Broking is a cottage industry, if ever there was one. MCCB registration data tells us that around 10,000 broker firms have a total of 30,000 advisers.
As many as 8,000 firms are sole traders. The future for a high number of small firms looks seriously bleak unless their operating models change.
To help us second-guess the future, let us remind ourselves of the way that lenders' relationships with brokers have worked in the last 10 years or so.
For many years, most of the mainstream lenders kept a tight hold on the purse strings and did not entertain the idea of paying fees for introduced mortgage business.
In my early career as a small firm in the mid-1980s, I vividly recall the day that National & Provincial Building Society offered to pay us £100 a case, in the context of Halifax, Abbey and Nationwide paying us absolutely nothing.
Most lenders have since paid some sort of introductory fee, even to small firms, but have perhaps done so with reluctance. Some lenders, perhaps even now, openly cast a suspicious eye over intermediary business, regarding brokers as “third parties” and responsible for introducing clients of a lesser quality than a lender's own directly acquired borrowers.s Some lenders are starting to enter the broker sector but only in a controlled way, with big franchisers, clubs or networks – the aggregators. Aggregation of mortgage distributors has been rare, much less prevalent than in the IFA sector in other industries – so far.
The costs facing lenders associated with supplying and servicing such a disparate population of small brokers are huge, yet for many years the intermediary market seemed very much in the driving seat – brokers deciding with whom to place mortgage business and very much having the negotiating advantage in terms of service, product and fee demands.
If lenders wanted to continue distributing 50 per cent to 80 per cent (and in some cases 100 per cent) of its mortgages through this channel, then it had no choice but to pay a competitive introductory – or procuration – fee and no choice but to cope with the inherent inefficiencies of dealing with tens of thousands of advisers and thousands of separate broker firms. But I fear that this balance of power is about to reverse in favour of the lenders as they seek to deal with aggregators and refuse to deal with oneperson bands.
The various regulatory responsibilities mean that lenders simply have to adopt new ways of dealing with introducers. The rules on promotion of mortgages, for instance, mean that many mortgage brokers will look to lenders to provide guidance or regulated “sign-off” of their mortgage marketing and advertising and lenders will not want to provide such a service to 10,000 firms.
Brokers are required to comply with the new regime, including the extensive provision of information requirements, but the FSA suggested in consultation that it would aim to require lenders to take reasonable steps to ensure that intermediaries provide PAIs.
This could still result in the biggest potential market change of all. Lenders may feel they have to exert some control over – at least monitoring of – all intermediaries which introduce business to them.
Let us face it, lenders are going to have serious difficulty in controlling 25,000 of their employed branch and call-centre-based mortgage advisers, let alone get themselves satisfied that the 30,000 intermediary mortgage advisers introducing to them are operating appropriately.
My prediction is that lenders simply cannot and will not continue to deal with the mortgage intermediary population as it stands. There are too many broker businesses creating an impossible span of control.
Lenders will first exercise greater control over technology platforms to influence significantly the provision of information to consumers. They need to ensure that such systems output the right compliant data.
The MCCB does not, of course, make lenders legally liable for a broker misselling that lender's mortgage product but most lenders will certainly assume a moral responsibility, given the potential brand damage resulting from intermediary wrongdoing.
Lenders will, therefore, select which intermediaries they want to continue trading with. It is already clear that lenders would want to deal with bigger broker firms which control sizeable volumes and which directly oversee the activities of their mortgage advisers.
Additionally, there is now a plethora of aggregators such as franchises, networks and clubs which can also offer lenders access to big numbers of mortgage advisers and mitigate the lenders' risk and servicing concerns.
There can be only one result for the intermediary market. The cottage industry of the last three decades will be swept aside. Mortgage brokers will either hang up their boots or take a safety-in-numbers approach and become a franchisee or member of one of the mortgage aggregators.
As dramatic as it may sound, it will be the only way to trade mortgages in the new regime. The future could be very bleak for small operators.