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FCA pledges to ‘address’ volume-linked proc fees in seconds market

by: Samantha Partington
  • 19/08/2014
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FCA pledges to ‘address’ volume-linked proc fees in seconds market
The Financial Conduct Authority (FCA) has warned the second charge market that the practice of linking enhanced commission rates to business volumes will be tackled in its September consultation.

Known as a volume override, this remuneration system involves lenders paying brokers higher commission per case when a firm exceeds a specified volume target, usually agreed on a firm-by-firm basis.

In some instances, once the target has been broken, the lender will not only pay an enhanced rate of commission on new cases submitted, but will apply the uplift to all cases previously submitted by the broker that month.

The FCA has banned the practice in the mortgage industry by placing an equal responsibility on the lender and the broker not to offer or accept ‘inducements’ which increase in value if the firm ‘exceeds a target set for the amount of business referred’.

The regulator began reviewing the way the second charge industry operated when it took over governance of the sector from the Office of Fair Trading on 1 April this year. Following a consultation in September, a new set of rules will be created to govern second charges which are expected to mirror first charge regulations.

A spokesperson for the FCA said: “We are aware of this practice in the second charge market and will be addressing the issue when we release our consultation on second charge lending.

“Until the new rules go live in March 2016, firms will be subject to [the Consumer Credit Sourcebook] CONC and will be supervised in accordance with these.”

CONC, the FCA’s rule book for the consumer credit industry which superseded the OFT’s Irresponsible Lending Guidelines, contains a mixture of rules and guidance notes.

It states lenders should only offer differential commission rates or payments based on the volume and profitability of business if the payments are justified because of extra work carried out by the firm. Currently this is only a guideline which cannot be enforced.

Several brokers, who wished to remain anonymous told Mortgage Solutions that due to this loophole volume overrides, renamed as a ‘loyalty bonus’, are still being paid.

One broker spoke of a small enhancement which took her commission payment to 1.5% per case, slightly below the industry average of 2%, and so she felt happy this did not act as an inducement. But she did confirm that it was triggered by volume.

Another remuneration system, described as a trail commission, saw a large brokerage receive a quarterly cheque calculated as a percentage of its total live loan book with that lender.

The biggest earner is a scheme badged as a ‘loyalty bonus’ which runs on a scale from 1% commission for brokers which place £100,000 per month with the lender up to 5% commission if the broker breaks the £500,000 barrier.

This system rewards brokers’ ‘loyalty’ with back payments of enhanced commission on previously submitted cases.

None of the brokers Mortgage Solutions spoke to were prepared to name and shame lenders rewarding volume.

However, we asked the second charge industry’s biggest lenders if they paid brokers enhanced rates of commission linked to volume.

A spokeswoman for Shawbrook said it does not offer overrides or additional incentives linked to volume.

Prestige, Masthaven and Precise all said they did not link broker commission to volumes of business while Nemo’s product matrix stated it paid a standard 1% commission on all its plans.

A spokesman for Central Trust said: “[Our] commission is based solely as a percentage of the loan advance and no other payments, gifts or gratuities are provided. All loans qualify for the same commission irrespective of the volume completed.”

Blemain Finance declined to comment on how it remunerated its brokers.

Alan Cleary, managing director of Precise Mortgages, said: “Overrides are virtually always bad for customers. They encourage intermediaries to keep giving business to the lender offering the override in return for an ever increasing proc fee irrespective of whether that is good advice or not.

“We have been told that some second charge lenders are still paying overrides and whilst OFT Irresponsible Lending Guidance may have allowed this practice it is not likely the FCA will be so forgiving.”

Are you aware of any seconds lenders paying volume overrides? Email us HERE.

 

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