Remuneration will always be a hot topic for mortgage brokers as their livelihood hinges on the payment of procuration fees by lenders for the introduction of business. A recurring debate is over whether a broker should charge a fee to the client or be paid from commission. Research suggests that more borrowers will take advice if they do not have to pay for it and under CP186 a broker will be able to remain independent and be remunerated through commission although will have to offer a choice to the client of fee-based remuneration. Under these circumstances, it seems procuration fees are likely to stay. So what is the current state of play and how are fees likely to develop?
One finger often pointed at the intermediary is that the payment of this fee must be being covered somehow; the inference being that the borrower ultimately pays for the broker’s commission. Of course, in reality the borrower is getting exactly the same product that would have been available to them had they walked through the door of a high street branch ‘ assuming that the client was lucky enough to have selected the right lender at the right time. And it could well be an even better deal through a broker, who has access to exclusive products available to them directly or through a mortgage distributor.
The procuration fee is of course a cost which lenders need to account for, but only in the same way as they need to factor in the costs associated with the advertising and marketing of a product to drive direct business. Add onto that the cost of the branch staff and overheads to convert those leads into actual business on the books and the payment of a procuration fee to a broker begins to look very good value. The fee is simply another cost of distribution and considering that brokers can often account for at least half of a lender’s mortgage business it is a very effective distribution channel. One key advantage of distributing in this way is that the ‘cost’ of a broker is only incurred once the deal has been done ‘ unlike the cost of an advert which is charged on placement with no guarantee of the number of concrete business opportunities it may generate.
A job well done
While procuration fees certainly make sense for a lender’s distribution there are other issues worth looking at in this area. The main problem cited regarding the payment of procuration fees is the potential for a broker’s head to be turned by the promise of a juicy fee. The big worry is that the client ends up with an inferior product through the avarice of the broker. In practice brokers are advised to stay away from this kind of temptation ‘ a job well done is the best way to generate further business from referred clients and of course continued loyalty.
While fees generally fall in the 0.25%-0.35% bracket on prime lending there will be some disparity between lenders and products. Lenders will sometimes pay more on a certain product and brokers have to ask themselves why. Only last year one lender offered a long-term tracker rate that included the benefit of a 1% procuration fee for the broker ‘ this was highlighted before even mentioning the product rate and features. This tactic was not well received and it was withdrawn.
With the introduction of new types of mortgage products, lenders take the opportunity consider the procuration fee they can afford to pay relative to the margin a product will make and for the time period they expect the mortgage to be in force. For example, some lenders offer higher fees on their offset products than on their standard product range. Offset and current account products are more complex and more niche but in some instances they will represent the most appropriate product for a borrower. The adviser is providing the borrower with the best product based not just on their mortgage but rolling in their cash savings too. This is of value to the lender who gains a current/savings account as well as the mortgage. And because the client has opted to combine their mortgage and savings in this way the lender expects that they can hang onto the loan for longer. Of course the broker should keep this under review to ensure that the client is making best use of the facilities these deals offer. If they are not then the borrower could well be paying over the odds due to the higher rates that these deals operate at.
So mainstream prime products will tend to pay a typical level of fee but this brings us to other areas such as buy to let, sub-prime and self-certification. These business areas can often attract higher fees than prime products, more in the region of 0.5% and again this comes down to two factors. The lender has a bit more margin to play with but again the broker could well be handling a portfolio of properties or a let to buy situation leading to a slightly more complicated scenario.
Taking a step further, sub-prime products can offer procuration fees of 1% or more but this will tend to depend on the level of credit problems that a borrower has incurred and that remains outstanding. Again we have the situation where the lender has more margin but equally the broker could be entering into far more involved work to place the business. A higher fee to recognise the fact is, in this situation, a fair system. Again the broker is the one who retains the responsibility of selecting the most appropriate product for the client. The added value for a client approaching a broker is that where they may fear an old CCJ will result in the payment of a much higher rate, the broker can actually place the case with a mainstream lender on a significantly better rate. While this does result in the payment of a lower fee and perhaps just as much effort, the client will definitely be a convert and the referrals should come flooding in.
In today’s cut-throat market are procuration fees likely to move from strength to strength or dwindle as margins are hit harder and harder? Much will depend on the impending regulatory backdrop, which could see a contraction in the size of the broker community. Lenders will certainly be looking to maintain the levels of business that are introduced by intermediaries so there is no reason to think that they would be able to take a step back towards reduced payments. With large brokers, networks and clubs continuing to place bulk business their bargaining power in negotiation of procuration fees will remain strong.
On the other hand the big problem for lenders is retention of clients for the longer term at a profitable margin and this has led to the talk of potential trail commission to be paid. This is unlikely to improve persistency for a lender in its own right as the broker’s responsibility is to the client, and should only advise the client to remain with their existing lender if that deal represents the best value for the client. The challenge for the lender is therefore to meet this requirement with better rates for existing borrowers rather than attempting to twist a broker’s arm with trail commission.
All this sounds like the lender is trying to squeeze more out of less but there are movements in the market that help. Technology is a key development that works well for all parties ‘ lender, broker and borrower. The use of online applications and increased automation of processing cuts down on administration for the lender as well as speeding things up for all concerned. We have already seen lenders prepared to offer slightly higher fees for applications submitted online or coming up with preferential deals available exclusively online.
In addition to this lenders can improve efficiencies in other areas. For example, in today’s burgeoning remortgage market, drive-by valuations are an easy way for lenders to cut cost and time in an increasingly service-driven market.
Lender’s credit scoring and borrower profiling has also seen them become more confident in loosening the requirements for the borrower to provide detailed evidence of income in lower loan to value cases. This reduced level of paper floating around processing centres can only help the lenders time and cost efficiencies whilst still offering razor sharp rates, good service and the accepted level of procuration fees.
So the payment of procuration fees is unlikely to disappear in a hurry although we should not be surprised to see lenders continuing to pursue direct business with products only available through the branch network. However, when a lender is looking to boost flagging lending numbers it will still be brokers that they turn to.
Lenders tend to pay higher procuration fees on innovative or complex products because the margins are greater.
Technology can reduce costs to lenders which allows them to offer enhanced procuration fees.
Despite talk of trail fees and the use of technology, lenders are still reliant on business volumes from brokers.