Griffiths’ argument for higher proc fees is woefully thin

From Jeff Sutherland-Kay

I suppose I should be flattered that Richard Griffiths has mentioned me twice in his recent scribblings, but his column in Mortgage Strategy on September 26 is just not right.

He tries to make the argument that lenders with branch networks use the intermediary channel to subsidise the costs of branch-based lending and refers to his question to me at the Mortgage Summit in Jerez.

It’s not that a lender, whether it’s my old friends at Alliance & Leicester or any other, would find the publication of acquisition costs by channel “embarrassing” (his version of my reply) but that the information would be “sensitive” (my actual word).

The point is that no lender would want this sort of information made available to its competitors or to City commentators as this might have a negative impact on its competitiveness and share price. Sensitive means commercially sensitive, Richard, not “embarrassing”.

Getting a true acquisition cost by channel is almost impossible as there are assumptions that have to be made when creating the financial formulae. On the intermediary side, for example, the business benefits from branch and direct advertising and PR as these help create awareness of lenders and products among the target audience, whether that audience is branch or intermediary oriented.

So the lender has to estimate what proportion of this cost should be allocated to intermediary distribution.

The high street branch presence has a beneficial impact too. And all the actual intermediary channel costs – from business development managers, their cars and phones, through to intermediary advertising and marketing costs to the proc fees – have to be included.

On the branch side, there are directly attributable costs such as the mortgage advisers, and proportionate costs such as the split of the branch overheads and the branch’s proportion of advertising costs. But there is then a significant element to be built in for customer value. Intermediary mortgage business means little or no additional income for the lender by way of insurance commissions, while insurance sales are much higher on the branch side. The mortgages tend to stick too, creating longer income streams.

So I’m afraid Richard Griffiths’ argument in favour of higher proc fees, based as it is on only a small part of the evidence, is woefully thin. And no lender in its right mind is going to give him the rest of the evidence. I’m not sure it would help his argument anyway.