Will the Mortgage Credit Directive kill off master brokers?

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Now that some second charge lenders are liaising directly with mortgage brokers, what future is there for the previously unassailable master brokers?

Master brokers have historically held all the aces when accessing second charge lenders. But the Mortgage Credit Directive has been a game-changer and second charge lenders are starting to deal directly with mortgage brokers.

So can the seconds market sustain its current number of master brokers, and what do they need to do to stay relevant?

Upping the ante
In March this year, the MCD brought the second charge sector under the Mortgage Conduct of Business rules. For many, this was a landmark moment because it meant mortgage brokers were now required to mention the option of a second charge to customers looking to extend their borrowing.

However, some second charge lenders have decided to up the ante and indicate a desire to work with mortgage brokers on a direct basis, cutting the master broker out of the game.

Association of Mortgage Intermediaries chief executive Robert Sinclair believes certain master brokers will need to raise their game if they want to stay in business.

“Whether or not a master broker can survive depends on what they bring to the party,” he says. “If they don’t bring much other than access to distribution, they probably have something to be worried about.”

Precise Mortgages was one of the first lenders to launch a direct-to-lender seconds proposition. Managing director Alan Cleary thinks distribution will eventually be the same for both first and seconds.

He says: “In my experience, many brokers like dealing directly with the lender but, when the product is more specialised, they use a packager or master broker. Therefore, the important thing is to allow the customer and the broker to choose whatever suits them best.

“Many master brokers have already adapted to the post-MCD world. Those that do not will disappear from the market.”

Around 25-30 per cent of Precise’s first charge business is produced by packagers and Cleary expects the second charge market to mirror this. According to research by Legal & General Mortgage Club, 84 per cent of brokers plan to include second charge loans in their advice process this year.

Of these, 32 per cent intend to write second charge mortgages themselves while more than half (52 per cent) will continue to refer the cases to a master broker.

L&G Mortgage Club launched a direct-to-lender seconds proposition in May. Director Jeremy Duncombe says: “There will be some brokers with the knowledge and confidence required to choose the direct option while, for others, opting to use an alternative such as a master broker not only will allow them to access a wider panel of products and detailed market knowledge but the master broker can shoulder the advice risk.”

L&G currently has four lenders on its panel, out of around 15 in the market. Duncombe thinks more lenders will soon enter the second charge space.

“The market is changing and it won’t be long before second charges are considered part of the mainstream,” he says. “As a result, more lenders are likely to join the market, providing more choice for brokers, which can only be a good thing.”

Other clubs and networks have also launched into the sector, or are looking to form direct-to-lender second charge panels.

TenetLime is on the verge of revealing its direct offering.

Managing director Gemma Harle says: “It is a totally new concept to many second charge lenders and we want to make sure they can provide the right level of service to our adv­isers and their customers before we launch.”

Too few on-panel lenders
However, master brokers are questioning whether club and network panels can offer borrowers the right advice with just a handful of lenders on panel.

“At the moment, with so few lenders offering a direct-to-broker proposition it will be very hard for a broker to give whole-of-market advice,” says Brightstar Financial director of second charge mortgages Bradley Moore.

“To offer a whole-of-market second charge solution, intermediaries seeking to do it themselves would need to be able to offer clients a comprehensive panel of lenders covering prime, adverse and buy-to-let – and that is just the beginning,” he says.

Fluent Money head of intermediaries Jeff Davidson has concerns.

“The question is whether mortgage brokers, who are used to dealing direct with lenders, could end up favouring a particular second charge lender with which they become familiar or are already comfortable from their use in other lending sectors,” he says.

Enterprise Finance sales director Harry Landy says brokers often lack the time and resources to deal with each lender separately. He believes it is much more efficient to use a master broker.

“With most lenders still not offering their products directly, brokers can’t be sure they’ve found the best deal for their client, or researched the entire market, without using a master brokers,” he says.

Some second charge lenders are keeping their cards close to their chest and have yet to reveal whether they plan to go direct.

Twenty7Tec managing director James Tucker thinks the market will continue to be divided for the time being but, ultimately, all lenders will offer a direct route. His firm has designed a sourcing system that enables advisers to compare mortgages with second charges.

“Lenders with the capacity to deal with large numbers of brokers will do so, while those that are more niche and operate smaller support teams will continue to prefer the specialist distributor route,” he says.

“Over time, however, the default position will be that all lenders offer a direct route for second charge lending as broker knowledge and skills improve.”

Sinclair disagrees. “I don’t think every second charge lender will end up being direct. At the moment the number of lenders offering a direct route is fairly limited.

“Lenders have to ask themselves whether they want to make decisions about small one-man-band brokers and carry out all the necessary due diligence in order to put them on panel and satisfy the FCA. Are they happy in that space? I’m not sure they are.”

Moore believes for a period the market will see a growing number of lenders going direct.

“Now is the first time they can, so it makes sense that more lenders will try it out,” he says.

“However, ultimately many lenders will realise it is far more efficient to deal with six master brokers than 2,000-plus individual brokers, in the same way that many lenders prefer to deal with brokers rather than directly with the borrower.”

Master brokers are sanguine about the threat from direct business. Y3S Group joint chief executive officer Matt Cottle believes eventually the post-MCD situation could improve matters for them.

“It’s a really good thing that mortgage brokers now have a choice on where to do their second charge business,” he says. “If people have choice, they are more likely to come into the market.

“Some brokers will go direct to a lender and then realise there is a lot more to package with a second charge than with a first charge, and they will end up back with a master broker.”

Cottle thinks many brokers under-estimate the amount of work required. As well as sourcing the best second charge deal, they must “carry out credit and Land Registry searches, apply for first charge consent, arrange a valuation, take payment from the customer and chase valuations”, he says.

Specialist solutions
Although the best second charge products are now deemed to be in the prime space, they should be regarded as specialist lending solu­tions, says The Lending Channel managing director Alistair Ewing.

“As such a different skillset and understanding of the market are required, these can come only from having spent time developing knowledge and understanding of the market,” he says.

“Master brokers will convert more business much more quickly than new entrants to the market, delivering better client outcomes.”

High stakes
But the stakes can be high for mortgage brokers who want to go through master brokers.

Fee charging in the seconds market has always been high compared to that in the first charge sector, with master brokers rolling their fee into the loan and typically charging 5-10 per cent.

When they operated under the Consumer Credit Act, master brokers could charge customers £5 only if they had pulled out of the deal. This meant they might pay £300 for a valuation but, if the customer subsequently changed their mind, be obliged to refund them £295. To compensate for this, master brokers typically charged higher fees across the board.

Under the MCOB provisions there is no such rule and many master brokers have realised this type of fee structure will not appeal to mortgage brokers. So they have changed to a cheaper, flat fee.

“In the post-MCD world, many master brokers are moving to reduce their fees as both first and second charges become aligned,” says Duncombe.

“Second charge loans have always been considered very specialist, dominated by master brokers with their own charging structure – something that many brokers dealing solely with first charge loans are completely unused to seeing.”

Gates Financial Services principal Kevin Gates was the first broker to submit a direct case to Precise Mortgages, through SimplyBiz Mortgages. In the past he submitted second charge cases through master brokers.

However, although the fees were higher than he would have liked, this factor was not what tempted him to go direct.

“The most appealing aspect in going direct is that the IFA stays in control of the whole process,” he says.

“Many clients don’t like the idea of having to go through a third party; they like you to handle the case at all times. After all, it is you they have the relationship with. Even though you tell them someone will phone them, you often get them asking ‘Who is this guy calling me?’”

“I had to look a bit harder for the second charge ranges to see who was doing what as it doesn’t appear on the usual sourcing systems. But it was exactly the same amount of work as I would do for a first-charge mortgage,” he says.

Gates wants more lenders to offer a direct route for second charges. “It’s definitely the way forward for mortgage brokers,” he says.

Personal preference
But this route will not be for everyone, says Perception Finance managing director David Sheppard, who prefers always to use a distributor for second charge loans.

“That way you are giving the client the best options from those that deal with second charge lenders day in and day out,” he says.

“My expertise is in mortgages and to look to expand to second charges when they do not come up enough to keep my knowledge fully up to date could lead to poor outcomes for clients.”

Several master brokers are offering brokers the option of either providing second charge advice themselves or using the master broker’s advisory service.

Moore says: “A common misunderstanding is that a broker cannot call themselves independent and still use a master broker to help source and package the case. Actually, the broker needs just to be able to give the advice; they do not need to be able to do the whole thing themselves.”

Technical problems
The ace card for master brokers undoubtedly is the technology they can offer for sourcing a second charge mortgage.

The principal sourcing systems can compare second and first charges on separate systems but few independent systems offer this capability without using a master broker.

Twenty7Tec is one of the few. However, its managing director thinks the firm’s technology systems will not necessarily encourage brokers to go direct.

Tucker says: “​Technology – such as having the ability to compare a first against a second charge product when looking at a capital-raising remortgage – will certainly increase the propensity of brokers to consider second charge products as a viable option.

“That said, by default that does not mean that more brokers will go direct to lenders for these products because many have a very strong relationship with their preferred specialist distributor, which they will look to maintain.”

Promise Solutions managing director Steve Walker thinks sourcing systems are not the be-all-and-end-all when choosing a second charge mortgage.

“Mortgage brokers don’t have adequate technology and expertise to select the most appropriate lender,” he says. “Our proposition offers brokers a sourcing system, a soft credit search and underwriters they can talk to to help them find the right lender more quickly.”

Walker adds that every loan nevertheless is underwritten.

“Mortgage brokers can’t replicate this unless they use a service similar to that offered by a master broker. Relying on a mortgage sourcing system may seem nice and slick but it will risk brokers not recommending the most suitable product,” he says.

“As the second charge market grows, packagers and master brokers will still be hugely important to brokers and their clients.”

Past masters?
Master brokers need not opt necessarily for ‘all or nothing’. Davidson says: “The first charge market demonstrates that lenders with the right investment in infrastructure can benefit from a dual origination strategy.

However, as we have seen with the specialist first charge sector, many lenders prefer to benefit from the scalability of a model that uses master brokers/packagers as a broker’s first port of call, marketing partner, packager and conduit for new business.”

According to the Enterprise Finance Second Charge Report, the market is worth around £1.03bn a year. With 25–30 master brokers operating in the sector, things could get crowded if more mortgage brokers opt to go direct.

And if master brokers are to maintain their lead, some market growth will be needed to accommodate those mortgage brokers going direct.

Cleary believes the sector will become more popular over time.

“The MCD has already improved product pricing and fees and, having spoken to lots of brokers, they share a similar view,” he says.

However, a lot of lenders have tightened their criteria post-MCD and some experts believe this has had a negative effect on volumes.

“From our perspective the second charge market is down about 20 per cent due to lenders applying stricter criteria, mainly in respect of affordability,” says Harle.

Without a gradual increase in volumes or new lenders coming into the market, the sustainability of existing master brokers is questionable.

A third party in any industry needs to offer something the customer cannot otherwise obtain. For master brokers, this is their knowledge of the market and access to exclusive products and lenders, the biggest pull being the latter.

Until the intentions of second charge lenders become clear, master brokers have no choice but to play a waiting game.

The more strategic master brokers will flourish in this new world

Martin-Reynolds-700.png
Martin Reynolds, chief executive, SimplyBiz Mortgages

History will show that the Mortgage Credit Directive was a defining moment for second charge mortgages.

Irrespective of their reputation for high interest rates or even higher arrangement fees – whether true or not – these new rules finally bring second charge mortgages into the same processes and procedures as first charge mortgages.

This means they will become more accessible to a wider section of the intermediary community and thus bring the product to a greater number of consumers.

The key to any market is choice. The way in which brokers access a second charge will change; indeed, it is already changing. We have begun to offer our members direct access to lenders.

Currently this is with Precise and Prestige but there will be more to come during the summer and beyond. This is important because it means more intermediaries will start to provide advice in this sector.

Previously, where the only real access was via master brokers, some brokers felt the sector was unsuitable as they did not wish to refer clients to an unknown third party. This is not a criticism of master brokers; it is just a fact of life: most brokers prefer to deal direct with the end lender, so the more that offer this service the more brokers will engage.

But this will not spell the end of the master broker, just as greater automation did not spell the end of packagers in the first charge market. They will adapt, change their business model and provide a different type of service.

Not all second charge lenders will be able, or want, to offer a direct-to-broker service. This may be due to infrastructure or lending appetite. These lenders will continue to work with master brokers as they do now.

Also, many lenders will offer multi-channel distribution. In most instances this could mean a different type of product range, where criteria are the differentiator, not price. This will enable lenders to move further along the risk curve but manage volume in a controlled environment. It may also allow them to test and review new products prior to wider distribution direct.

The only fly in the ointment is technology; there is no sourcing system that caters properly for this market. Many have made a start but their offering is too narrow. As more lenders go direct, this should help the systems to offer a better service.

But ensuring it shows both second charge and remortgage options will be key to success.

Direct-to-lender secured loan panels should not be seen as a threat to master brokers but a natural evolution in the product offering. The more strategic master brokers will flourish in this new world. This will be good for the market and also for the intermediary, who will have more choice.