Yorkshire Building Society's pledge to introduce trail commission has reignited industry debate about how IFAs should be paid for selling mortgages.
The society is the first lender to stick its neck out and make a concrete promise to introduce renewal fees in a bid to retain mortgage business.
The obvious question for IFAs is what other lenders intend to do. Not for the first time, a herd mentality has taken hold and the industry is seeing a raft of responses from lenders singing from the same “wait and see” song sheet.
But, in this case, their reluctance to state a firm position has a certain logic to it. How IFAs are paid by providers has long been a thorny issue across the financial services industry but is one that taints the image of the mortgage industry more than most.
The reportedly high procuration fees in the sub-prime sector have often drawn allegations of broker bias towards the products sporting the fattest fees.
Bradford & Bingley felt compelled to equalise the commission it pays to its brokers when it converted its branches into IFA centres to pre-empt any charges of bias.
Yorkshire's move could help clean up the image of the market but this is not the primary motivation for its decision. It believes paying IFAs on a dripfeed basis rather than by a one-off up-front fee will help stem the proliferation of rate-chasing borrowers switching mortgages every couple of years.
While most lenders admit this situation is unsustainable, many are remarkably quiet when it comes to doing something about it. One of the few to buck this trend is Skipton Building Society. Head of corporate communications Mark Smitheringale says: “We have talked about this for a long time. If introducing trail commission encourages brokers to stop churning business, then we would welcome it – anything that helps reduce the cannibalisation of lenders' mortgage books.”
But although Skipton is prepared to talk to any big IFA or network about a bespoke trail commission agreement, Smitheringale says it will not impose a more wide-reaching arrangement until it has seen the market reaction to York-shire's decision.
This waiting game is popular among lenders. Nationwide Building Society is effectively speaking for the whole market when it says it is “considering” a similar move but has no concrete plans or any kind of timescale. It will see how Yorkshire fares and act accordingly.
However, there are those who believe lenders should pay less attention to each other and look closer to home. Scottish Amicable national mortgage manager John Malone says the deciding factor for many lenders considering this approach should be the composition of their product range.
He says: “Those lenders with products with longevity, such as trackers and flexible mortgages, should be more likely to pay trail commission because their products lend themselves to this type of payment. Discounted shorter-term loans suit payment by up-front procuration fees, so I think the nature of lenders' product ranges should play a crucial part in their decision.”
The success of Yorkshire's move could hinge on such factors. If most lenders do not follow suit, it is likely that Yorkshire's share of new business could dip as dramatically as Nationwide's, which is suffering because its competitors have refused to take its long-term view in dropping discount mortgages.
Savills Private Finance director Mike Boles says: “If Yorkshire makes the move first, then I think some lenders may follow but not all. Those lenders would struggle to attract new business because brokers can get an up-front fee from other providers and remortgage the client in a few years for another fee.”
While Boles doubts that Yorkshire has the strength on its own to haul the market out of its current dilemma, others are not so sure. Pretty Technical Partnership partner Kim North welcomes the move and believes the society, while not among the biggest lenders, has enough quality in its products to make the move work.
She says: “The big procuration fees are undoubtedly dying, so now is a good time to try and be a pioneer as long as there are good products on offer, which Yorkshire has. I think lenders will follow because they know trail commission is the future but it is vitally important there is a second tranche of providers doing this, otherwise Yorkshire will find it very difficult to trade.”
A big factor for Yorkshire will be the level of renewal commission it pays and for how long. Even more important will be whether it decides to scrap up-front fees altogether and pay the whole commission over a few years or simply reduce procuration fees and pay less retrospectively.
Yorkshire says it is still ironing out such details, perhaps aware of the significance of its decision. Its move towards trail commission could either revolutionise the way IFAs are paid or prove to be a damp squib which damages its share of new business.
As much as Yorkshire holds its destiny – and potentially that of IFAs – in its own hands, ultimately, its success or failure hinge on its rivals being brave enough to follows its move.