Proc, stock & barrel: Is it time for an overhaul of commission?

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Lenders’ payment of proc fees is notoriously inconsistent. With brokers aggrieved that their post-MMR workload is going unrewarded, is it time for an overhaul of the proc fee system?

The path of lenders’ procuration fees during the past decade tells the story of the mortgage broker industry. From the boom to the bust to the recovery, proc fees have mirrored brokers’ success.

As volumes plummeted after 2008 and lenders conducted more business directly through branches, proc fees began to fall – to around 0.3 per cent on average in 2010 and 2011 – creating major concern about the viability of the sector.

In 2012, Legal & General provoked fury among many in the industry by launching a broker pilot with ING Direct for a proc fee of less than 0.3 per cent. John Malone, at the time PMS executive chairman, claimed the deal could spark a race to the bottom on fees that would cripple the industry at a sensitive time.

Although some other lenders’ proc fees were at a similar level, many felt the ING Direct deal could prove a tipping point. But this was not the case and the broker world was later transformed by the Mortgage Market Review and the advent of fully advised mortgage sales.

While brokers’ share of the market is understood to have been as low as 50 per cent after the crash in 2008, it is now believed to be around 70 per cent.

Direct-only lenders such as HSBC, Metro Bank and the Post Office have started to offer broker deals because they represent a trained workforce for providing advised sales.

With brokers therefore in higher demand, the laws of economics have pushed up prices and lenders are again willing to pay more for a valuable service.

Rising fees

Analysis of Moneyfacts data by Mortgage Strategy shows the extent of change in proc fees on residential deals over the past five years.

In 2011, building societies such as Hanley Economic, Holmesdale, Ipswich, Marsden, National Counties and Ulster Bank paid just 0.25 per cent while East Shilton paid a flat fee of only £250.

Today lenders vary in their payment models, with some paying nothing and others vast amounts to win intermediary business.

Moneyfacts data shows MBS Lending topping the proc fee charts at the end of February with rates between 0.55 per cent and 0.65 per cent. Precise Mortgages came second with published fees of 0.5 per cent and Virgin Money was third, paying up to 0.5 per cent but varying between introducers.

Accord Mortgages, Aldermore, Buckinghamshire Building Society, Metro Bank, Principality Building Society (on properties in Wales through PMS) and Scottish Building Society all pay proc fees of 0.4 per cent, while NatWest Intermediary Solutions offers the same to its directly authorised brokers.

The average proc fee is around 0.35 per cent with some lenders also capping the maximum cash value payable.

However, proc fees in non-mainstream sectors such as bridging can be as high as 1 per cent on very large property deals.

But while building societies such as Marsden have nearly doubled their proc fees over the past five years, from 0.25 per cent to 0.4 per cent, some lenders have kept their fees very low. In 2011 Abbey paid just 0.2 per cent on residential mortgages and today Santander continues to pay the same rate on standard deals, although it has much higher levels for deals with mortgage clubs.

While some building societies cap the total proc fee at only £1,250, many others have a minimum fee, some with rates as high as £250.

Other lenders set a minimum property value, such as £30,000, before paying proc fees.

Some lenders have unusual arrangements, with Investec Private Bank paying a flat rate of £750 and Bank of China giving brokers half of any mortgage arrangement fee.

Many big intermediary lenders negotiate specific deals with networks and mortgage clubs and offer preferential rates for their chosen partners.

Others focus on certain deals. In January 2014 Santander cut proc fees on mortgage deals of more than five years, reducing them from 0.5 per cent to match its other proc fee structures.

Most brokers combine proc fee income with upfront fee models to provide a larger revenue base. The shift to consumer fee models came in the wake of the credit crunch when broker business declined.

Today there remains an ideological battle at the heart of the broker market with major inter­mediaries such as London & Country shunning upfront fees. Instead they aim to deliver the volume necessary to earn a living from proc fees alone.

However, anecdotal evidence suggests fee charging is becoming more prevalent.

Residential-mortgages

Reforms
Since the financial crisis, lenders have changed not just the levels of proc fee but also how they award payments to different brokers. This includes having agreements with large distributors for varying fees or making distinctions based on quality of business.

In early 2012 Santander kicked off a proc fee revolution with a shift to awarding quality-based fees to its appointed representatives.

Then in 2013 Lloyds Banking Group began providing brokers with the metrics it would use to measure quality at the end of the year.

The change applied only to its key accounts and DA firms were unaffected, although it is not known if the lender will include DAs in the future. The move applied only to the BM Solutions and Halifax brands.

More controversially, some lenders have distinguished between DA and AR brokers. NatWest Intermediary Solutions pays its ARs proc fees of 0.35 per cent but tops up DAs’ remuneration to a healthy 0.4 per cent.

In contrast, many older lenders discriminate against DAs by paying them lower fees, such as Accord, Coventry Building Society, Halifax, Nationwide, Santander and Woolwich. The difference in pricing is usually explained by lenders’ greater faith in network compliance models for overseeing deals, rather than DAs.

But attitudes are changing as DA compliance improves and the difference in quality fades.

In June 2015 Leeds Building Society broke new ground when it decided to equalise DA and AR proc fees.

Workload
While the MMR has been broadly positive for brokers and their market share, the extra regu­lation has increased their workload.

Since April 2014 brokers’ clients have had to submit to more stringent affordability checks and income verification, involving more paperwork and labour.

Some brokers believe proc fee levels are still not commensurate with the amount of work required from the intermediary sector.

Lentune Mortgage Consultancy managing director Stuart Gregory says: “Proc fees have certainly not increased in line with the amount of work that is now required to adhere to MMR and now Mortgage Credit Directive requirements.

“We are spending more time on each case and, when you know that lenders were paying the same or more in proc fees back in 2008, the payments for brokers have not evolved.

“This needs to change, rapidly. Too often the amounts on offer are just accepted by brokers  but we should fight more for better terms.”

Gregory believes the method and timing of proc fee payments also need to improve, enabling brokers to better manage cashflow.

“Payments from lenders are increasingly erratic and it makes cashflow extremely difficult,” he says. “Take two mainstream lenders, Santander and Nationwide: how can it be that, in 2016, Santander can pay commission to a broker within one week of completion but Nationwide doesn’t pay its commission until the middle of the month following completion? It’s not justifiable – and it’s also unfair to brokers.”

Retention fees

The extra workload caused by the MMR also affects the retention of clients at lenders, with product transfers consuming a lot of broker time and effort.

Woolwich pays 0.2 per cent, Halifax for Intermediaries 0.33 per cent and Metro Bank 0.2 per cent (gross) when brokers replace a customer’s mortgage upon its maturity.

Last November Cambridge Building Society became the first mutual to offer a proc fee for retention business, with a 0.2 per cent special rate. The retention proposition, which is running as a pilot through Legal & General, is also available for additional borrowing.

Legal & General Mortgage Club director Jeremy Duncombe has called for brokers to receive more proc fee remuneration, specifically in retention fees, given their increased workload.

“Most lenders have raised their proc fees to reflect the changes but retention proc fees have been almost forgotten,” he wrote in Mortgage Strategy earlier this year.

“It is paramount that more lenders pay proc fees on retention business. Brokers still need to go through the full advice process in these cases, requiring them to dedicate time and effort equal  to what they would do with new business.”

The majority of lenders either pay nothing for retention business or offer just a small fee.

Gregory says: “While some lenders still insist on cutting out brokers completely for product transfer payments, others pay such a small sum that it is, frankly, an insult to the amount of work that brokers do to retain their clients.

“What some high-street lenders choose to overlook is that the level of compliance we are required to complete is no different on a product transfer from what it would be on a standard remortgage to another lender. It may be a simpler process for the lender but it isn’t for the broker.”

Regulation

The Retail Distribution Review, which came into force on 31 December 2012, was one of the most protracted and controversial pieces of regulation enacted by the former Financial Services Authority. It banned all commission payments by providers to investment advisers in order to end the perception of product bias.

But mortgage products escaped its clutches and proc fees continued, with varying commission payments paid by providers to brokers.

In January 2015 the FCA announced it was monitoring rising proc fees and might intervene if it believed there were problems. But it has since ruled out a complete ban on proc fees in its review of the MMR and in the recently published Financial Advice Market Review conducted with the Treasury.

Last September, then FCA director of super­vision and authorisations Linda Woodall told Mortgage Strategy: “We didn’t find any evidence of commission bias, as we did in the financial advice market, so there was nothing to address there. We still don’t have an issue with comm­ission bias in mortgages and so there is no need to take steps in that regard.”

The different treatment of advisers and brokers has sparked resentment among IFAs, who feel they have been unfairly targeted by the FCA while brokers have escaped its wrath.

Advisers have called for a “level playing field” and complained that the perception of bias is just as prevalent with proc fees as with commission payments.

Pensions Champ founder Alan Higham says: “I’m against commissions generally unless they are presented as an explicit charge that the customer signs their agreement to.”

Meanwhile, ThreeSixty managing director Phil Young says the mortgage market looks “outdated” compared to advisers’ regulated sector.

“I think the mortgage and insurance markets have some catching-up to do,” he says.

“I have been saying this more about insurance of late as I know inducements are still pretty rife there but you could say the same about mortgages. Missing the RDR means those parts of the market look pretty outdated.

“I’m not dead against commission or proc fees but I struggle to see why there are different fees for the same type of mortgage.”

He adds: “There may be an argument for different proc fees for totally different types of mortgage based on the amount of work involved.

“It would be better for those in the mortgage market to consider this themselves before the regulator does, but I don’t see much call for reform in any part of that market at the moment.”

Timeline: How proc fees have changed in the past five years

2012: Legal & General Mortgage Club strikes proc fee deal with ING Direct for less than 0.3%

2012:Santander kicks off proc fee revolution with new metrics paying higher fees for better-quality applications

2013: Lloyds Banking Group continues the rush to quality with new proc fee system for key accounts and directly authorised brokers

September 2013: Mortgage Strategy investigation reveals huge gulf in lender proc fees between DA brokers and ARs

January 2015: Lenders start to increase proc fees as mortgage and housing markets begin to expand and MMR kicks in

September 2015: FCA director of supervision and authorisations Linda Woodall rules out ban on proc fees despite RDR

November 2015: Cambridge Building Society announces it will pay 0.2% proc fees to brokers for retention mortgage deals

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