You are right to be highly suspicious of their motives ‘ it is ludicrous that some packagers and distributors profess that they have the future organised when the FSA rulebook is still written in pencil. One large distributor has already changed its story three times about what it will offer brokers post-2004.
The problem is that these firms face a massive discontinuity in their business next year: their distribution disappears unless they lure brokers in now, and lock them in through AR or support services contracts. They want brokers to commit their business to them and are prepared to do almost anything to get them to sign up. Many of these firms are offering an AR arrangement and scare-mongering about direct authorisation by saying how costly life will be under direct authorisation, yet the FSA will not be publishing annual and periodic fees for mortgage brokers until January 2004.
If brokers do consider becoming an AR, they should avoid the IFA networks who have wandered into mortgages but do not have a mortgage reputation or specialism, or they could end up second rate citizens to its investment firm members. And they should avoid the packagers and clubs who have no prior experience of compliance services. Most packagers have no experience of statutory regulation whatsoever.
As you say, some networks also offer a support services package for brokers who choose direct authorisation. This structure may be appealing to most brokers, given that firms retain their independence. The problem is that at least three of the major five or six mortgage distributors or networks have absolutely no compliance, T&C, CPD or audit and monitoring experience, or the staff to fulfil these crucial roles. So they are selling ‘vapour ware’ ‘ selling the concept of a compliance support service, which barely yet exists in their business. Choose carefully or, as you fear, you may be getting divorced shortly after the honeymoon.
I am genuinely surprised by the number of distributors that have recently started to offer brokers AR status, as well as the momentum that has gathered around the concept of direct authorisation.
Given this potential influx of ARs, there has to be a concern over the standards of service that directly authorised brokers will receive from their distributors. And, moreover, we have to consider the primary motivation for distributors encouraging AR applications in this way.
In the first instance, the distributors will benefit rather than the ARs themselves. And in driving up the volumes of business that they are writing, they will be able to press for higher commissions which, in turn, will enable them to charge their members more for the privilege of membership. This provides distributors with an added value revenue stream combined with an easy way to control their own destiny.
However, from a broker’s perspective, the converse argument is probably true. Brokers that have a concern about their own independence should really question whether this approach actually adds value to their own businesses or whether, in fact, it merely offers them an easy route to administration after the 2004 regulations come into force.
And there is the rub. Because of the way in which the market will be shaken up by the impending legislation, no one really knows for sure what the effects will be. We cannot say for definite that directly authorised brokers will receive a poor service, just as we cannot do anything but surmise as to the advantages that ARs will receive from going down their route.
While I am sure that there are additional benefits to members becoming ARs, we have to question exactly what these will be.
With true definition still missing from the FSA’s proposed structure for mortgage regulation there is a lot of ‘bluff’ and ‘jumping the gun’ going on as distributors try and steal a lead over their competitors.
The issue of motive is one that, to be fair, is simply one of common sense. Their motive is to market their message of service and inclusive benefits. For example, it is unlikely that a lender will negotiate a highly competitive procuration fee deal with an individual IFA when they can offer their products through far bigger distribution models. This is no different than we currently see with regulated products. The majority of IFA’s in practice are not currently being directly authorised by the FSA, but via networks or large national IFA companies such as Inter Alliance.
This is not through any other reason than scale. Joining a company offering appointed representative status would allow many benefits to the IFA, distributor, product provider and ultimately the borrower, through negotiation of exclusive deals that can be done with scale.
A potential ‘double whammy’ is also possible as the IFA not taking appointed representative status may face difficulty in obtaining professional indemnity cover as a sole trader; this is already a scenario being seen across the mortgage industry.
It is vital for the depth and structure of the Industry however that we do not see the distributors take a ‘big brother’ attitude, offering a wide choice of options and facilities, and for lenders to pay their part as well in making sure this happens.