Davidson says this method is fine in theory but difficult to implement.
She says: “I can see the idea that advisers should be rewarded for the quality of their business but introducing different parameters could mean that lenders play one adviser off against another. It could lead to distortion in the market when what we need is consensus. It could be great but I think it is a bit too complex to make a workable model.”
Cornell says innovation is needed and suggests that lenders give advisers more opportunity to manage their clients’ mortgages past the point of sale.
He says: “I would like to see lenders empower brokers to do more work after the sale. Currently, most brokers sell the mortgage and that is it. It would be useful if brokers were given the means to help manage the client because I think they would be better, quicker and cheaper than lenders at dealing with things such as arrears and defaults.”
The FSA is looking at “customer-agreed remuneration” for the finance industry, where advisers negotiate a fee with the client before advice is given or products sold. Lenders pay no up-front commission.
The aim is primarily to raise professionalism by separating advice from the selling process.
Cornell says this method, which is being applied to life and pensions under the factory-gate pricing tag, would not necessarily work in mortgages.
He says: “Mortgages are a very different thing to pensions and life products so it is difficult to say that what works in those industries will necessarily work in mortgages.”
Cornell also claims that more than half of the UK’s mortgage brokers already charge fees so this model would not hugely affect the way they do business.
Aifa retail distribution review chairman Barry Kayes says: “The client paying fees is very different to the proc fee and commission model. Clients are not going to pay fees. They will be resilient to this and this will result in less people getting advice.”
Kayes says the FSA is sympathetic to differentiating between advice and the selling process and while customer-agreed remuneration may stifle bias, he suggests that lenders will find new mechanisms to differentiate themselves to win broker business.