But one of the most significant events of 2006 happened in its final month when Hamptons Mortgages, Alexander Hall, Savills Private Finance, Chase De Vere Mortgage Management and Colbalt Capital Group announced their collaboration in the form of Concordia. The concept was simple; the five top directly authorised London brokerages collectively represent £10bn of business a year, giving them the opportunity to secure competitive products from lenders as well as generous procuration fees.
The group is said to mark a new era in the history of distribution. The shock that these five competitors could overcome their differences, not to mention the strong personalities behind them, to allegedly improve the market for lenders and consumers was met in some quarters with disbelief. Kent Reliance quickly branded the collaboration a “cartel” designed to bully lenders into paying bigger proc fees, while networks and mortgage clubs fretted that these sorts of directly authorised collaborations could lead to their own demise. Only time will tell what impact Concordia will have on lenders, clubs and networks, but one thing is certain – with or without its existence the market is changing as lenders re-evaluate the way they distribute products and the value each method affords them.
Two of the main figures behind Concordia, Kevin Duffy, managing director of Hamptons and Andy Pratt chief executive officer of Alexander Hall, are quick to admit that this changing environment was the impetus behind their collaboration. Although they say the concept has been prevalent in the minds of the five for some years, it is the expectations of 2007, from doomsayers and optimists alike, that have spurred it on.
“It is fair to say that Concordia is in some respects our reaction to what we see is a shifting distribution landscape in London and through the UK,” says Duffy. “Lenders are looking more closely at their value chains with introducers to assess which product sectors mean more to them and how much they are willing to pay.”
In Duffy’s mind it could go one of two ways. As margins grow ever tighter, and distributors increasingly expect to be financially rewarded for the value they add, it is possible that some lenders will look again at the possibly of selling direct to consumers. “I believe there are still mainstream lenders ” If lenders can embrace intermediaries with the right cost base then they’ll be well positioned to be able to develop their business further”uncomfortable with the intermediary dynamic,” says Duffy. “Whether intermediaries have 75% or 80% of the market, in the boardrooms of some of these lenders brainstorming has long been under way investigating moving the dynamic back to where is was five years ago – around 50/50. But for those lenders chasing direct to consumer business many will find it tougher than they thought.”
While this sort of distribution might be desirable for some lenders, the realities of direct-to-consumer distribution are far from perfect. As Pratt points out, as well as the cost of running branch networks and advertising, ultimately the consumer will choose whom to buy a mortgage off and at the moment they are choosing intermediaries.
“For years a couple of lenders have focused on trying to bring business back in direct,” says Pratt. “But ultimately none of them have been successful. This recognises not so much that intermediaries are better at selling mortgages but that consumers are choosing them over going to lenders direct – it’s completely consumer-led and this is the key challenge facing lenders, as they see the landscape changing. If they can embrace intermediaries with the right cost base then they’ll be well positioned to be able to develop their business further.”
Assuming, then, that lenders, as Duffy puts it, “accept that they can’t get the toothpaste back into the tube”, then the other route is embracing technology and/or expanding product lines into niche markets. “Mainstream margins are as skinny as they have ever been,” he says. “If lenders are going to improve their profit-and-loss accounts then it can only really be through technology or the adoption of specialist lending. But this can only really be done quickly and cost effectively through the intermediary channel. It will be the pursuit of margins that will determine the distribution pie for the future.”
Accommodating lenders as they move forward into 2007 is central to the concept of Concordia. Pratt believes that lenders will start to create niche products that target specific groups of customers. This is already happening. Back in October Woolwich launched a mortgage aimed exclusively at City workers expecting big bonus payments in the new year. And Advantage launched a flexishare mortgage in the summer that allows first-time buyers to borrow 6x their income, split between a conventional mortgage and a residential ownership loan.
“At Concordia we recognise the rise of niche product areas and we want to work with lenders to target specific customers,” says Pratt. “It won’t happen overnight but we will see new and existing lenders looking to target their products.”
Pratt says the key to lenders’ success with specialist products is distribution – or more specifically Concordia. “Where a network will find it difficult to target an exclusive specifically for the type of business that it is getting because its advisers are appointed representatives, all Concordia’s advisers are employed by us. Therefore, we have a feel for where exclusives are going to work,” he says.
So where do packagers fit into this shifting distribution landscape? Duffy and Pratt, at first glance, might not be the best people to ask this question. Both their businesses do without this packager distribution, not least because only around 1% of their collective business is sub-prime or a typical packager case. Also, Pratt says that as large businesses they have enough resources available to be able to place cases without the help of packagers.
But despite this both Duffy and Pratt admire the way packagers have evolved and survived since regulation, and concede that they will continue to play a valuable role in the distribution chain. “Packagers have defied a lot of people’s expectations,” says Duffy. “They’ve been fleet-footed and creative in terms of adjusting to the problems facing them. A good example is the extent to which many of them have come up with sourcing systems.”
Duffy believes that packagers’ movement towards regulation since M-Day is an example of their adabtability and industrious nature. “The advantage packagers have over other businesses is that many of them are privately owned and run by entrepreneur businessmen who have the means and willingness to change and adapt very quickly to any perceived threats they see emerging from the lender or the market at large,” he says.
An example of the power of packagers is their tendency to group together to form associations and alliances. In many ways Concordia is modelled on these groups in that, while all companies involved remain fully independent in propriety terms, their collective power enables them to negotiate exclusives with lenders and promise enough distribution to be handsomely rewarded.
On one hand this is a compliment to packager associations, and a clear nod to the success they’ve had thus far in the market. But on the other side of the coin, could Concordia be seen as a threat to packager alliances? In the same way as it could potentially eradicate the need for DA brokers to use a mortgage club, could sub-prime brokers follow Concordia’s example and group together to do deals with lenders for more competitive products, thereby cutting out the packager?
Jon O’Brien, operations director at the ” One reason brokers will continue to use packagers is for their knowledge of sub-prime and specialist products”Professional Mortgage Packagers Alliance, says the PMPA was founded on a similar business principle to mortgage clubs – offering lenders bulk distribution in return for enhanced fees and exclusive products. Although, unlike a club, the PMPA and the other alliances that followed its lead favoured the new breed of packagers specialising in niche and sub-prime business rather than direct-to-consumer broker firms.
O’Brien believes that Concordia is a new variation of this theme. “Opinions have been expressed that this alliance will be able to command the highest proc fees, and that the model will be taken up by other powerful broker firms forming similar co-operatives, resulting in the decline and demise of the good old mortgage clubs that started it all off in the first place,” he says. “But does this theory hold any water? I think it’s highly unlikely that lenders will give a competitive advantage to any one purchasing co-operative. The vast majority will continue to woo whichever distribution route can deliver bulk sales for their own products and will keep their options open.”
As for Concordia, it has no concerns that its materialisation should have much of an impact on the packager market. “One reason brokers will continue to use packagers is for their knowledge of sub-prime and specialist products,” says Pratt. “For smaller firms without the resources to source products effectively packagers are a fantastic resource. There is a potential for brokers to misplace complicated products so I strongly advocate that if a packager is available they should use one.”
Duffy concurs and adds that packagers also have a role to play in the mainstream side of the market. “Packagers are a much maligned species,” he says. “But they provide cogent and constructive solutions to all manner of problems that brokers face. With the right technology, packagers have the potential to satisfy what is a requirement across the prime side of business more and more. As credit issues increase, the criteria and technology packagers use to identity suitable products and offer solutions to brokers is fantastic.”
The birth of Concordia could be seen as the birth of a new era, the era of bulk distribution. And although its impact on the market is likely to be positive, it ultimately remains to be seen. Yet the point has been made. Consumer choice has placed 75% of the mortgage market in the hands of intermediaries, and unless lenders recognise, respect and react to that fact, then they could have a sorry future ahead of them.