The added burden for mortgage brokers of needing to show a level of capital adequacy to back up their mortgage business, after 2004, could force many small mortgage brokers out of the market, according to national mortgage broker Homebank.
The capital adequacy requirement in the IFA market is set at £10,000 to £15,000 for a small trader, but that can include equity in the IFA’s main residence.
George Dodds, managing director of Homebank, said: ‘Trying to show capital adequacy will do more to cull the number of brokers than the requirement to pass the CeMap exams. If the level is set too high, then brokers will either have to join an umbrella network to remain independent, or join a larger brokerage. Perhaps this is what the FSA wants. If it makes the compliance burden too heavy and herds smaller brokers out of business or into larger organisations, it reduces the cost of supervision.’
Rob Clifford, managing director of franchise Mortgageforce, agreed that the FSA would find it easier to regulate the market if there were more aggregation. But said the regulator did not ignore capital adequacy requirements and the networks, clubs and agencies will still need to show capital in proportion to their membership.
‘There are a lot of aggregators out there that appear to have no substantial backing. The question is which of the broker groupings will survive. Do they all have free capital to show they are appropriately capitalised to look after their members?’
He continued: ‘I would not be so quick to say that capital adequacy rules will cause small firms to join other organisations, although there are lots of reasons to suggest that smaller brokers will want the help of experienced aggregators.’
A spokesperson for the FSA said: ‘These matters will be dealt with in the consultation paper for conditions for authorisations, due in December. We cannot say what is in it but it is likely that a variation of the current regime as it applies to IFAs will be implemented.’