In its Mortgages Market Study interim report, published last week, the FCA noted that in some cases lenders specify in their contracts what proportion of the procuration fee a mortgage club is able to or must retain, adding that even if it is not set out in the contract it remains the “market norm” for clubs to keep a slice of that fee.
However, the regulator said it was “not clear how this practice is working in the interest” of borrowers. The report added: “It could weaken price competition between mortgage clubs and/or limit opportunities for new clubs with alternative pricing models.”
A gentlemen’s club
Daniel White (pictured), managing director of White Financial Services, argued that the commercial agreements between clubs and lenders have created a “gentlemen’s club” in effect.
He continued: “How can an independent firm declare its services to a client, but then be unable to access certain lenders because of the product distribution with certain clubs only? It just doesn’t create a fair market and it’s simply down to commercial arrangements that only suits particular parties”.
Ripe for disruption
Adviser Alliance founder Martin Stewart has previously argued that this section of the market is “ripe for disruption”.
He added that he was an advocate for mortgage clubs as a whole, but warned innovation in how mortgage clubs priced their service was needed, as there is currently “no easy way for new entrants to break into the sector”.
He continued: “The regulator likes competition because that generally means good news for the consumer and therefore we should be able to offer different pricing alternatives for the broker particularly when we are talking about significant sums of money – an average of 0.35% proc fee on £200bn of lending soon adds up.”
Stewart concluded that varied pricing models have disrupted sectors like aviation and estate agency, adding: “Maybe this could be the first signs of the same process happening in the mortgage club sector.”
Room for alternatives
David Hollingworth, director at L&C, said that while clubs clearly offer benefits to brokers and lenders alike, the FCA was right to question whether the current set-up could “potentially stifle the opportunity for some clubs to undercut others in the share of fee that they retain or through a shift to an alternative model”.
He continued: “It’s a very competitive market and one that benefits from diversity, so while I think customers are not disadvantaged by the ability of clubs to negotiate better products, there should be room for alternatives.”
Why do lenders dictate fee retention?
Andrew Montlake, director at Coreco, said he had always thought it strange that lenders dictate how much of the fee a mortgage club must retain, as this should be up to the club in question.
He added: “There has to be room for choice and various clubs with different pricing models should be allowed to evolve to suit the needs of the broker and ultimately always have the client’s best interests at heart.”
Mortgage club fees are justified
However, James Mole, mortgage and protection adviser at Gingko Independent, argued that the small percentage clubs take is justified because of what the broker receives back in terms of support and compliance.
He added: “I think that if they disappeared this would hinder the consumer, because brokers would make less in lender paid procs fees and would have to charge the consumer more. The only party who wins in that instance is the lender, and nobody wants to see the lender make more money surely?”