Master brokers will survive post-MCD only if they remain relevant and offer value through well-packaged high volumes
Two things happened as a result of the consumer protection offered prior to the MCD.
First, master brokers were born: essentially a middleman between intermediary or client and the lender, as neither lender nor broker was willing to risk their money prior to completion on the basis it might be lost.
Master brokers accepted this risk due to volume business and diversification of risk. Good for the master broker and borrowers who decided not to complete, but bad for clients who did complete as they were paying not only their costs but those of others who had changed their mind.
The second phenomenon was controlled distribution for master brokers. Only a few master brokers existed, perhaps 30 or 40, which controlled nationwide distribution of secured loans.
In this environment of relatively limited competition, fee charging was mostly the same – typically 5-10 per cent of the loan amount. Customers paid this level of charge because they had no risk and loans were sold to them on an ‘all-inclusive’ basis, master brokers’ fees covering valuations, third-party references, administration and introducer payments.
Rarely did customers understand the true costs involved, mainly those of valuations. As a result, fees increased, with master brokers profiting from a lack of transparency.
Fast-forward to today and the way in which secured loans are sold and regulated has entirely changed. Consumer credit no longer applies; instead this type of lending falls under MCOB legislation. Changes to the way in which fees can be charged will fundamentally alter distribution. We are already experiencing this, with Precise Mortgages now allowing direct access to seconds for DA brokers of PMS. In time, Precise will permit direct access to other clubs and networks, and other lenders will have to follow.
No doubt this is a major threat to the master broker community. Some will not survive. But providing access to brokers directly is a good thing and the right thing to do. Why should consumers be lumbered with increased costs because of controlled distribution?
Many brokers will become skilled in second charge advice and able to provide the best solution from both first and second charge markets. There is no need for consumers to pay two brokers simply because current distribution dictates it, especially when some packagers intend to continue to charge massive fees.
Brokers will start to challenge high fees when an alternative exists within the master broker market and when they have the opportunity to provide the advice themselves. We have heard of master brokers charging £12,500 for large secured loans, and receiving large commissions. This type of fee charging is over, in our opinion, and no broker will entertain master brokers charging such fees when they know alternatives exist or they can apply directly.
Our long-term view is that, to thrive as a master broker, you need to remain relevant and provide value. In simple terms, this means providing well-packaged, high volumes of business to lenders.
As a consequence of this, distributors will be afforded higher proc fees, lower interest rates or product incentives, making the broker’s client financially better off, even including charges such as one-off packager fees.
Those packagers that decide to continue charging high fees, or have no choice because of their overheads, will cease to exist in the long term.
Chris Fairfax is managing director at Positive Lending