Forging ahead

18 October 2010 | By Robert Thickett

It has been just over a year since Sesame and Bankhall merged to create one of the largest distributors of mortgages in the UK.

With Sesame the largest network in the UK for mortgage distribution - at the last count in Mortgage Strategy’s Network Review, it had some 1,445 appointed representative firms - and PMS one of the largest mortgage clubs in the UK, their merger immediately meant that it carved out a large chunk of the UK mortgage market.

The merger saw John Cupis, previously managing director of mortgages and general insurance at Sesame, become managing director of PMS.

Since taking up his position last year, Cupis has streamlined the two organisations so that the teams now work out of the same office in Birmingham, and they now control and manage all mortgage and general insurance business for the wider Sesame Bankhall group.

When Mortgage Strategy spoke to Cupis about his plans for the brand over the next year, he was keen to promote his new team.

“What it has enabled us to do is bring together the best parts of our business,” he says. “Now all network firms, as well as directly authorised brokers, via PMS are managed in that one team in Birmingham, so we have synergies that we’ve brought together from the two businesses being run in one office.

“Birmingham is the nerve centre of the mortgage and GI proposition, and we support both networks and DAs for all those propositions from there.”

Combining the two firms saw 100 people lose their jobs across the Sesame Bankhall group, but Cupis is emphatic that it’s vital that networks and distributors cut their cloth to suit the current economic climate.

The likes of Network Data and The Mortgage Times Group are prime examples of networks that ultimately failed to adapt quickly enough to the contraction in the mortgage market in 2008.

“Shedding staff, although it’s an unfortunate difficult decision, is all about running a good business,” he says.

“If we’re not profitable, then we’ve seen already what happens to unprofitable distributors and networks, so this is just part of running a business.”

One individual whom PMS has been able to retain is its founder and executive chairman, John Malone. As Mortgage Strategy revealed last month, Malone has extended his contract at PMS for another two years.

In addition to his role as chairman at PMS, Malone is also the Association of Mortgage Intermediaries’ representative on the National Fraud Authority’s mortgage fraud forum. In that capacity, he is holding a series of seminars with brokers around the country to increase awareness about the threat posed to the industry by fraud.

“We have real strength, depth and experience as a group, and having Malone on board really adds to that,” says Cupis. “He’s founded PMS, been a great advocate of the intermediary and it’s brilliant to have him on board.”

The market continues to be tough, with gross mortgage lending for 2010 on track to surpass 2009 for sheer hideousness. Some £143bn in gross lending was distributed last year, but just £63bn was distributed in the first six months of the year. Unless the remainder of 2010 picks up, it looks to be a disappointing year for the sector.

Despite these market setbacks, Cupis says Sesame and PMS have continued to expand in the first six months of this year.

“Currently, we distribute more than 13.5% of all mortgages in the UK of Council of Mortgage Lenders’ gross lending. Before the merger, it was less than that,” he says.

“We’ve merged the businesses, been clear on our brand, increased market share, retained and grown our adviser base, and seen good growth in the network and some growth in PMS.”

Taking the CMLs’ gross lending figures for the first six months, this percentage equates to some £8.5bn in lending - pretty good when the market is about 60% down, compared with the height of the market in 2006 and 2007.

Another big stumbling block that everyone in the sector will have to deal with is the Mortgage Market Review. Cupis argues that the MMR, while presenting challenges, also represents opportunities.

“We’ve been managing advisers through regulation for over 20 years as a group - that’s what we do,” he says.

“The MMR and the Retail Distribution Review will just be another set of regulations that we will help advisers through.”

The last MMR paper on responsible lending that came out in July has been the equivalent of kicking a hornets’ nest. While many in the industry have conceded the fight over self-cert mortgages, lenders still believe they can prolong the life of fast-track servicing and interest-only.

Advisers will face their own challenge in the face of individual registration. At a recent round table, held by Mortgage Strategy and Santander on the Mortgage Market Review, many of the intermediaries in attendance were supportive of the measure, but were concerned that it could result in adviser numbers falling further.

Cupis is resolutely in the pro-registration camp, especially when the market has seen incidents of fraud or where the competence of advisers has been called into question and they’ve been ejected from one network, then popped up at another or become directly authorised.

“The fact we can’t track the rogue advisers has not been helpful for anyone, both for professionalism in the industry and also in terms of poor practice,” he says.

“So individual adviser registration is a good thing - what we don’t want is overzealous action on the part of the regulator or networks to ensure brokers get through that process.”

He says the group is going through the policy statement to understand how it will affect its business, and will set its own rules, guidelines and interpretations for its network members.

“We already have extremely strict entry rules for firms and advisers joining the network in terms of their solvency, credit history, 10-year referencing and other checks and balances,” he says.

“We also have a strong compliance regime for firms joining the network and for our existing customers. So, I think the main challenge will be the DA market, where they haven’t necessarily been used to this regime. This will be a new process and we are looking at how we can help advisers through that next year under the Bankhall and PMS banner.

“We will be looking at how we can use our Bankhall Support Services to get advisers through that process and we already offer services around adviser registration - we just need to tweak those for the mortgage market.” The FSA is likely to ask brokers to come clean on a variety of issues, such as whether they have any County Court judgements or a criminal record or whether they’ve ever been fired from a job.

Surely, there can be only so much massaging of an adviser’s application to help people through the process if they have a lot of bad debts, got fired from McDonald’s when they were 16 and have been done twice for drink driving?

“If advisers have significantly poor credit history and a lot of debt and other inappropriate circumstances, then clearly if they’re going DA, the FSA will look closely at those applications,” he says.

“But if they come to a group like Sesame Bankhall, we’ll be able to give them guidance on the likelihood of that application succeeding.”

One problem that has proved insurmountable to a growing number of brokers is where firms and individuals have been kicked off lenders’ panels.

Cupis says that the key issue for him with this growing problem is that there is often no explanation provided by the lender as to why the action has been taken.

“Everyone would accept that if you have a legitimate case as a lender against an adviser and that you can explain why, then you have the basis of a decision,” he says.

“The problem is when it appears to be randomly decided and no explanation is given. It’s a bit like running a business and someone walking in and saying ’We’ve taken away your licence trade - I can’t tell you why and I’m not going to tell you why’. How demotivating and disastrous would that be?

“I understand that some of the information is confidential, but I think you can explain why decisions have been taken without having to reveal sensitive data.”

While the tide may have turned against intermediaries in the form of dual pricing for the time being, he says when the market picks up again it will quickly return in intermediaries’ favour.

Before joining Legal & General Mortgage Club in 2001, Cupis spent most of his career working for NatWest and L&G Bank, prior to the latter being sold to Northern Rock. So he has seen first hand the deficiencies in direct branches as a way of distributing mortgages.

“Dual pricing is a product of a lack of funding liquidity in the market,” he says.

“When funding liquidity returns, virtually every lender I’ve spoken to has said there’s a limited capacity through the branches, however hard they try, and that they’ll be looking to the intermediary market to drive that volume.

“I’ve seen both sides of a lending balance sheet in terms of direct to consumer and intermediary, and what is quite interesting is that in 15 years, if you look back compared with where we are now, the method of delivering mortgages direct to consumers hasn’t changed much. In fact, with the regulatory environment we’re now in, we’re probably not far off where we were.

“The issues are that direct to consumer is limited by the numbers of people and computers those lenders have to distribute via that channel, so there is a finite capacity.”

You can see it with HSBC - it probably had the keenest products in the market last year, easily beating the rates put out by mainstream lenders that distributed mortgages direct and via intermediaries. But it was still locked out of the top five biggest providers of gross lending in 2009.

“It doesn’t matter how hard lenders have tried over decades of lending, even when you price products extremely keenly through the branch channel, the intermediary has such a strong relationship with a client that inevitably they will always take a significant share of the mortgage market,” he says.

“And that hasn’t changed, in my view, in decades. If anything, with more regulation and scrutiny over products, customers will be seeking the reassurance and confidence from an adviser in terms of their decision for a mortgage even more. Regulation is helping us and intermediaries advise clients appropriately in terms of the mortgage choice they next make.”

But apart from the MMR, the other blot on the landscape is the government’s Spending Review that is due to be announced on October 20.
Cupis is the first to admit that if households are going to have less disposable income as a result of the cuts, then affording mortgages will logically become more difficult. But with interest rates at record lows, lenders will need to work hard at assessing their individual appetite for risk.

“Lending is all about appetite and managing risk, so I think the challenge is for lenders to work out how much they want to lend and at what price, given the constraints they’re under,” he says. We’ve already seen some softening in prices in the past few months, as lenders are wanting to lend more.”

As to whether the nationalised and part-nationalised banks could still do more, he says that the challenge for those lenders is to balance the increased prudential and capital requirements of high LTV lending against shoring up their balance sheet.
“That is quite a difficult challenge for them,” he says.

“However, there are many first-time buyers with good track records, good credit track records and have deposits that aren’t at the 25% level, but are in the 5% to 10% level. It is these customers who are not as price sensitive, because they can afford those mortgages.

“What is a mystery to me is why the rate for 90% LTV lending starts with a 6% and 60% lending might only start with a 2%.

“There seems to be a big disparity between good-quality first-time buyers at high LTV against an established second-time buyers at 60% LTV.”

The main argument put forward by lenders for why they are not offering more competitive high LTV loans is that they have to put the same amount of regulatory capital aside for one 90% LTV deal as they do for three deals at 60% LTV.

While he understands the capital argument, he also argues that there is a demand argument that also has weight.

“First-time buyers are being overly penalised - look at the rental sector, which is booming,” he says. “Those customers can afford sky-high rents that are almost as affordable as buying a house.”

With gross-lending levels continuing to look rocky and house prices continuing to falter, lenders will hopefully take this argument on board before it’s too late.

But for the time being, Cupis is positive about the future, and no matter which direction the market twists and turns over the next couple of years, he is confident that Sesame and PMS will continue to maintain its position in the market.

 

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