Packagers provide an important link, between the broker and the lender, but with the introduction of CP98 from the Financial Services Authority (FSA) next August, the role of the packager could be under review.
Indications suggest some packagers could look towards consolidation whereas others may not be so lucky ‘ some of the smaller groups may even be forced out of business.
‘I am not sure whether the role of packagers is changing, but we do need to ask, where do packagers go next?’ says Mark Charlesworth, managing director at The Mortgage Operation.
With regards to the next step, Charlesworth says that we first need to assess what packagers actually provide. Services such as lender distribution, the negotiation of products and services alongside fees to members are all important roles and add value to the broker ‘ but this may not be enough in the new regulatory environment. ‘If they are not adding value to both sides, then they are not going to stay in existence,’ he says.
The majority of lenders who deal through packagers tend to be in specialist areas of the market and the role of the packager increasingly revolves around distributing niche or non-mainstream products to the broker market.
The role packagers play in this niche market can provide added value to the adviser, as it ultimately means brokers do not need to be experts in every aspect of the mortgage market.
Time restraints for the broker need to be considered and with the introduction of CP98 it will become important that advisers ensure their mortgage recommendations comply. By working alongside a packager, advisers can outsource a substantial part of this work and save time.
Administration conducted by the packager can also help remove burdens on the broker as they conduct an administrative function on behalf of the lender which, in turn, saves time with any queries or delays that occur, such as re-submitting application forms.
However, the roles packagers adhere to will come under scrutiny after CP98 is introduced, when they will have to reassess their role.
Steve Hoare, managing director at Home Loan Partnerships, says: ‘The main packagers are going to have to look towards performing a compliance role for lenders. With CP98 as it is, lenders are not going to be able to take on the implications and they will have to look at middle men to do it for them ‘ otherwise they are going to have to set up huge compliance departments.’
However, according to Hoare, this could create problems for smaller packagers, who may be unable to provide some of the services provided by the larger firms. He says: ‘Some of the smaller organisations who perhaps deal in small levels of business may not embrace what is approaching in terms of regulation. But whether we like it or not, it is going to happen.’
As regulatory changes begin to take effect, packagers will need to adapt and this could lead to more, or alternative services being offered such as compliance guidance for intermediaries.
Some of the larger packagers have also become more involved in the general insurance side of the business, instead of solely focusing on mortgages ‘ and this could be an indication of things to come.
Many brokers using packagers are non-regulated so if the packager is able to offer a range of other services such as secured loans, term assur- ance and contents insurance, then the opportunity to boost earnings is magnified.
Some packagers have recently introduced a ‘direct packaging’ service, targeting intermediaries who prefer to go directly to the lender rather than through a packager.
Paul Howard, sales and marketing manager at Mortgage plc explains: ‘The broker decides which product and lender he wants to recommend to his client. He then submits the appropriate application form to the lender in the normal way, except that he will notify the lender that he is part of a packager network.’
The benefits of this type of service are that the lender will have agreed better commission terms with the packager, the packager is able to offer a brand name to their distribution and the broker is able to do exactly the same deal but earn more money. The customer remains unaffected.
Meanwhile, packagers are providing sourcing software and The Mortgage Operation, is offering regional seminars, designed to help and support brokers.
However, for some packagers the option of offering alternative services may not be viable, with the only route left being consolidation. Packagers need to ensure that products are delivered in a compliant fashion and with the advent of CP98, some may be not be able to guarantee this.
‘As a result of the requirements lenders will have on packagers in terms of ensuring that there products are presented accurately at point of sale, there will be some consolidation in the market,’ Charlesworth says.
‘Even now there has been a significant growth in the number of packagers. Many do a good local job, but they have not got the infrastructure for any other services,’ he adds.
Hoare agrees and says there are many groups which accredit themselves as packagers just to get around the Mortgage Code, but when CP98 is introduced next year, this will come to an end.
‘Packagers are going to have to either do it properly or consolidate with others,’ Hoare says.
Looking to the future, the introduction of CP98 is bound to bring opportunities for packagers in terms of compliance and regulation. Whether in the form of additional services or consolidation in the industry ‘ we can expect to see improvements.
A watchful eye
Under CP98, the lender will be required to check that all applicants have the appropriate pre-application details, which is where the packager has the important role of helping brokers deliver the required documentation to the customer.
Howard says: ‘Inevitably there will be some casualties which will tend to be the smaller companies. The more well established businesses will have got themselves in form to meet the challenge. It will also provide opportunity for mortgage networks to enter the market and provide a compliant business environment for mortgage brokers.’
Dean Lawson, an IFA at Mortgage Adviser UK, believes the issue of upfront charges levied by packagers needs to be addressed. He says that packagers tend to hide behind the fact they are not registered under the Mortgage Code and can therefore charge upfront charges, unlike brokers.
‘Packagers can keep the fees if the case does not proceed. This needs to change, if they are packaging the mortgage, they should operate under the same code. It is still not necessary for them to be regulated on the mortgage code or FSA, but they should operate under the same guidelines of the code as brokers,’ he says.
‘The way mortgage regulation is heading this will become statutory, it will be at least a year before it is addressed, so two to three years before we see anything. Even for registered brokers the way forward is still unclear,’ he adds.
Some packagers could add value by providing a more personal service to brokers, according to Michael Dorrington, director of Michael Dorrington IFA, but the onset of e-commerce has yet to take hold of the packaging market.
‘Electronic trading is still fairly uncommon among packagers, mainly due to a lack of facilities. Online systems still need to be developed, but in time they will enhance the delivery of mortgage applications and reduce the time taken to process application forms,’ he says.
However, whatever the issue, Howard says there is still a pre-disposition of lenders to use packagers as an introductory channel ‘ and this is unlikely to change.
‘Lenders and brokers will have to make changes to the way they sell mortgages and packagers cannot be isolated from these huge challenges,’ he says.
When the new regulations come into force packagers will need to offer a compliance service for lenders.
Additional services such as secured loans and term assurance are now being offered by larger packagers.
Some smaller players may be forced out of the market with consolidation likely to increase.