In an attempt to create a level playing field between mortgages and second charges, the Mortgage Credit Directive (MCD), which dictates seconds must be discussed at every refinancing interview, has opened the door to the unequal treatment of consumers.
When the new rules landed in March this year, most mortgage networks decided not to allow their intermediaries to advise on ‘seconds’ for fear of a regulatory breach by dabbling in a corner of the market they didn’t fully understand.
Instead, networks chose their own second charge partners, called master brokers, to advise on and secure the finance on behalf of the consumer, which appointed representatives (AR) are obliged to use. The result of some of these commercial arrangements has the potential to cause huge detriment to consumers as analysis revealed a borrower could pay between £2,250 and £5,825 for the same loan, depending on the brokers’ network membership.
The FCA flagged networks’ commercial relationships as a concern in May this year when it reviewed competition in the mortgage market. The regulator criticised large broker networks for having a stranglehold on the market and promised to launch a study into consumers’ ability to make choices in Q4 this year.
Game of roulette
Mortgage Solutions’ investigation looked at the closed distribution relationships of TenetLime, Mortgage Advice Bureau (MAB), Personal Touch Financial Services, Intrinsic, Sesame and Openwork.
The findings (see table) showed consumers looking for a second charge loan of £120,000 would pay £3,575 more in fees if the broker was an AR of TenetLime rather than Intrinsic, which recently introduced a cap on master broker fees.
Borrowers looking for smaller sums are subjected to the same game of roulette, as a loan of £5,000 could cost £1,080 through the TenetLime network but £350 through PTFS.
Using three different loan amounts, £5,000, £60,000 and £120,000 and a property valuation of £350,000, Mortgage Solutions examined networks’ fee structures to calculate how much the arrangement of a secured loan would cost the consumer. All fees include valuation costs and introducing adviser fees.
|PTFS||Promise Solutions, Gateway||£350||£4,200||£5,000|
|Openwork||Enterprise Finance||Declined to disclose||Declined to disclose||Declined to disclose|
|Sesame||Enterprise Finance, Positive Lending, Promise Solutions||Declined to disclose||Declined to disclose||Declined to disclose|
|TenetLime||Enterprise Finance, Norton||£1,080||£3,830||£5,825|
These are max. fees; master brokers can charge less
Brightstar, Positive Lending, Fluent Money, VLoans, Enterprise Finance
Several master brokers appear on different network panels and are allowed to charge different fees for the same loan balances, depending on the network’s contractual relationship.
In recent months, some networks have already begun to rein in master broker fees. Intrinsic’s master brokers can charge no more than 4% with a monetary cap of £2,000, while other networks have imposed a sliding scale, dictating how much brokers can charge for different loan amounts.
David Carrington, PTFS sales and marketing director, said the market was shifting and fees would ‘inevitability fall’, with a review of his network’s fee structure due to take place in September.
Gemma Harle, managing director of TenetLime, described the market as ‘difficult to control’ as some master brokers had not embraced the new regime.
Shrouded in secrecy
Openwork and Sesame refused to disclose their customer fee-charging structures, leaving two of the biggest networks in the UK shrouded in secrecy.
Head of relationship management at Sesame, Jane Benjamin, said the network was ‘very comfortable’ with its proposition and did not see the merit in getting into a running debate on specific fee levels.
Openwork’s mortgage director John Cupis said the pre-MCD contract it had with Enterprise, its sole second charge broker, would be reviewed in September and declined to discuss the current structure.
Sources have told Mortgage Solutions that Enterprise does not have set fee scale and that fees are decided on a case by case basis. Enterprise declined to comment on these points but said the fee scale started at 3%.
Chris Fairfax, MD of master broker Positive Lending, which recently introduced a flat master broker fee of £995 with valuation costs added on top, said: “In the new world of second charge mortgages you need to be a volume business to be successful because fees have to come down.”
“We’ve been preparing our business model for what we think the future will look like in two to three years’ time and perhaps we have been premature in offering the flat fee but it’s done now and we already reaping the benefits.”
Consumers with a directly authorised (DA) mortgage broker, stand a greater chance of paying much less for the advice and arrangement of a second charge as DAs can go direct to the lender.
Michelle Niziol, director of DA firm Independent Mortgage Solutions, said if she has a second charge customer, she rings around all the second charge lenders to find the best solution and then places the case directly.
Precise Mortgages confirmed that for a loan of £60,000, on a property valuation of £350,000, the costs involved if the broker went direct would be; a £295 non-refundable assessment fee, a valuation fee of £250 and a product fee of £300. Niziol said she would charge around £750, making the directly authorised cost £1,595.
“As a DA we have total freedom on where and how we place our second charge cases,” said Niziol. “The network route certainly appears expensive.”
The Financial Conduct Authority declined to comment on whether the second charge distribution channels of networks were treating customers fairly or if it intended to take any action.