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Proc on the move

Mortgage clubs and networks are reviewing their business structures amid growing concern that procuration fees will fall away over the next two years to be replaced by advice fees.

The Intermediary Mortgage Lenders’ Association warned earlier this month that broker remuneration may become more based on advice fees than proc fees in future.

Premier Mortgage Service, Legal & General Mortgage Club and Personal Touch Financial Services have confirmed they are reviewing their businesses.

PMS managing director John Malone believes around 30 per cent of broker income will come from up-front advice fees by 2010.

He says: “At the moment, this figure is probably less than 5 per cent but in the project work we are doing, we see this increasing by 2010. We will have to change our proposition as we cannot take a fee out of that income.”

Legal & General director of housing Stephen Smith says: “Even though times are difficult at the moment, it is good to be looking as an industry beyond the next 12 to 18 months. We are looking at the next three to five years at what the shape of the business will be and how it will operate.”

Smith believes there will be increasing pressure from the FSA and lenders for intermediaries to prove their value and this could see more brokers charging for advice.

He says: “For mortgage clubs that simply aggregate volume and do not add value, the future looks grim. The challenge is for a club to prove how it adds value.”

John Charcol senior technical manager Ray Boulger says: “If it is getting more difficult for mortgage clubs to negotiate a bigger proc fee, then some will face difficulty as a lot of brokers are attracted to clubs for this reason.”

PTFS sales director Dev Malle believes there are still ways of making mortgage clubs work. He says clubs can add value even without proc fees by getting more competitive deals from lenders.

He says: “Where before we would take a percentage of the proc fee that is paid to the broker, the lender could put the proc fee back into the product, making it more competitive, but still pay us a distribution fee.”

PMS appointed former Edeus commercial director Martin Reynolds as its new corporate manager in June, to review its distribution model and business partner strategy. He says the retail distribution review is another key reason for looking at the way it does business.

He says: “The FSA has said there will be no read-across but it is inevitable that it will happen. We are working out the scenarios at the moment and looking at where that leaves mortgage clubs. It could see us end up with a different business model.”

Stroud & Swindon Building Society sales and marketing director Linda Will believes the death of proc fees is being greatly exaggerated. She says: “I think the thing that will most likely drive the change will be the RDR. The regulator likes life when everyone is playing to the same rules so I think it will be brought into the mortgage market.”

Bank of Ireland head of marketing Mehrdad Yousefi agrees that a read-across of the RDR may act as the catalyst to advice fees by mortgage brokers becoming the norm. He says: “It will need to have backing from the regulator and then maybe it will have some currency. I am concerned that a person earning under £26,000 may think twice about getting advice if they are charged a set fee each time they visit their broker. It needs a lot of education by the authorities or there is a risk that brokers may lose 20 per cent of their clients.”

Pink Home Loans managing director David Copland says: “It is slightly more difficult for the mortgage clubs which deal with directly authorised brokers. We are a slightly different business. A lot of our business comes from appointed representatives, so there is always the option of charging a fee. Then we become responsible for the advice given.”

Malone does not believe that proc fees will disappear completely but he suggests that lenders will stop offering them on short-term products such as two-year fixed rates.

He says: “I am certain there will be a change. On products where there is longevity, such as five-year fixed rates and more, there will still be a payment of some form, perhaps a bit of a trail element. With short-term products, I do not think there will be a proc fee.”

Will says: “Lenders will be looking more than ever at the quality of the loan and reward brokers on that basis.”


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