A healthy, prosperous future for mortgage brokers is important to all lenders, but especially centralised lenders, for two reasons. First and foremost, because intermediary-only lenders’ future success is inextricably linked to that of intermediaries. Second, because mortgage intermediaries as a body of professionals have done a fine job over recent years in opening up the market for the more innovative lenders and have contributed to broadening customer choice.
This was highlighted recently by the Council of Mortgage Lenders (CML), which pointed out that 65% of all flexible mortgages have been sold through brokers. Brokers have been able to sell a different product concept to borrowers who, without their help, would have been less likely to understand the benefits that this type of mortgage can offer. Mortgage brokers have also been instrumental in the development of true self-certification, and are doing sterling work in the field of credit-repair mortgages. If there was no intermediary channel, it is hard to imagine how some of today’s most innovative mortgages, with features such as daily interest calculation and niche products, would ever have seen the light of day.
Now, as statutory regulation approaches, the publication of Consultation Paper CP174 is just the latest in a long line of documents to emerge that will cause mortgage intermediaries to make key decisions about their future, and it is important not to forget the scale of the numbers who are affected. The Register of Mortgage Intermediaries shows there are over 38,000 people working in around 13,000 firms.
With thousands of column inches in the press already devoted to the unfolding regulatory story there is no shortage of detailed information, and there is little point in repeating it. Instead it may be prudent to offer up a real-world view on the whole heated and complex issue from a lender’s perspective.
Planning for success
Nobody in business plans to fail, but there are those who fail to plan. Business plans will vary in complexity depending on the size of the business, but most follow similar lines. They will start with sales targets and income generated, then cascade down through costs and overheads to arrive at a bottom line profit or net earnings figure acceptable to the owners or proprietors. Hopefully, profit figures will be higher than expenditure for most business plans and therefore the main focus of successful planning and successful businesses should be on maximising income rather than simply minimising costs.
With regard to mortgage advisers, profit figures are usually compiled on a going-concern basis, and almost certainly assume the business will continue into the future and certainly beyond October 2004 ‘ Mortgage Day.
Therefore, intermediaries currently face a simple choice as part of their business planning: do they want to continue doing what they are doing now, providing a unique problem-solving service to clients who may be ignored by the mainstream, or do they feel that come regulation, their talents may be more profitably used elsewhere?
Forget for a moment the mass of detail and mini-decisions that may lie ahead. Right now, the only truly important decision comes down to two little words: yes or no.
If the choice is ultimately ‘no’ then of course no one will stand in the way. However, if the decision is to continue doing business in more or less the same way as it is being done now, whatever regulation may bring, then all other issues need to be addressed now.
Take the much-debated cost of professional indemnity (PI) cover. It would untrue to pretend that premiums driven up by the move to regulation will not hurt and, if the Financial Services Authority (FSA) is to be believed, the maximum premium is likely to be 3.5% of turnover, the same as IFAs pay now. This may seem steep to mortgage intermediaries who are used to paying just over 1% of turnover, but it is unlikely to be fatal for any but those with the weakest balance sheets. There is also talk about the possibility of firms offsetting the amount of capital they hold against the PI cover they need, which could obviously cut premiums if it actually happens.
Assuming for a moment that firms carry out no other regulated activities then, as proposed, they will need to hold 5% of their net annual mortgage broking income as capital. Far from being an imposition, there are those who would consider this kind of holding nothing more than good cash-flow management.
Incidentally, partners or sole traders may be allowed to include personal assets that are not needed to cover financial liabilities outside the business. So equity in personal property for example could make up some or even all of the capital holding requirement.
Brave new world
The point is this: if PI is viewed as an unacceptable imposition, are advisers cutting off their nose to spite their face? The real calculation advisers should be doing is what it could cost not to go ahead into the ‘brave new world’ post-regulation. For any broker worth their salt the potential loss of future income could far outweigh the extra overhead.
As for the cost of ensuring broker firms are compliant, there are a number of options depending on the size and resources of the business. Larger firms might consider investing in a complete sourcing system from a provider, such as Mortgage Brain or Trigold, who could set up a corporate or ‘white-labelled’ version of their proposition. Small partnerships or sole traders could consider renting the use of a single sourcing system. These will add yet more to overheads but again, what is the likely cost of not doing business in the future?
If the firm currently uses a packager or a network and is not intending to be directly authorised, then it needs to ask them how it intends to keep its brokers compliant. The future of packagers depends to a great extent on keeping their brokers feeling secure with regard to compliance, so some positive support would be expected. And, of course, if a packager is making the necessary investment, the adviser firm will not have to.
Whatever technology option is taken, it should be remembered that it is not just an issue of cost. Advisers should also look positively at the opportunities that new technology will give. By making procedures and administration not only compliant but much more efficient, these new systems can free up more time to use face-to-face with existing or new clients. That handful of extra productive hours each week could make any extra technology costs pale into insignificance.
Right now it may seem like the whole weight of bureaucracy is weighing down on mortgage advisers but, in fairness to the FSA, there is an opportunity to help reduce the overall cost of continuing in business. The FSA has stated that its approach to regulation will be in proportion to the perceived risks of the activity being undertaken. This is the issue of ‘proportionality.’
The FSA recognises that large numbers of mortgage brokers are relatively small firms and that mortgage clients are, in general, at relatively low risk. That is why it is designing an appropriate supervisory approach using innovative tools to provide a cost-effective and ‘proportionate’ supervisory approach.
It is also considering the information that it will require from firms in the future and a consultation paper on these requirements will be issued in July 2003. If mortgage brokers respond in numbers to this paper they can ensure the impact of regulation is reasonable ‘ and that their administration overhead is minimised. Yet again therefore, cost need not be the overriding factor in decisions about future trading models.
Coming back to the original proposition about rising above short-term term problems to ensure long-term gain, the short-term issues are not just about money. Once the big decision to remain in the mortgage business has been made, many other smaller issues need resolving.
For example, if firms choose to stop selling a particular product to give themselves a slightly easier regulatory ride, what about those existing clients to whom that product is important. If they go elsewhere to get it, will they take the rest of their business with them?
Then there is the value of independence ‘ often labelled the ‘gold standard’ of mortgage advice. Many clients are attracted to a particular adviser because they value independent advice, particularly if those clients have ‘non-standard’ mortgage needs that require a problem solver. If that adviser changes their status to appointed representative, will clients remain loyal or will the credibility of the adviser be downgraded as a result? If an adviser decides that independence will be the cornerstone of their proposition for the future, then they need to do whatever it takes to maintain this offering post-regulation.
There is no doubt that regulation will have an impact on the way many intermediaries conduct business and indeed it may mean some mortgage advisers have to fundamentally change the way they work.
It could, however, be argued that, within the broader framework of financial regulation, the FSA is not asking professional advisers to do any more than they should be doing anyway. Regulation will be in proportion to the perceived risks to consumers and similarly, the impact of regulation should be kept in proportion within overall business plans.
In other words, mortgage intermediaries need to make the big decisions now and sort out the detail as soon as possible. They can then focus on a profitable future as a valued and indispensable part of the UK’s mortgage industry.
The imposition of holding at least 5% of turnover as capital is nothing more than good cash flow management.
Maintaining independent status may be more demanding, but it can help firms to differentiate themselves.
PI premiums may be cut by offsetting the amount of capital against the PI cover needed.