The FSA’s RDR interim report in April said mortgages would be left out of the review due to the credit crisis. The regulator has also pushed back its overdue review on mortgage conduct of business to an unknown point next year.
But after the dust settles, remuneration of mortgage brokers is likely to be high on the FSA’s agenda.
Hamptons managing director Jonathan Cornell says: “There will be a change to the way that mortgage advice is remunerated in the future, moving towards the other financial services.”
The Intermediary Mortgage Lenders’ Association says any hope that the Government and the FSA have of moving the focus on to the long-term care and retention of the client cannot happen using the current up-front payment model.
Imla chief executive Peter Williams says. “The trouble with commission is that it is in the door, then out the door. It does not encourage intermediaries to think forward. There is an issue here of whether we migrate from sales and commission to advice and fees, so the broker has a much better understanding of the borrower beforehand.
“Lenders will want intermediaries to deliver long-term value. In that environment, there is an issue about the intermediary’s role in remunerating in a way that encourages long-term sustainability. Up-front commission does not really deliver long-term value.”
But others in the market do not believe that a change in remuneration model will lead to a greater focus on long-term client care.
Premier Mortgage Service corporate manager Martin Reynolds disagrees that trail fees rather than up-front fees will encourage better standards. He says: “It is down to how the broker deals with things – either it is a customer or it is a client. Will a client in arrears want to return to a broker if they have to pay another fee, or will they come back for free if it is all part of the client/adviser service?
“It is down to business structure and whether there will be pure mortgage brokers in the future. How many pure mortgage brokers will remain? We will surely see more firms diversify, with mortgage specialists as one part of the structure.”
Cornell is also wary on remuneration changes. He says: “I am not keen on the trail model. It seems you are being rewarded for leaving the borrower with the lender. It seems strange to get paid to do nothing.”
Mortgageforce chief operating officer Kevin Duffy does not think the whole remuneration process needs an overhaul, merely a “re-engineering” to reflect sensible, long-term lending. He says: “There is nothing wrong with being paid up-front, especially from the point of view of the client. The problem is that remuneration needs to reflect the life of a mortgage.”
Duffy adds that by splitting payment so an adviser receives up-front cash and then an annual income based on the quality and the performance of the mortgage, would avoid mortgage droughts.
“If the broker revenue reflected the life of the mortgage, then churn – a contributing factor of where we are now – would be disincentivised.”
Some brokers are already using other forms of remuneration. Basinghall Finance uses an “aligned interest” approach in its relationship with brokers. Instead of merely offering an up-front fee, the broker partners benefit from overall profits of the lender. The broker also has an insight into product-pricing models and generally works with the lender on the same level.
Home Funding chief executive Tony Ward says: “With the aligned interest, brokers and lenders are interested in the same thing and are economically in the same place.”
Ward says this ethos is proved by Basinghall’s low arrears’ figures. Basinghall’s theory is if the adviser has a vested interest in the lender and helps with the structuring of the mortgage, the quality of the whole mortgage sales process is higher. “It is definitely one for the future,” he adds.
Cornell, whose firm is a Basinghall broker partner, notes: “Basinghall has an incredibly innovative model. I think when we see the next batch of lenders enter back into the UK market this model will become more common.”
Association of Mortgage Intermediaries director general Chris Cummings agrees that a closer relationship between lender and broker is needed in the future.
He says: “We are looking to work much more closely between lenders and brokers, with lenders more open about what type of business they want to attract, whether it is in terms of spreading the risk with LTV values or the various drivers a particular lender has at any one time. Brokers can then tailor their proposition accordingly.”