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Proc on the rocks?

The mortgage market is set to see a shift in the reward structure for brokers, according to the Intermediary Mortgage Lenders Association.

In a statement published last week, Imla executive director Peter Williams said he believes procuration fees will play a less prominent role while advice fees become more important.

Such a scenario is not disputed by the Council of Mortgage Lenders, whose spokeswoman says: “We have not put out a view on this but logically and instinctively it sounds perfectly plausible. It is consistent with the current market conditions if this happened.”

However, the CML adds that it believes broker remuneration remains a commercial issue for its individual members.

John Charcol senior technical manager Ray Boulger says Imla would not make its statement without good reason. “If Imla is suggesting this, we would be foolish to say it will not happen. In current conditions, proc fee reductions have to be expected,” he says.

Boulger adds that as Imla as an organisation is supportive of brokers, it suggests that those lenders which are not as broker-friendly will definitely go down this route.

Savills Private Finance director Melanie Bien says: “It seems to be the way things are happening. I think procuration fees will play a part going forward but we will have to see how big a part they play. We already charge a fee but there will always be some people who will refuse to pay a bigger fee.

“The market is changing all the time. Brokers still need to get paid and I would not have thought that proc fees will disappear completely.”

Highclere Financial Services partner Alan Lakey says Imla’s statement fits in with the retail distribution review. He says: “The FSA previously said there would not be any read-across to the mortgage market due to the current difficult market conditions. However, that is another way of saying that were it not for that, they would be introducing it to the mortgage market.”

Lakey says his firm charges a £150 fee and then takes a proc fee from lenders. He says if lenders did not pay proc fees, he would have to charge around £750 to clients and he is concerned that they would not be happy to pay the higher amount.

He says: “I think it will increase the take-up of direct business and that has got to be bad news for consumers.”

OFM Group managing director Andy Sewell says: “The problem with an up-front fee instead of commission is the increased cost to the consumer. The proc fee is factored in to mortgage costs but unless consumers saw a significant reduction in those costs, would they be willing to pay more up-front for advice?”

Sewell says OFM charges a nominal advice fee and if it were not receiving commission, it would have to increase this three-fold. “I am unconvinced consumers would be happy with that arrangement,” he says.

Boulger points out that if remuneration did become more based on advice fees, then the biggest challenge would be for no-fee brokers.

He says: “If this move is going to happen, then it could have a substantial effect on these brokers. It could see the no-fee model become extinct.”

London & Country head of communications David Hollingworth says it has no plans to abandon its no-fee model. He says: “We do not see any strong signals from mainstream lenders that they will stop paying proc fees but we will have to wait and see what happens. If the market changes, we will have to look again at our position but at the moment it is not a problem.”

However, Hollingworth admits that brokers are likely to see a contraction in proc fees in the sub-prime market which were previously very high. “It is likely that these will now become more on par with mainstream business,” he says.

Personal Touch Financial Services sales director Dev Malle says there is a good chance that the market will move towards a more fee-based model but he does not believe it will go the whole way.

He says: “It is difficult to see that it will abandon proc fees completely. In three or four years time, lenders may start to look for increased levels of business and the two ways they do that is by offering cheaper products or by paying bigger fees. It will take an awful long time for proc fees to disappear.”

Malle says a large number of PTFS members have a fee-based model so they would be able to adapt better if lenders did go down this route.

Imla continues to stress that differential pricing and product availability between the intermediary and direct channels are facts of life and in no way reflect a desire on the part of lenders to undermine the role of intermediaries.

Williams says: “Given the growing dominance of the intermediary channel over recent years, with over 80 per cent of mortgages introduced via brokers in the first quarter of 2008, intermediary-based sales are certain to return strongly, not least because of the benefit to consumers of providing a wider range of choice and enabling customers to choose based on high quality advice.

“As the need to bring added value to the intermediary proposition becomes more important, we think we may see a shift in the reward structure, with procuration fees playing a less prominent role and fees for advice becoming more important, with ever more emphasis upon high quality standards.”

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