Mixed fortunes

22 August 2011 | By Samuel Dale

1 - Supermarkets
Visiting your local supermarket is no longer solely for buying your weekly vegetables. In recent years supermarkets have expanded to sell everything from yoghurt to trampolines and, seamlessly, they have moved into financial products.

Already, Sainsbury’s, Marks & Spencer, Tesco and Asda offer insurance from pets to cars and credit cards with big rates attached. The products target clients using the mountains of personal data accumulated by the stores.

They are also incentivised by loyalty schemes such as Tesco Clubcard and Nectar cards at Sainsbury’s.

These giant firms have sprung up on every street corner in the last decade and elbowed out more and more corner shops and local businesses. And Tesco is preparing an imminent launch into mortgages later this year, so are mortgage brokers about to suffer the same fate? Are borrowers ready to choose their mortgages alongside their meat and two veg?

Speaking at the Building Societies Association’s annual conference in May, Neil Tomlinson, head of retail banking at Deloitte, told delegates that supermarkets have access to information about risk factors such as alcohol intake and whether a customer smokes.

“The supermarkets can analyse what is in our shopping basket,” he said at the time.

“Picture scenes where they are able to assess and underwrite your insurance risk and price based on goods you have in your basket, whether it be for a mortgage or an unsecured loan.

“If you think about supermarket loyalty cards, the distribution, the convenience of where the stores are, they really will start to make an impact if they get their act together.”

He predicted supermarkets would be offering financial products in every town in the UK within the next few years. They have already revolutionised the way financial products are delivered and shaken up the banking sector and it can only be replicated in mortgages.

Tesco could inject fresh capital into the market and launch a major marketing campaign for the industry but there is a danger that brokers could miss out if the company chooses to offer direct-only deals through its branches.

Certainly, local brokers may have a similar fight with supermarkets that independent convenience stores have had to face in recent times.

2 - Technology
Technology has already shaken up the broker market with paperless applications and social media. The latter has rocked the business world and more brokers are using Twitter, Facebook and YouTube to interact with clients. It is a new marketing tool that is offering benefits to some brokers who are gaining clients and raising their profile through the medium.

Other tools such as Skype are becoming more common and are predicted to grow by the Association of Mortgage Intermediaries.

Some brokers such as Coreco already use Skype to stay in touch with clients they are unable to meet face-to-face.

Andrew Montlake, head of communications at Coreco, says embracing technology is going to be a major issue for brokers.

“Some are good at using new technologies and we have a few things we are trialling but others are lightyears behind at getting to grips with it,” he says.

“It is going to be important for the next generation of advisers to use technology more.”

Advances such as paperless applications are becoming more popular with Abbey for Intermediaries becoming the latest to accept scanned documents from brokers as proof of identity and income.

NatWest Intermediary Solutions has also dabbled in instant messaging as a way of communicating with brokers, although it has been criticised by Charles Haresnape, managing director of Aldermore, for lacking the personal touch.

Jeff Knight, director of Tonic Marketing, says smart phones will continue to grow in popularity and broker and lender websites need to take this into account.

London & Country has an application offering mortgage services that customers can access on their phone.

“With smart phones, it should help brokers give enhanced case updates to clients,” says Knight. “Lenders need to think about how case tracking will work on brokers’ phones. There is an opportunity for an app, perhaps from a sourcing system such as Mortgage Brain, as well as from lenders, that will help brokers keep up-to-date with rates, criteria and case progress.”

He expects lenders’ systems will become more intuitive, just like iTunes and Amazon, to aid their own communication with brokers.

Communication between lenders, brokers and consumers is being revolutionised by technological advances and brokers must embrace it or get left behind.

3 - Europe
There are so many potential flashpoints from Europe, whether it’s Greek debt or regulatory changes it is hard to know where to begin.

At the macro level there is the sea of debt from Greece to Ireland that is a cause of economic uncertainty and puts the future of the euro in jeopardy.

In the mortgage market there is the juggernaut of a far-reaching mortgage directive making its way through the legislative process.

The biggest regulatory impact for brokers could come from the directive’s proposals to separate advice from the mortgage itself. It is proposed that all advisers must offer a sufficient array of products, meaning lenders may be forced to offer rivals products if they want to offer advised sales.

Paul Broadhead, head of mortgage policy at the Building Societies Association, says it would naturally lead to advice coming only from brokers and lenders providing an information-only service.

“At the moment the directive is treating the mortgage and the advice as different services but I don’t think this will end up being the case,” he says.

Brussels is also proposing the concept of cross-border transactions and passporting intermediaries so they could operate in different countries. It has the potential to revolutionise the way brokers operate but there are potential snags.

“I can understand why the idea of cross-border transactions exists in a free market system you should be allowed to operate across borders,” says Broadhead. “But what we don’t want is someone to be able to be qualified to a lesser extent in another country and then come over to the UK market. It would not be a level playing field as we have a strong regulatory framework in the UK.”

There are also the macro issues flowing from the directive such as compulsory regulation of buy-to-let and bridging which would affect how brokers deal with these areas.

The directive is in its early stages and the debate is raging over what changes should be made and what impact it will have on the UK. But it is clear that brokers will need to pay more attention to Brussels as more regulatory powers shift there and economic uncertainty remains.

Whether its major regulatory changes or sovereign debt crises Europe will be crucial to brokers in the coming years.

4 - Comparison websites
Google’s recent move to launch a UK comparison service for mortgages was the latest in the migration of consumer information online.

Moneysupermarket.com has long been competition for brokers and their online rivals are increasing. Consumers are gaining more access to information and brokers need to find a way of utilising this powerful source of clients.

Chris Gardner, director of Obligo, says online is the new battleground for mortgages and firms don’t look back when they make the move.

“I often hear cries from the traditional financial services lobby that it’s all about personal service and how much consumers value face-to-face advice,” he says.

“That may be but you can bet your life that most customers who do prefer face-to-face advice will have been shopping on the web prior to the meeting and will be telling their broker when the deal they recommend is not the cheapest. To some extent, virtually every mortgage transaction now has some internet element to it and that can only increase.”

Justin Rees, marketing director at Leadpoint, says comparison sites have traditionally focussed on car and home insurance but a competitive market has meant turning to areas such as mortgages.

“As they already have millions of visitors comparing financial services products it makes sense for them to focus on mortgages and related products,” he says.

“The recent purchase by Google of BeatThatQuote and its subsequent soft launch of comparison advertisements for mortgages only goes to reinforce the potential size of the mortgage comparison market in the UK.”

Google now lets consumers compare products but it only allows sponsored deals to show up on a search.

Rees says there will always be a role for brokers and they should use leads to make the most of the internet.

“Due to the nature of the mortgage market where there are so many variables that can affect the range of products available to consumers they will continue to go online in their millions to research and request advice,” he says.

New entrants such as Google show where the future competition for mortgage comparisons lie and brokers must be ready to adapt and access the online world.

5 - Fees and commission
The onset of the credit crunch led to a collapse in mortgage volumes and a sharp increase in the number of direct deals. Combined, these have led to a major dip in broker income as proc fees became insufficient.

A number of remuneration models have emerged from the crisis with the majority of brokers making the jump to charge fees for their advice.

There are many different methods of charging but Mortgage Strategy’s broker census last year revealed 64% of all brokers were charging clients a fee. But some are thriving under a free advice model, most notably telephone-based broker London & Country.

The Which? mortgage service offering free advice to consumers and paying its advisers with salaries instead of proc fees has also proved successful. It is being made available to the wider public later this year and Which? is hiring more advisers at its new Bristol office.

With a migration to networks to share the cost of regulation, the shape of the broker market is likely to change irreversibly

But more changes to remuneration could continue as brokers adapt to a new world. Protection and general insurance sales are more important than ever as brokers look to add more value to their existing clients and business.

Another idea floated recently by major distributors was trail commission to give brokers guaranteed income for a set period rather than the up front proc fee.

Major players such as Countrywide and Paradigm are openly welcoming the idea and Santander and Lloyds Banking Group have considered the concept.

However, it may be one for the future as Santander admits that it cannot justify the cost to offer both up front and trail commissions.

Maria Harris, head of national accounts at Lloyds Banking Group, says it is a possibility but would need a group effort by lenders.

“We have looked at the possibility and impact of trail commission, and how workable it would be,” she says. “It’s not something we plan to investigate further. The key thing is that it cannot work for one lender, or one network, in isolation. Although it might be feasible, there would have to be consensus among all lenders and networks before we reviewed current processes.”

Remuneration models have changed massively since 2008 and debate about the next move will rage on.

6 - Consolidation
Industry figures are hard to come by but the number of brokers is estimated to have dropped from around 36,000 to just below 10,000.

The credit crunch has seen small brokerages massacred while the larger companies have clung on. Recessions often spell opportunity for the big players as they look around the market to pick up bargains and this one has been no different.

LSL Property Services snapped up Home of Choice and Pink Home Loans on the cheap and it recently added The Mortgage Alliance from Santander.

Countrywide has also been busy buying Mortgage Intelligence and starting Capital Private Finance with the Mortgage Advice Bureau.

Sesame bought Bankhall in the summer of 2009 to become the largest appointed representative network while it added PMS later in the year to extend its directly authorised proposition. Earlier this year it reported a whopping 27% share of mortgage distribution while Legal & General extended its reach to 17%.

Industry estimates put the combined share of these four players at 60% and set to grow further. With higher regulatory costs it is inevitable that many will want to become part of larger operations.

A spokeswoman for Legal & General says the economies of scale cannot be ignored when it comes to mortgage distribution.

“Whatever comes from the Mortgage Market Review is likely to lead to increased costs,” she says. “There will always be a place for small firms providing a high level of service for customers. However, mass market distribution and advice given to the proper compliant standards is likely to be the domain of the larger players.”

The bigger distributors are still on the lookout for purchases, with both LSL and Countrywide remaining in an acquisitive mood.

Combined with a further migration to networks to share the costs of regulation, the shape of the broker market looks set to change irreversibly.

7 - Individual registration
The industry seems to be united in its support to register brokers individually in a bid to increase professionalism. Last week Nigel Stockton, financial services director at Countrywide and former sales director of mortgages at Lloyds Banking Group, claimed it is frustrating for lenders to see appointed representatives hiding behind network structures.

Increased checks on indebtedness, personal finances and criminal records will help to cleanse the industry and create more rigorous due diligence.

Despite the widespread support the Financial Services Authority has delayed its introduction until 2012 or 2013 blaming the major regulatory change of splitting prudential and conduct regulation.

Dominik Lipnicki, director of Your Mortgage Decisions, says the FSA should have introduced an approved persons register when it first took control of mortgage regulation.

“It is a positive move even though it is more red tape,” he says. “It will protect consumers more and make brokers move around far less and make the industry more transparent.

“It will clean up the market and get brokers to be more responsible about their licence and registration with the regulator. But I hope registrations are able to be done speedily so it doesn’t further delay recruitment as it can already take months to hire ARs.”

The Association of Mortgage Intermediaries backs the move too and its director Robert Sinclair says it is right that everyone selling mortgages, both advised and non-advised, within lenders and intermediaries should be personally accountable.

“This is a significant step forward in protecting the public and increasing access to advice,” he says. “If branch-based staff are advising on mortgage products they should hold the same level of qualification and status as mortgage intermediaries.”

Widespread support and increased professionalism means many brokers are embracing the changes. Whenever it is finally introduced it should lead to a cleaner industry with more professional advisers.

8 - The rise of renting
The British people are defined by the aspiration to own their own property and purchase a house. Levels of home ownership consistently hovering around 70% for the last few decades have been testimony to this desire.

Social housing and the private rented sector are not as popular as they are on the continent but this could be changing.

A government intent on reducing social housing combined with inaccessible mortgage finance is putting pressure on the private rented sector.

Capital Economics predicts that the sector will rise from 14.2% now to around 17% by 2015 and could lead to a culture shift.

John Heron, managing director of Paragon Mortgages, predicts one in five households will be renting from the private sector by the end of the decade.

This means buy-to-let mortgages have to grow and there has to be an increase in the number of landlords.

Many brokers will have to gain a better understanding of buy-to-let mortgages and learn more about the needs of professional landlords as it becomes a more important feature of the market.

Mortgage Strategy has revealed a rush of lenders entering the sector this year including Santander, Metro Bank and Yorkshire Building Society.

The Yorkshire launched its first deals last week while Santander is expected to offer products later this year.

With more landlords taking up a greater share of the mortgage market buy-to-let is an area more brokers may dip their toe into.

Julian Rance, director of sales at Paragon, says tenant demand is as high as it has been in the modern era.

“Brokers need to think laterally about how they can help landlord clients,” he says. “There are plenty of opportunities for straightforward purchase and remortgage cases where the landlord is switching from one lender to another or to a new product, but how else can they help clients?

“For example, it is more difficult for landlords to raise capital to fund new purchases in a slow housing market, but with approximately two thirds of private rented properties unencumbered, landlords can release equity from these properties to fund new purchases.

“Brokers can mine their books to see which landlord clients were previously active in buy-to-let and have slowed in recent years, it may be that they are struggling to raise fresh capital while sitting on a portfolio of lowly geared or unencumbered properties,” he adds.

With more landlords owning a greater share of housing it is important that brokers adapt to a changing demographic.

9 - Interest rate rises
Interest rates have stood at 0.5% for over two years and look set to stay put for anywhere between six months and two years depending on your view.

Those on SVRs have enjoyed an enormous stimulus to their finances and incredibly cheap mortgage payments. Those stuck on long-term fixed rates taken out before the fall are cursing their decision as the base rate dropped rapidly.

Capital Economics predicts there will be no rate rises this year and probably not for the rest of next year. What is clear is that interest rates will rise and while it will squeeze household incomes for brokers it could mean a boost to remortgages.

Industry consultant Mehrdad Yousefi says rate rises will be a positive opportunity for brokers to do more remortgage business.

“It will mean that many customers start thinking about the deal they are on and shop around for remortgage deals,” he says. “By the time rates increase it will be almost five years since borrowers on SVRs have looked at their interest rates and deals so it will be good for brokers.”

David Hollingworth, mortgage specialist at London & Country, says there will be an upsurge in inquiries when a base rate rise looks imminent.

“If you look back to earlier this year when a rate rise looked likely and fixed rates were increasing in price we saw a quick response from borrowers who rushed to fix,” he says.

“There will always be a proportion of borrowers who are going to hold on to SVRs and review their deals when the day comes. If we reach the point when a rate rise is imminent then we will see an upsurge from people who have put off a new deal for some time.”

All borrowers on SVRs are asking when is the best time to remortgage or fix their deal.

For brokers it has been nigh on impossible to find a better deal for those on record low SVRs so customers have been advised to sit tight.

But when rates eventually rise brokers are well poised to take advantage of a surge in enquiries and deals when advice will be crucial.

10 - Regulatory changes
Financial regulation is being shaken to its core at national, continental and global levels.The financial crisis highlighted systemic weaknesses in banks leading to the Basel III agreement on capital requirements earlier this year.

There has also been a European directive on capital requirements, stress testing of banks and new regulatory bodies set up.

In the UK the FSA is set to be abolished next year to be replaced by the Prudential Regulatory Authority and the Financial Conduct Authority under the control of the Bank of England.

The UK moves were driven by chancellor George Osborne who wants a clean break with the past and the failure of the FSA to prevent the crash in 2008.

For brokers the changes are important because, firstly, it will have a new regulator of conduct in the form of the FCA under the Bank of England.

It has promised to be a far more intrusive regulator and will be headed up by former Hong Kong regulator Martin Wheatley.

The changes have increased the uncertainty around regulation and have led to delays in parts of the MMR, notably individual registration.

The changes are being pushed through alongside the Retail Distribution Review, set to come into force on January 1 2013 and the MMR, which is being published in the autumn.

The extent of regulatory changes structurally, prudentially and for conduct is dizzying.

The bureaucrats of Brussels, Basel, New York and London are distant from most brokers’ everyday lives. But it is difficult to influence those distant regulatory bodies and highlights the importance of trade bodies speaking with one voice.

In the UK things are changing too and the impact on the broker market will be profound with more scrutiny, more cost and more regulation. The wide-ranging changes are shaking financial services across the globe and brokers need to be aware of what’s coming their way.

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