It should be an interesting year for mortgage brokers ‘ not an easy one perhaps ‘ but it will certainly see to fruition a number of develop- ments that have been consulted on during 2001. The way forward may become clearer, if not simpler. The question is how brokers will have to adapt to the changing regulatory environment and the implications the new regime will have on the way business is transacted.
The year will be focused on regulation with the deadline for the implementation of mortgage regulation, known as N3, under the Financial Services Authority (FSA) set for 31 August 2002. It remains to be seen whether this deadline stands, or whether some leeway will be granted to give lenders more time to meet the FSA’s requirements.
While brokers will not need the FSA’s authorisation to advise, they will need approval by an authorised firm or person for any advertising or communications regarding mortgages. CP98 may sound ominous ‘ and for many in the industry it is ‘ because it means lenders will be responsible for the information given out to clients by brokers selling their products.
This responsibility will focus on the four stages of disclosure at key stages of the sales process, which are recognised as pre-application, offer the start of mortgage and over the life of the loan. Brokers who have not already done so will need to obtain a recognised mortgage advice qualification, the recognised ones being CeMAP and MAQ. The deadline for this is 31 December 2002. The Mortgage Code Compliance Board (MCCB) has stated that it must ensure the public is adequately protected ‘ introducing compulsory qualifications is, in its view, the best way forward.
Looking to the future
CP98 has been the buzzword for 2001, but will it be the buzz-off word for 2002? Will brokers be content to let lenders scrutinise their advertisements or marketing literature? Are lenders going to be happy to take any introductions, or will they concentrate on those they can guarantee will meet the right business levels?
If there is an encouraging light on this, it is that the practitioners in the industry are united, in that no-one has much of an idea of how regulation will work in practice. In practical terms for the broker, it could mean a move towards networks, mortgage clubs or franchises.
Rob Clifford, chief executive of Mortgageforce, says brokers are now experiencing what IFAs did in the early 90s, when networks developed to meet the needs of IFAs seeking help with training, technology and compliance. This had the added attraction of building business through asserting greater buying power as part of an aggregated force.
‘The regulatory threat is probably the most powerful threat for the mortgage intermediary market,’ he says. ‘We know that of the 1,000 mortgage advisory applicants that have approached us for franchises, 70% are interested in finding a safer environment in the face of regulation going forward.’
The danger, however, is that brokers may be sucked into networks or franchises that are not proficient.
Clifford says: ‘Some brokers will join networks for the wrong reasons. Many networks are taking thousands of brokers onboard and there does not seem to be any barrier to entry. If you are prepared to sign a contract agreeing to give away 10%-12% of your income, they will accept you. There is significant room for brokers to be taken advantage of.’
There is another force for the emergence of networks, in that they may also be a solution to the mortgage lenders’ compliance headache.
‘Ask lenders how they are going to control 38,000 mortgage advisers and they do not have a clue,’ Clifford adds. ‘I think lenders will soon be looking to ways they can mitigate their obligation under the FSA. They will say we want to deal with, for example, 20 firms who themselves take the responsibility for the 10,000 registered broker firms. So we will see networks emerge that will work closely with lenders to meet that obligation.’
The broker is not unused to regulation and those prepared to stay the course will be drawing in both breath and belts and facing the change, but there is no doubt that there will be a fall-out.
Pam Tate-Lovery, head of mortgages at IFA firm Berry, Birch and Noble, says: ‘Regulation is going too far and we are already losing a lot of good people in the industry.’
When it comes down to getting on with the job in hand, remortgaging and equity release business look to come to the fore as areas where advisers can concentrate their efforts.
Working with older clients
The Council of Mortgage Lenders (CML) has recently come out to encourage lenders to develop equity release schemes, highlighting the £400bn of equity in property held by older homeowners, of which only 1% is used as an income for funding a better quality of life.
Peter Williams, director general of the CML, says: ‘Value for money and risk are key issues that have to be addressed in the development of equity release products and older people and their relatives will need to feel more confident about what they can deliver. A co-ordinated effort among interested parties could lead to the development of well-regulated, standard equity release products, to satisfy a variety of needs in old age.’
Certainly the range of products on the market needs developing, according to Tate-Lovery. ‘We need more lenders to offer equity release because at the moment there is no competition. Those doing it have a monopoly and they charge what they like. There is definitely a market out there for retired people who do not want to move house, but want to get money out and enjoy their lives,’ she says.
The business is time consuming however, and brokers will need to consider charging a fee, despite resistance from clients.
‘Usually brokers work from a combination of procuration fees and life insurance commission, but with equity release there is no life product. Brokers may have to charge a fee to make it worthwhile,’ says Tate-Lovery.
The remortgage market has also been developing as borrowers become less inert and more aware of the opportunities for a better deal on their mortgage. Certainly the recent interest cuts will push more clients to look around which, of course, spells good news for brokers.
Lenders are said to be rallying to tackle the issue of re-broking, but there is not huge evidence of this, according to Tate-Lovery.
‘Building societies are attracting business in one door by offering free valuations, covering legal costs and so on, yet out the other door they are losing valuable customers with a good track record,’ she says. ‘When customers come to us, we say ‘go back to your lender and see what they can offer you’. Almost every time they come back to us because their lender cannot offer them anything attractive, so they remortgage elsewhere. This is good news for brokers because we can advise these people.’
Much of what brokers will have to do over the next year is to look at the issue of fees and commissions ‘ especially as a reaction to how lenders will respond to the combined effects of regulation and remortgaging.
For the first time, lenders are facing a cost for their activities with brokers and these costs are likely to be significant in terms of compliance. This, combined with the dilution of the lending book due to borrowers going elsewhere, is likely to impact brokers.
Clifford ponders on whether lenders will cut procuration fees: ‘Will they stop paying £200 a case and pay £150 instead?’ he asks. ‘Alternatively, they might start switching from front-end fees to back-end fees, for example trailer or renewal commission to protect against a cycle of turnover in the UK.’
Another area for brokers to consider is the e-mortgage market and their place in it. The MCCB has a working party looking at the market, which highlighted some 180 mortgage broker sites in August 2000. Whether brokers are using the internet to market their business or not, the internet does not seem to be a threat to those shying away from a web-based approach.
‘Most clients like to use the web as a comparative tool, but given the enormity of the cost of a mortgage, people do not make a £100,000 decision on the click of the return key,’ Clifford points out. ‘I like the fact the internet has created massive choice, but that creates confusion and drives people to take quality advice.’
So, whichever way you look at it, 2002 will be a challenging year for brokers, but for those that grasp the nettle and adapt to the changing regulatory landscape, there is no reason why the year should not be a rewarding one.
Broker networks that remove the compliance burden are likely to become more popular post N3.
Remortgaging and equity release will be important areas for brokers in 2001.
The position of brokers will be clarified once lenders decide how they react to the dual threat of customer retention and regulation.