The issue of fees and commission has risen again in the light of a change in regulation under the FSA, and concern about repayment of broker fees should a mortgage deal fall through. But how much of a problem do these developments present and how can the small broker survive profitably in the market?
The real bugbear for mortgage brokers is receiving fair payment for work done, before a mortgage deal falls through. Under the Consumer Credit Act (CCA), brokers must repay all but £5 of their fees to clients if a mortgage fails to pass the application stage. This issue is not a new one but when it was revealed that the Department of Trade and Industry (DTI) did not intend to include Section 155, which has particular relevance to broker fees, the frustrations of mortgage brokers came to the fore.
The industry has a champion, however, in the form of the National Association of Mortgage Brokers and Advisers (NAMBA) a body yet to be officially formed, which has taken it upon itself to campaign for the DTI to review Section 155.
NAMBA argues this ruling fails to reflect the work brokers carry out on a client’s behalf. NAMBA’s action has stemmed from the DTI saying that, while it did not intend to review Section 155, it will reconsider this if it receives enough requests to do so by interested parties.
‘We have so far had over 330 responses from IFAs and brokers, all saying that Section 155 should be reviewed,’ says Julian Jennings, chief executive of NAMBA. ‘We want the DTI to review Section 155 in the same way as they are reviewing the whole of the Consumer Credit Act, that is, comprehensively.’
Jennings has said that a fairer figure for broker retention would be £150. Jennings points out that assuming a broker spends 10 hours working on a mortgage, his fee for that work, if the mortgage deal falls through would only be 50 pence an hour ‘ on the basis of receiving £5 ‘ a figure way short of the minimum wage. As most brokers are self-employed, the minimum wage does not apply to them but they should be allowed to charge a fair fee for their work, which this ruling effectively prevents them doing.
A fair fee
‘We are supposed to be talking about professionals and this figure just does not equate as it does not reflect the expertise being provided to the consumer,’ says Jennings.
Opinion is varied as to how large an issue this is for mortgage brokers. Ray Bolger, technical manager of Charcol, has estimated that 30% of all mortgages get to the application form filling stage and then fall through.
However, David Bitner, mortgage technical manager of Bradford and Bingley Marketplace, says it should not be too major an issue for most brokers and believes the ability to charge an up-front fee is appropriate if there is a lot of work in connection with the mortgage.
‘Smaller brokers may need to charge an up-front fee and this would help them, but we can not see it as a problem for most brokers in the UK, certainly not large brokers who do not charge fees until the mortgage application is accepted,’ says Bitner.
Jennings agrees: ‘Large, national broker organisations with income streams from other areas of opportunity can cross subsidise,’ he says. ‘But for smaller firms, or where this business choice is not available, there is not the income stream from elsewhere.’
The fact remains that brokers are still being hit.
Rod Murdison, proprietor of Murdison and Browning, says: ‘I have had circumstances in which I have done an enormous amount of work researching different lenders and products for a client, only to have that client go direct to the lender as soon as they have found out who I was recommending. What come back do I have?’
Bending the rules
Whatever the extent of the problem, it is still clearly felt strongly by some brokers. According to the Mortgage Code Compliance Board (MCCB), some brokers are now holding on to their fees by using unofficial forms which tell clients that fees will not be refunded if the mortgage deal falls through, thereby breaching CCA rules.
Some brokers are also bending the rules by setting up in-house packaging firms, because regulation allows the fees to be kept if the mortgage application went through a third party. Using a third party, however, is unlikely to be the way most brokers, certainly smaller ones, work. OFT guidelines stipulate an arms length relationship must be proved, which is probably why some brokers have been pulled up, as someone working from the next desk or the other side of the office may be technically at arm’s length, but not legally.
Reluctance to pay
Another industry concern, which could exacerbate the resistance of clients to pay for advice, stems from pressure on lenders in the light of new regulation from the FSA. The FSA proposals require lenders to be responsible for ‘taking reasonable steps to ensure that intermediaries comply with the new pre-sale disclosure requirements’, that would enable customers to shop around between lenders.
The fact that the new proposals should mean higher mortgage premiums is disputed by the FSA. It estimates the cost to the industry would be £53m initially and then £30m-45m on a recurring basis. For consumers this would be equivalent to an increase in the monthly cost of a mortgage in its first year of between £2 and £2.70. The FSA argues that as it was called in to the debate because consumers felt they were not getting the right deal, If by these proposals they do get the right deal, they will make a saving ‘ the implication being that £2.70 is a fair price to pay for that. The FSA also points out that this will cost considerably less than the regulation of advice.
If fees are a problem then what are the alternatives? Would, for example, renewal commission be a solution, providing brokers with a steady income stream. However, would this also be a way for lenders to minimise remortgaging? The implication is that customers could be locked into uncompetitive deals because the broker is receiving trail commission.
‘Renewal commission has been touted as a way lenders could maintain products,’ says Bitner. ‘But if a broker is approached by a client to re-broke their mortgage for which the broker was receiving renewal commission, the broker has a conflict in deciding who he is representing ‘ the client or the lender,’ he points out.
The problem is one for the lender. ‘There is a re-broking problem in certain parts of the industry,’ says Jennings. ‘But not everyone is re-broking. If the industry needs to recognise this as a problem the lenders need to find a solution which makes it more equitable.’
Rather than seeking to re-broke, in most cases the adviser is presented with a re-broking case, which he has no choice but to carry out. ‘Most brokers want to get the best deal for their clients,’ says Murdison. ‘I can only go on what my clients say to me, if they do not want a mortgage deal with a redemption penalty after two years, I have to find the best deal to fill that need. If after that time they come back to me to re-broke their mortgage, that is what I will do for them.’
One lender paying brokers trail commission puts a different, but important perspective on the issue. ‘We have paid trail commission on the FreeStyle mortgage,’ says David MacMillan, sales and marketing director for Standard Life Bank, ‘The flexibility of which often meant that the IFA would get involved. The trail commission reflects that.
‘I have not met an IFA yet who has gone for trail commission rather then send a customer elsewhere if they wanted to switch lenders,’ he says. ‘Our experience is that if a client asked an IFA for assistance in moving to a different lender then that is exactly what they would do.’
MacMillan adds: ‘Trail commission is not a carrot to retain a broker. And if a client wants to move to a different lender with the broker’s assistance, the broker would still earn commission on the new mortgage.’
To suggest that trail commission presents brokers with a dilemma could be seen as insulting to self-respecting mortgage practitioners. There are undoubtedly unscrupulous brokers in the market, but for the majority, one would hope the spirit of independent advice holds true. Brokers must then find the fairest means of remuneration for them and the client.
‘I know some brokers may go for the providers paying larger procuration fees,’ says Murdison. ‘But if the best product for my client does not pay me, then I will simply say to them that unless I can cover my fees through other related products, which will earn me sufficient commission, then I will charge a fee, which will be paid when the mortgage application is accepted.’
The most obvious reaction for brokers would be to waive the commission idea altogether and insist on fees, however, some clients are resistant to this.
‘A solution is to charge an up-front fee and then offer to rebate the commission on acceptance, which gets rid of time wasters ‘ they can still walk away and pay their £5,’ says Murdison. ‘I do not think clients object to paying a fee, they just want payment by results.’
So, what happens if the DTI either does not review Section 155 or reviews and maintains the £5 retained fee? It seems there is no real consolation to brokers just yet.
‘The broker will have to work within those guidelines. It is archaic, but there will be nothing you can do about it,’ says David Copland, sales and marketing director for Pink Home Loans.
Whether the DTI reviews and increases the amount of fees a broker can retain if a mortgage falls through is not the issue, the issue of unfair practice on the part of some brokers and some customer’s needs to be addressed. And perhaps the balance needs addressing a little more on the broker’s side. How would it be for example, if lenders were to refuse to deal with customers who had obviously taken independent advice and then left the broker to avoid paying a fee?
Could the new disclosure documentation and the monitoring by the lender of intermediaries as proposed by the FSA, actually give brokers the ammunition they need to fight back against unscrupulous customers?
NAMBA has launched a campaign to encourage the DTI to review Section 155 of the CCA, which concerns the retention of fees.
Some brokers may need to charge an upfront fee to prevent making losses when cases fall through.
Many borrowers are reluctant to pay a fee for a service.