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Proceed with caution in sub-prime

Until lenders and sourcing systems integrate their systems, brokers will have to proceed with caution and do plenty of research when advising in the sub-prime sector, says Richard Coulson

I’ve had a lot of feedback about my comments last week concerning cascading and sub-prime clients, so I thought I’d clarify my position.

When we set out to create Home of Choice it was with the intention of creating a home for successful mortgage firms – a place where they could trade safely and profitably while having a choice of products and providers as close as possible to that available to IFAs. In almost every area we have been able to deliver on these intentions.

But there are some areas in which we have had to be careful. Sub-prime is an area that the Financial Services Authority has flagged as a concern and as a target for its future reviews. In September last year it conducted a review of sub-prime sales across the industry and found that in 80% of cases there was insufficient evidence to prove the market was researched enough to ensure that the most appropriate products were recommended.

I was not surprised to hear this. For starters, there has been no accurate, sub-prime mortgage sourcing system available until recently, so brokers relied on sub-prime lenders that offered online decisions. This was the only way to get the quick decisions that are often needed in the sub-prime market. These online systems allowed easy and quick access to sub-prime mortgages and proved so popular with brokers that a few more lenders began to offer them.

But today, lenders are looking at this slice of the market in a more favourable light and many more online systems are available. Ease of access and speed are therefore becoming harder to justify as reasons to recommend lenders. Even if speed is the client’s concern, many lenders’ online systems that should be utilised before brokers decide which lender has the best schemes available for their clients.

The expanded market means the sub-prime sector has once again become labour intensive and this is one reason why many packagers have not disappeared like so many people predicted. Brokers who don’t use packagers today might be tempted to only use their preferred lender’s online system. With treating customers fairly and best advice high on the regulator’s agenda, this restricted research is wide of the mark.

Lenders that enjoyed early success with their online systems started to feel the heat when their competitors launched theirs. Product pricing had to get more competitive and cascading was born. For lenders, cascading is an efficient way to keep brokers within their product ranges. It provides an alternative if the initial product selected doesn’t fit. For brokers, this can make life a lot easier when a client is unsure of their credit history, but it’s also a potential regulatory danger. Once a case has been cascaded down to the next product, it is essential that brokers come out of the system and research the market again in light of the new information. The original lender’s next best option will not necessarily be the most suitable product for that client so the research process must start again.

We live in a world of fierce sub-prime competition, with margins being squeezed tightly. This is good news for our clients in terms of rates and good news for us in terms of delivery. Lenders are doing all they can to improve their technology to make dealing with them easier and faster than dealing with their competitors. This greatly helps brokers who use online systems and cascading facilities in an appropriate manner.

But lenders are businesses like the rest of us, doing their best to sell their products. It is brokers and networks who must ensure that customers are always treated fairly and that the best independent advice is always given.

Fortunately, there are sourcing systems that can help brokers stay safe in the sub-prime market. Trigold’s ENC system has evolved considerably over the past year and is now more accurate, but still has some way to go until it can be used as anything more than a rough guide. And Enterprise, which built our branded packager Choice Homeloans, has just launched its EDGE system. This generates accurate, online, ranked sub-prime solutions from a panel of 10 lenders and an audit trail from initial enquiry stage that proves thorough research was carried out prior to recommendation.

Systems like these are a big help to brokers as they help them stay safe and prove the appropriate research has been carried out.

All we need now is for lenders and sourcing systems to come together and integrate their systems so we can all get on with safe and fast trading in this lucrative sector. In the meantime we will just have to carry on being careful and doing our research. I’ll keep pushing hard for integration for the benefit of us all.

FSA should stop feeding media appetite for bad news on financial advice
I read recently in The Sunday Times about research from IFA Promotion which showed that the regulator’s duty to educate consumers is falling flat. It found that more than eight in 10 adults didn’t know the different types of advice on offer and seven out of 10 thought they had been to an IFA – unlikely as true IFAs form only a small proportion of the advising population. In response to the research, the Financial Services Authority was quoted as saying it will take tough action against firms that aren’t open about their status. Readers are told by the journalist that if people want independent advice, they should get it in writing.

In my experience, people who want mortgages want choice. Whether they are multi-tied or independent is neither here nor there. But implying that if an adviser is not independent consumers are being short-changed is irresponsible. It’s easy for journalists to keep knocking advisers when continually given ammunition by the FSA.

At the Association of Mortgage Intermediaries’ annual dinner, FSA chairman Sir Callum McCarthy, said it is vital to get tough on the rule-breakers so good mortgage brokers are free of them. It’s a familiar theme and I agree with him.

I’d like to see the regulator give more of a lead to our industry and consumers. Without us, most people would have a tougher time getting onto the property ladder. And how many consumers would choose to take out adequate life insurance without the facts being pointed out to them?

The good news stories are rarely written. This leads to poor stereotyping of the industry and growing mistrust by consumers. The government should realise that unless the FSA stops knocking us, consumers will be put off buying financial products, leading to greater reliance on the state.

Richard Coulson – chief executive, Home of Choice

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