Getting together to stay independent

5 July 2010

It has been said that small directly authorised mortgage brokerages are doomed, caught between the hammer of a regulator that does not like the idea of the cost and complexity of supervising thousands of small firms and the anvil of lenders that exhibit varying degrees of discomfort over their perceived lack of control over these companies.

But it is in both the regulator’s and lenders’ best interests to retain healthy distribution by DA brokers. Apart from the quality business they generate, such small firms add value to the market, mitigating lenders’ risk while providing a breadth of independence that best serves the interests of both lenders and customers.

So the issue is not so much whether lenders need small DA brokerages, it’s more whether they can afford to do without them.

Lenders source most of their intermediary business through a small and falling number of large DA firms and networks. They like the ease of access to centralised compliance and the enhanced levels of control within such firms. On the face of it, this seems to be a simple and cost-effective way of managing intermediary business channels.

But there are risks. First, the continuing concentration of key intermediaries into no more than a handful of firms could lead to serious problems if competitors start to acquire distribution.

It is in both the regulator’s and lenders’ best interests to nurture the health of DA broker distribution

Second, there’s the potential for hard to detect, low level process risks compounding over time within some of these firms, leading to serious and expensive outcomes. A healthy and widespread DA industry serves to dilute such risks.

While it is not lenders’ responsibility to regulate intermediaries, not knowing or staying in regular contact with their business introducers has risk and compliance implications.

In this regard, lenders are facing conflicting pressures. On one hand they want the unfettered and flexible scalability of DA brokers’ quality mortgage business. On the other they are faced with the risk of taking on business through channels over which they don’t have sufficient control or contact.

For lenders, with the onset of the Mortgage Market Review and the associated broadening of approved persons responsibilities failure to know and engage with all their introducing intermediaries may present an unacceptable and potentially costly risk. It’s understandable that in such circumstances some lenders most sensitive to risk will be looking to either exclude or marginalise those channels or firms over which they have least control.

But there appears to be a wide range of risk appetites among lenders, with those least affected by the credit crunch seeming to be least sensitive.

The net effect is that although most big lenders openly proclaim their support for the small independent DA mortgage intermediary community many are less than optimistic about overcoming barriers to continuing to deal with a large number of such firms.

DA broker feedback indicates that lender commissions are continuing to narrow while business quality requirements are intensifying. This puts pressure on brokers’ cash flow, especially those who have not migrated to a fee-charging proposition.

Add to this the general uncertainty in the market and the high average age of practitioners - many of whom are already saying they’ve had enough of the business - and it’s hard to see why DA firm numbers should not fall further.

But lenders have it in their power to address this growing imbalance. First, they could accept the undoubted value of small to medium-sized DA firms and the contribution they make, and demonstrate this commitment by working with mortgage clubs to ensure they continue to have access to the best products and proc fees.

Second, they could reconfigure their field sales activities to economically deliver what might be called a ’know your intermediary’ strategy, with the additional benefit of improved business volumes.

For their part, DA brokers should carefully weigh up their relationships with - and expectations of - mortgage clubs. Of course, a key issue here is whether they are prepared to align themselves exclusively with a single club.

Such consolidated bargaining power could make a significant difference in negotiations with lenders, although it’s clear that any such activity would have to comply with competition legislation.

In any event, such a getting together may be too much to expect from firms and individuals who value their independence so highly. But ironically, the key to the survival of smaller independent DA mortgage firms may lie in protecting that independence within the context of loyalty to a single club.

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