Networks have become the chameleons of the mortgage market, metamorphosing their business models over the years to ensure the survival of their species.
With new predators lurking on the horizon, however, are networks about to change their colour once more?
The digitisation of the mortgage process threatens to sink its claws into not only brokers’ client relationships but also those of networks and their appointed representatives.
“One of the biggest challenges for networks will be staying on top of technology,” says Connect for Intermediaries chief executive officer Liz Syms.
“In order to compete, we as networks need to provide brokers with options to rival the robo-advisers — offering more efficient ways to search for products and criteria as well as state-of-the-art customer relationship management systems.”
Rory Joseph, director at mortgage and protection network JLM Mortgage Services, says external IT providers are making great strides in offering technology for remote advice but, although his firm is embracing this, others are not.
“Some larger networks could be left with workforces that will struggle in the mainstream market as technology evolves, and their role will be that of specialist lending only,” he warns.
Stonebridge Group director of business partnerships Paul Nye believes many networks are relying on off-the-shelf software platforms to support their advice standards and sales processes.
“This gives them limited flexibility to adapt their propositions quickly or differentiate themselves from the competition. We may see that start to change,” he says.
Networks that fail to keep pace risk being consumed by their rivals, according to HL Partnership development director Martin Sims.
“Networks will have to remain relevant,” he says. “This will involve matching propositions with a changing AR landscape. Technology will be key; also acknowledging the need to remain focused on core activities.”
Personal Touch Financial Services head of propositions Vikki Jefferies expects bionic advice to be at the forefront of networks’ strategies.
“Humans and artificial intelligence must work together to deliver effectiveness and efficiencies, not only for the client but for all parties involved,” she says.
Networks’ biggest rivals, directly authorised clubs, have remained in close pursuit over the years. Networks have tried to guard against them by offering DA models alongside their own AR proposition or, in some cases, switching to a DA model completely, as Legal & General did in 2015.
“There is a lot of talk about growing DA propositions within the network model and we believe this will increase,” says Joseph.
“However, while lenders are pushing a business quality-based limited distribution offering, network ARs will continue to be the first port of call.”
Another way forward could see brokers ‘pick and mix’ networks.
“It is a little-known fact that brokers are permitted to be part of more than one network, as long as both networks agree,” says Syms. “A broker may be with one network that focuses on mainstream and pensions & investments, and then with another, such as ourselves, for more specialist mortgages,” she says.
As regulatory paperwork and costs continue to get more onerous, this way of doing business may become more prevalent, Syms believes.
“Most networks need one compliance person for about every 10 brokers carrying out regulated business,” she says. “This has meant a number of networks have put their fees up and are less keen to take brokers not writing very much mortgage business.
“As mainstream network fees continue to rise, brokers may well look for other solutions, such as the multi-network option.”
Nye expects more consolidation but little in the way of new entrants.
“We may see both further consolidation among networks and further polarisation between wealth business and mortgage/protection, where those networks writing significant business levels in both areas find it viable to continue retaining permissions for each,” he says.
Healthy AR numbers do not equate always to a healthy network, which many brokers learned the hard way during the financial crisis with the demise of several high-profile networks. Nevertheless, without a sustainable diet of ARs, networks cannot survive.
“AR numbers within the network sector haven’t grown in recent years,” says Nye. “There have been winners and losers but the pool they fish in isn’t significantly bigger.
“Although a number of DA firms have moved to AR, we haven’t seen the wholesale shift that some expected, partly because they either haven’t seen network propositions as a strong enough attraction or they felt comfortable managing their regulatory responsibilities directly,” he says.
For new entrants to the market, however, Syms believes networks have the upper hand.
“It will be hard to access the level of support networks offer anywhere else, and networks may prove to be brokers’ only way in to the market, other than being employed,” she says.
“It takes the Financial Conduct Authority up to six months to register someone as DA and give them the necessary permissions. This continues to provide networks with a competi-tive advantage as they provide brokers with the permissions they need far more quickly, enabling them to start earning much earlier.”
There has been little movement over the years in firms’ terms
of business, however. Networks recently came under fire in Mortgage Strategy, accused of imposing restrictive clauses on members looking to leave, such as freezing incomes for several months.
Jefferies says: “Just like business models, terms need to be flexible to accommodate an ever-changing market and the services provided. If or when these change, contracts should be reviewed. Networks provide advisory firms with peace of mind, reducing risk in their business significantly. If this role changes, I expect contracts to follow suit.”
Joseph says networks need to become more transparent, particularly with regard to their fees, if they wish to regain the broker community’s trust.
“Some newer networks have focused too much on gaining headcount rather than recruiting for quality,” he says. “Lenders may be wary and potentially apply greater checks on business originating from these networks.”
The other deterrent for those considering a switch to the DA model is the continued escalation of the regulatory workload.
“Compliance requirements are only ever going to get more stringent,” says Syms.
Nye says the impact of the Senior Managers Regime may mean more firms seek network support to help with their new regulatory responsibilities.
“Networks with a strong AR proposition will include a number of areas that could also be very useful to DA firms and are easily transferable: software platforms, marketing and business development support, and protection panels, to name a few,” he says. “It’s logical that networks will increasingly make these elements more widely available as part of their development strategy.”
Joseph predicts that lenders will continue to keep a close eye on their panels.
“If lenders still limit distribution, as per the far greater emphasis on ‘knowing your broker’, the economies of scale and due diligence that a network offers a lender will see this sector expand,” he says.
For the next stage of networks’ evolution, members are likely to push the agenda.
“In this market, networks that continually adjust their proposition to keep pace with innovation and regulatory rules will thrive over the coming cycle,” says Nye.
If networks are to maintain their place in the mortgage food chain they must blend closely with market requirements, which means continuing to change their appearance promptly whenever circumstances dictate.