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Exclusive: Share of brokers charging no advice fee rises in 2023 due to Consumer Duty and PT growth

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  • 22/05/2024
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Exclusive: Share of brokers charging no advice fee rises in 2023 due to Consumer Duty and PT growth
Around 56% of all regulated mortgages sold by brokers last year were not subject to a fee, an increase from the prior year, and attributed to a growth in product transfers and Consumer Duty implementation, Mortgage Solutions can reveal.

According to figures obtained by Mortgage Solutions following a Freedom of Information (FOI) request to the Financial Conduct Authority (FCA), this is an increase from 52% in 2022 and continues a trend of growth from 2019 when fee-free deals accounted for 43% of all regulated mortgages.

The data covers internal product transfers, further advances, lifetime mortgages, and second charge mortgages.

The proportion of brokers charging fees fell across the board, with the largest decrease occurring at those charging up to £499 making up 22% of all regulated mortgages. This was down from 30% in 2022.

The £500 to £999 bracket contracted slightly from 11% in 2022 to 10%, with the £1,000 to £1,499 bracket decreasing from 1.73% to 1.53%.

Meanwhile, the share of brokers charging fees between 1,500 to £1,999 reduced from 1.26% in 2022 to 1.15% in 2023.

At the upper end, those charging £2,000 or more decreased from 2.41% in 2022 to 2.29% in 2023.

A follow-up FOI request found that for all regulated mortgages, which includes second charges and lifetime mortgages, the average broker fee was £277.90, a decrease of around 6% on the prior year and 5% down on 2021 figures.

 

Product transfers fuelling fee-free rise

Christine Newell, mortgages technical director at Paradigm Mortgage Services, said the rise in fee-free mortgages was not a surprise as product transfers, which typically do not come with a fee, formed a larger part of the market compared to purchases and remortgages.

Newell said this could be a long-term trend if the market stays “flat in terms of new business opportunities” so refinancing will “remain difficult” against lenders’ product transfer pricing as “brokers will need to rely on, and work, their existing client base”.

David Hollingworth, associate director for communications at L&C Mortgages, agreed that product transfers taking up a larger proportion of business in the last couple of years was a factor in the fee-free trend as lenders have “fought hard to keep hold of their existing borrowers in the face of tough competition”.

“Brokers have continued to do the right thing for borrowers and more customers will have been recommended to stay put, whether for the rate, tougher affordability in the wider market or both.

“There’s clearly a similar amount of work for an adviser but often a lower procuration fee.  However, a customer may find a broker fee even harder to swallow when they are staying put with their lender and so may have contributed to an increase in no fee business,” Hollingworth noted.

Sebastian Murphy, group director at JLM Mortgage Services, said traditionally, many people received mortgage advice with no fee, and noted an “expectation amongst consumers that this will continue in perpetuity”.

He said: “This makes it difficult for a change of tack for firms, especially where for example, in the refinance space, borrowers have the option of going direct to the existing lender. And we’re all acutely aware of how much resource lenders put into renewals.”

 

Consumer Duty meant to initiate ‘two-way scrutiny of fair value’

Newell noted that Consumer Duty could have had an impact as “firms have had to assess fair value on their services they provide”.

She said companies have consequently had to look at several alternative commercial decisions such as charging for an ongoing service to include a rate switch in future as well as long-term fixed rates.

Other commercial decisions a broker include streamlining their target market audience to attract higher value clients, which Newell said could create an advice gap for lower value loans or spark fees for product transfers.

Newell said brokers needed to monitor rates due to the “unstable rate environment” and lenders offering pricing up to six months before the end of the fixed rate period.

She said: “We at Paradigm believe the remuneration available on product transfers from the majority of mainstream lenders does not cover the cost of the ongoing processing. When one considers the alternatives, the costs could be far greater for lenders, and they need to be careful not to throw the baby out with the bath water.

“One also needs to consider a product transfer income stream for a broker will always be decreasing due to the capital repayment structure now of most loans.”

Hollingworth added that considering Consumer Duty for L&C had been a “straightforward issue” as it did not charge a fee, it may “not have been so simple for firms to document if a more variable approach is taken and different customers could be charged different amounts, even when similar in profile”.

“Consumer Duty doesn’t prevent a fee being charged of course but it’s only right that a consistent approach should be taken,” Hollingworth said.

He said this had been further put under the microscope due to Halifax’s recent move to impose a maximum broker fee cap, which put a “marker on its expectation for fees”.

Hollingworth said there may be instances when a high fee is justified but Consumer Duty was intended to “initiate some two-way scrutiny of fair value and lenders will be looking out for outliers that are charging big fees”.

Murphy continued that Consumer Duty seemed to want advisers to cover off as many product areas as possible, possibly as there is a fear from the regulator that the adviser will be the “only advice the consumer takes in their lives, and they’re trying to ensure that advice covers off as many needs and services as possible”.

“There seems to be something of a disconnect – on the one hand advice is less valued by the regulator, and on the other they want mortgage advisers to deliver more advice beyond the service the customer has come to them for,” he said.

Murphy said that there is perhaps a “need for the regulator to get its ducks in a row, accept that consumers want advice and extenuate the huge positives of taking it, rather than being somewhat obsessed with making sure consumers have access to non-advised routes, only having access to one lender’s products, and not having all those protections that come with advice”.

Scott Harris, managing director of Your Mortgage People, said mortgage broker fees had been in decline for a number of years, but Consumer Duty had been “accelerating” the trend as “firms seek to ensure they can justify their position via fair value assessments, and lenders exercise controls over their intermediary base to weed out unfair or excessive charges”.

“This is great news for consumers, and demonstrates a market with effective levels of competition, which is in line with a FCA key operational objective. The Consumer Duty, in this respect, drives out unwanted behaviours. It adds structure and fairness to the marketplace as the fee a customer pays is tied to the value they receive,” he said.

Harris said the FCA declared it was not a price regulator so the “interaction between regulation, Consumer Duty, and the position of individual lenders and brokers is not without nuance”.

He continued: “In particular there is a fairly diverse array of methodologies applied by individual mortgage lenders as to the best way to manage fee levels.

“In the early days, I heard conflicting views on flat rate versus percentage-based charging systems, and different tolerances on caps. Happily, there was quickly a consensus that one size didn’t fit all, and to embrace the letter and spirit of Consumer Duty a value assessment required understanding of the underlying business model, type of business and borrower type.”

 

Broker competition could be factor in fee-free trend

Hollingworth noted the “competition in a tricky market and increasingly savvy consumers” could be contributing to the growth in fee-free transactions.

He said: “Embattled customers dealing with higher mortgage rates and an increased cost of living will only be likely to shop around more, in search of the most cost-effective solution in terms of mortgage and adviser.

“The market only gets tougher to navigate so the growth in number of customers being able to take advantage of advice without paying a fee will only help boost the accessibility of advice. “

Robert Payne, director of Langley House Mortgages, agreed that heightened broker competition could be a factor as “brokers are fighting for business and those that don’t charge fees make themselves more attractive”.

He said: “For straightforward cases I think the procuration fees paid by lenders are reasonable and you can run a profitable business. However, not all brokers have the luxury of straightforward cases and as soon as you start doing complicated or highly regulated cases such as debt consolidation, the time spent on each case rises dramatically and charging fees becomes more justified.”

Payne said in the past he had heard of some brokers “playing on the naivety of clients” who could be unaware they get paid by the lender, and some charged for a product transfer which could be done in minutes or by the client themselves.

“It’s likely these brokers are moving away from charging fees for these types of cases as the market becomes more aware of fee free options,” he noted.

Payne said there was “definitely still a place for charging fees” and as a fee-free broker there were cases where it was “frustrating” to not charge a fee, but it felt it was the right thing to do for the customer.

 

This is part of a series on broker fees with further deep dives into lifetime mortgage, second charge fees and average broker fees coming up.

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