Last week, Halifax sent a note to brokers saying that, following the implementation of Consumer Duty, which ensures customers receive fair value from services received for any fees paid in its distribution chain, a maximum broker fee cap of £1,500 or 1% – whichever is greater – would be in place from 1 June.
Brokers speaking to this publication said that lenders have been questioning broker fees over the last few months following the implementation of Consumer Duty, but this was usually done internally, and a compromise could usually be reached.
Most brokers agree that the fee caps Halifax will impose are very high, especially for a mainstream mortgage, so it is unlikely that brokers will hit that ceiling, but they are worried about the precedent that it could set.
Broker fee caps could be ‘step too far’
Ranald Mitchell, director at Charwin Private Clients, said that lenders enforcing fee caps was a “step too far” and did not tackle the key issue of some brokers charging disproportionate fees.
“The idea is good, the execution is poor. Fair value and Consumer Duty are the reasons cited for this move, and of course others will follow. The problem lies in the percentage model. [A broker with a] customer borrowing £500,000 can be permitted to charge £5,000 (1%), while the same amount of work arranging a mortgage for £155,000 could procure a maximum fee of £1,550.
“This is deemed fair value? Many lenders issue annual compliance reviews to broker firms, without any focus on fee structure. Perhaps if they looked more closely into this, they could refuse agency for deemed ‘over-chargers’,” he said.
Mitchell said that understanding the running costs and structure of each firm would be “necessary to justify if they are fair value”.
“I’m not in favour of lenders dictating to brokers how they should charge. The problem is expansive and detailed, and not one lenders should undertake,” he said.
Justin Moy, managing director at EHF Mortgages, said that “many lenders are asking similar questions privately with brokers”.
“Depending on the type of case, and background work required, pricing should be appropriate to the situation, and agreed upfront with the borrower. For example, the level of work, support and experience on an adverse case should warrant more income than a more plain vanilla case.
“Excessive fees on those high-street lender cases feel inappropriate for the majority of cases, hence the Halifax stance, but lenders should accept that it is up to the broker to justify, in agreement with borrowers, and fee costs are not in their remit – the FCA should be delivering guidance on fees and appropriateness, not the lenders,” he said.
Darius Karpowicz, director at Albion Financial Services, agreed that regulating broker fees should “fall within the remit of the regulatory body, not lenders themselves”.
“If lenders begin to dictate fee structures, we could see a downward trend that may push fees to unsustainable levels for many brokerages. This could start a chain reaction that’s hard to reverse, potentially impacting the quality and diversity of services brokers can offer.
“For customers, while lower fees might seem beneficial in the short term, the long-term effects could include reduced support and choice, impacting their ability to navigate complex mortgage markets effectively,” he said.
Elliott Culley, director at Switch Mortgage Finance, said that it was “common practice” for mortgage lenders to ask for fee structures as part of the onboarding process, but a lender “should never dictate what a fee should be”.
“It is the job of the broker to justify the fee to the regulator, not the lender. There have been instances of high broker fees in the past, which do need to be stamped out, but leave this to the FCA to remedy.
“Broker fees are an essential income to lots of mortgage brokers, and a mortgage application takes time. If the case is more complex, then this can take double or even triple the time of a normal case, so higher fees are understandable. Lenders should concentrate internally on their own Consumer Duty obligations and let us concentrate on ours,” he added.
Broker fee caps could ‘backfire’
Ben Perks, managing director of Orchard Financial Advisers, agreed that it may not be in lenders’ remit to monitor fees and it could “backfire”.
“By setting such high broker fee limits in an effort to reduce the amount brokers charge, they might actually cause the opposite to happen. There will be brokers around the country wondering why they are so far below the limits set and debating increases.
“The FCA have made it clear that fees should be fair, good value and proportionate to the work involved. They should regulate this, not lenders,” he said.
Scott Taylor-Barr, principal adviser at Barnsdale Financial Management, said that Halifax’s limit was “generous” and “very few brokers will find them an issue in their day-to-day business”.
However, he warned that other lenders who follow its lead could have a “lower limit in place, which could then impact brokers and their customers”.
“Of most concern is how regularly these caps are going to be reviewed by those imposing them; with the ever-increasing costs of running a business – the recent inflation-busting increases from the FCA being a notable example – how long will it be before what is today seen as a high cap becomes a broker’s typical fee and so is then more problematic?
“There is a wider point to be debated here too, as to whether it is right, or indeed legal, for one part of the mortgage chain to cap the earnings of another. Surely if this were an issue that impacted on the functioning of the market, it would and should be the FCA who acts, not lenders,” he said.
A source who wanted to remain anonymous added that this could add issues for credit repair firms, as it can take 6-12 months to place a case with a lender.
They added that certain lenders are being more flexible with missed credit card payments or missed phone payments, so the lenders are working with these firms and customers that they haven’t worked with before and then saying fees are too high.
Another source noted that broker fee caps could mean that brokers move away from more complex cases, as fee caps could mean that an adequate fee could not be imposed.
What’s the regulatory view?
A trade body source said that Consumer Duty requires lenders and brokers to ensure fair value across the distribution chain, and it requires lenders to take account of broker fees in their fair value assessments.
However, they said that if a particular fee charged by a broker meant that the overall price to the customer may not be fair value, then a lender could challenge the distributor, but this would be done through established broker panel management channels in the first instance.
Another regulatory source said that lenders should think about distributor costs when assessing fair value, but it was not a requirement to carry out a separate assessment for every distributor.
They said that Consumer Duty does not mean lenders have to cap the level of broker fee charges and it was the responsibility of the broker to demonstrate that the fees they charged the customer were fair value.
However, they said that if a lender was worried that a fee was too high and that it could lead to a poor customer outcome, then they could cap fees or choose not to deal with that firm or broker in the future.
Some views were gathered from Newspage.
