Solent Mortgage Services describes itself as a branded mortgage arranger rather than a packager, and it is a distinction the directors are keen to make when we meet at the firms head office on the outskirts of Fareham, Hampshire.
I meet with sales and marketing director Ian Balfour and managing director Kelvin Cooper, as chief executive Paul Robinson has to dash off to another meeting after posing for a team photo.
The firm has been at its current head office for three years, finally housing all staff under one roof, as Debs, the company receptionist, informs me. She says SMS has come a long way since the head office was a set of offices above shops on Leigh-on-Solents high street.
In those days, employees would regularly run between offices with paperwork in order to get a mortgage application packaged. Nowadays, the biggest problem that staff face is the nightly struggle to get off the Cams estate before they get stuck in a gridlock of traffic that makes London seem reasonably congestion-free.
Between 1989 and 1995, Balfour says that SMS really only dabbled in the traditional mortgage market because it felt there was nothing of real benefit it could offer the intermediary, and the sub-prime market didnt really exist.
At that time, there were no more than a few small companies offering sub-prime lending. But it was Kensington Mortgages that offered 250 a case, lower interest rates and lower redemptions penalties that caught the companys eye. Cooper says the lender and its proposition helped to define the mortgage market.
Since 1995 there has been massive growth in the sub-prime market, and companies such as SMS have benefited from being there at the start. But the firm still has plans to expand into new markets, and it is conscious that its survival as a big player in the distribution of mortgage products is reliant on thinking about the needs of brokers and lenders before they themselves are aware of those needs.
This awareness has been something the company has always tried to maintain. When the decision was made to bring the mortgage market under Financial Services Authority regulation, Balfour says SMS was keen to become regulated, seeing it as a better way of doing business. Even so, the path to regulation was not a smooth one. We had to define where our position was in the market and where we thought our future was, and I dont think anyone really knew the answer to that final question at the onset of regulation, he says.
Moreover Cooper says the FSA at first did not see the necessity for the packager to become regulated at all. At the time, we put our proposition to the FSA and were told there was no need for us to be regulated. But at the same time, we had the dynamic of lenders saying they wanted us to be regulated.
Such pressures meant the directors of SMS decided to act as if the company were a regulated business regardless of whether it was or not.
Eventually we became regulated as an arranger, says Cooper. We undertook a gap analysis and it became clear because of our branded lending proposition that we did post-offer work and put our telephone number on much of the paperwork, so fitting the FSAs guidelines. Fortunately, there wasnt a lot of work involved to become regulated, because we had already done it.
Our view is that everyone in the mortgage chain should be regulated, he goes on to say. Whether the FSA will bring everyone into regulation is another matter and that is down to the FSA, but the indications are they probably wont.
Balfour also suggests that part of the FSAs reluctance to regulate the entire mortgage market comes from ignorance. I dont think that the regulator really understands what we do. We had a visit from the FSA a couple of months after regulation because it wanted to get a feel for what we did. But if you are not customer-facing, I dont think the FSA is too concerned.
What SMS is doing, whether the FSA understands it or not, is attempting to lead innovation in product development and the speed with which lending decisions can be made.
Product innovation will be important in going forward, so competitive products, criteria-based advantage and principle underwriting to people that can provide quality business and good volumes are all important, says Balfour. We definitely believe that integration between all parties should happen. We want to bring about surety of decision-making on day one by speeding up the process. As distributors, if we do that we will all be protecting our future.
Balfour describes branded lending as a joint effort between the arranger and lender. SMS will sit down and talk with a lender about the products currently on offer and what the market wants or requires. It will then try to build products around what it believes it can sell in the market.
But some relationships are different. That between SMS and Preferred often means the lender uses the company to stress-test the risks of making changes to the criteria or rates of some of its products. This will often be because Preferred does not necessarily want to take such a risk across all its customer base because it doesnt know whether the product will work or whether the risk it carries is too great. If the changes work, then the lender might take those changes into its core range.
We had a range for about 18 months that had 23 criteria changes, says Cooper. Those performed very well and Preferred took all those changes into its core range. Then we negotiated some new changes. So we are pushing the boundaries up and offering a different range to Preferred. The benefit to us should be better products and the benefit to the customer is that they get a better rate.
Meanwhile, the relationship SMS has with other lenders is determined by its ability to create new products and look at new risk areas, and convince those lenders that changing the rate here, or some of the criteria there, could bring greater levels of volume.
Balfour is quick to take up the argument: There is risk across a whole range or pricing structure, so its simply taking a different look at these. The lender might then tell us to push the criteria on a certain LTV, or make a slight adjustment to the criteria or the rate to see if we can come up with a better product to suit specific customer needs.
This may mean the products available through SMS are somewhat better than those customers could get through the lender themselves. But at the same time, Balfour admits, the firm has to be aware of the risk if the product range does not perform enough to give it the margin it is looking for.
That said, Cooper believes that mortgage rates will stabilise to a certain standard. He says rates today are as good as they are ever likely to be, leaving little room for competition. And he believes that benefit and service is where competition between lenders and packagers will lie in the future.
Since last year the focus has been on the benefits attached to the mortgage. This has led some lenders to worry about whether they are going to get enough business while others are going for market share, which is a bit silly really. But the benefit is to the client free valuations and so on. What this means is that loyal customers [brokers] will use us. But those who are new to us or the market will have no real sense of loyalty and will look at the benefits they can gain for their clients. If one of our competitors offers better benefits, they have to go for that.
Balfour also has concerns about competition over rates. Companies may be attracted by greater competition over rates and see such competition as an opportunity to get more margin. But if the market changes, it might have the knock-on effect of creating less confidence from an investor perspective. This could make it difficult to provide the products to help customers, because the funding is not going to be there from investors, he says.
As margins squeeze, if you had money and you wanted to put a bond together, unless you can offer a decent return why would you want to take that risk with your money? So there might not be the cash to provide the products and we could end up in the bad old days of not having private funding. There is a balance between providing benefits for the customer as well as margin to investors, Balfour adds.
Nobody gets all the business they want, adds Cooper. If you look at all the lenders and all their business plans, and how much they say they are going to lend, then obviously they cant all do the amount of business they say they will.
This in itself has meant that SMS is looking to expand into new markets. With an office already in Northern Ireland, Cooper and Balfour say SMS is looking to expand into other countries in Europe, among them Sweden, the Netherlands and Spain.
The UK is a good market in itself, but you have to look further afield, says Cooper. There are other risk areas of the market in the UK, but whether lenders are innovative enough to lend to those areas is another question. Kensington was the first to take the risk to lend to certain individuals, and the market needs someone to be willing to take similar risks.
Cooper believes that few of the US investment firms currently investing in the UK mortgage market are willing to take those risks, preferring to see the UK as a staging post that will enable them to penetrate Europe. One such market is the Republic of Ireland, which SMS believes is about 20 years behind the UK market. Cooper says at least one UK specialist lender is trying to generate a market there, and SMS plans to be around to support any such market the lender manages to create.
He also suggests that Sweden is another country where the market could open up to UK distributors, while SMS has already been visited by mortgage firms from Belgium and Holland that are interested in seeing how the company works.
SMS might be keen on expansion into Europe but this is still unlikely to be imminent or straightforward. While the directors are confident that EU regulation will look similar to that in the UK, they concede it would make little sense to launch a new operation on the European mainland until such regulations have been published.
Another area in which SMS intends to be at the forefront is in online technology. The company is already taking online applications from the Mortgage Trading Exchange and is proud that it was the first packager to do so. Currently, says Balfour, the only other packager to take online applications through MTE is The Mortgage Times. But he says that getting brokers to use the technology is still taking time.
Balfour also has concerns about non-conforming sourcing and says few in the sub-prime market are happy with what the sourcing systems are offering. But at the same time he admits getting the offering right is difficult, particularly when it comes to helping intermediaries carry out research, make direct submissions online and keep compliant audit trails.
Such problems and the desire to accommodate as many intermediaries as possible has led SMS to create its own platform. Cooper says technology is set to become the next real battleground for distributors in the mortgage industry. And while those involved in distribution are in a good position to provide solutions, they have different needs, which creates problems.
We are fortunate in that we can see the lenders and we know what their capabilities are. And we know enough about the sourcing systems and research tools, and what the brokers want as a solution. Problems arise when you try to get it all to fit. Its a struggle.
We believe there should be a standardised platform and we think that is what our system is doing. If that fits into the Origo standard, then fine but we have to make our own commercial decision. Its foggy at the moment. UNIPASS is a good idea, but I only know of one lender that is actively looking at it. Electronic ID is something we already offer that other lenders are also offering, but we dont know their timescales. So we have to work to our own timescales., Again, if that fits into standardisation, thats fine.
Balfour says commercial interests are playing a significant part in the way technology solutions are being developed. He points to MTE, citing the fact that it is owned by a consortium of lenders and that while it deals with a large number of applications and can transfer information electronically, there are still many problems with the platform, which make it difficult to use.
e says the functionality of an IT platform and the ease with which it can be used will be the two most important factors in determining whether the platform will be successful.
While this might sound obvious, Balfour points out there is not a single technology solution that enables the mortgage intermediary to take a case from start to finish and this, he says, must be the goal. The difficulty in achieving this, however, is partly created by the numerous commercial interests involved. While Balfour sees Origo as trying to bring these commercial interests together, he says doing so must be hard.
Moreover, SMS believes it has already created the system to not only meet these diverse commercial interests, but which also has the potential to become the industry standard within a few years.
It sees product cascading and research as important to future developments, owing to the sheer number of products and choice of lender available. Balfour says web-based processing involving direct interfaces with lenders is an obvious requirement of any IT solution, while online case tracking, online case management, improved admin and online decisions are all a necessary part of the IT package.
To this end SMS is re-launching its extranet known as a porthole this month. The website will offer all of the above tools and SMS hopes to make the system available through MTE. By doing so, says Cooper, brokers will be able see a case come into SMS and go straight to offer.
We actually showed Origo a schematic of what we are doing and where the lenders fit in, says Cooper. We showed them where the sourcing systems fit and everyone else, and they replied that although the lenders dont actually know it yet, this is what they want. But they are still at least two years away from this. However, this is the blueprint they should all be working from.
Balfour says this is what some people fail to understand about distributors. He says one of the reasons that companies such as SMS exist is because they tend to adapt much quicker to the needs of the market, as they have to do so in order to survive.
We have been positioning ourselves post-regulation not on will regulation change our business? but how can we be different? How can we add value? How are we going to provide systems that brokers are going to want or need to use? that, more than anything will make SMS a successful distributor.
Solent Mortgage Service was founded 1989 by current chief executive Paul Robinson and Richard Leslie, who now sits on the board as a non-executive director.
Other board members include Andy Payne, director of standards procedures and compliance, who joined the company in 1990, while sales and marketing director Ian Balfour joined SMS in 1992. Managing director Kelvin Cooper joined in 1995 while the newest addition to the team is finance director Debbie Painter, who joined the firm last year. Altogether, SMS says its board of directors has more than 145 years experience in the industry.
The company operated as a second mortgage broker packager between 1989 and 1995, before being one of the first firms to get involved in the sub-prime market.
SMS was the first packager to carry out correspondent lending in 2000. It began branded lending in 2001, seeing turnover increase by 300% between 2002 and 2004.It has also seen significant growth in the number of mortgages completed, rising from 600m in 2003, to 807m in 2005 and 900m last year, with 1.4bn in applications.
The company became regulated by the Financial Services Authority as an arranger in 2004. It has six regional offices across the UK, including an office in Northern Ireland.