In The Odd Couple, Felix Ungar and Oscar Madison are two very different men who live together out of necessity only to find their different approaches to life drive each other up the wall.
It’s a premise that echoes the view that many of us have about the broker and lender relationship in the UK mortgage market.
The relationship has evolved for two principal reasons. One is that the sheer volume and variety of mortgage products has necessitated an “expert” to decipher what is right for borrowers.
Product differentiation has increasingly used technical features not often easily understood by borrowers such as off-setting. Borrowers have consequently required and benefitted from advice.
Secondly, intermediary distribution suits lenders as they can effectively control the volume of their lending without taking on fixed cost.
In an environment where market share is important and therefore products are plentiful and innovation and change present, this gives broker distribution a very real edge over branch and other direct channels.
This model works well in conventional times, but there are times when it undergoes considerable strain.
In extreme markets, such as the height of the boom and the following crash, the balance is lost. Regulation has been a reaction to boom market where the dash for market share overrode other considerations.
Equally the subsequent credit squeeze saw the return of limited distribution requirements and emphasis on quality borrowers that resulted in mechanics such as dual pricing – a pet hate of all brokers.
Furthermore, the erosion of underwriting experience from lenders over the last decade has provided another source of tension for brokers in squeezed markets. Perfectly good business goes unwritten because of overzealous credit procedures and technology.
Reduced lending has meant that many brokers have adapted their business models to survive and to address the impact of activities such as dual pricing.
Diversification into other products and services or recalibrating the balance of their businesses to include more products, such as general insurance and protection or financial planning, has become commonplace.
The emergence of fewer, but more professional, groups of intermediaries who have much closer relationship with the customer, will force a fundamental reappraisal of lenders’ approach to intermediary distribution as they focus again on market share.
Brokers’ businesses are more robust and more lenders are back in the market. Established lenders of the last two years are feeling the impact of new lenders entering the intermediary space.
The past two or three years have underlined how important it is that lenders and brokers understand where their responsibilities towards each other and borrowers lie.
Ultimate accountability for the affordability of a mortgage lies with the lender, although the intermediary is responsible for establishing affordability to make sure that, when advice is given, a particular mortgage is appropriate and in accordance with the lender’s published criteria.
Lenders’ responsibilities lie in assessing suitability across target markets, developing the product / service proposition and supporting literature and advertising, monitoring general trends in sales, administering the product, and dealing with customer queries, claims and complaints.
For their part, consumers are best served when brokers focus on working with individual customers, creating and maintaining customer relationship, advising on product suitability and taking primary responsibility for monitoring individual sales for appropriateness.
They should help with the initial processing of mortgage business, service and consider ongoing borrowing requirements and alternative needs, and deal with customer queries, claims and complaints.
But while we can delineate responsibilities and assign legal accountabilities, there is a duty of care to consumers that infuses the roles of all parties.
Arguably for the best consumer result, there has to be tension in the broker-lender relationship and it is highly probable that the model’s ringing endorsement in the MMR reflects the FSA’s belief that this is the case.
The proof of the pudding is in the eating, but the ingredients look promising.
The combined costs of Individual Registration, full mortgage qualifications for all selling staff and the need to validate affordability and suitability in all sales – both advised and non-advised – is likely to increase the costs of doing business direct for lenders.
The broker market has undergone a significant amount of change over the last three years in terms of what is expected from it from a regulatory perspective as well as the reduced numbers as result of the credit squeeze.
These changes alone will grow lenders’ confidence.
Of course, the relationship will continue to develop as more product innovation and technology evolve. Lenders will always need to manage their response to such demand, to avoid introducing additional cost while stimulating increased levels of customer contact.
What have remained constant are the important commercial drivers between brokers and lenders.
As Jack Lemmon and Walter Matthau discovered, learning to live with someone can be challenging, but in the end rewarding.
