The past 12 months have left the market almost unrecognisable compared with the one we knew. First-time buyers have been ousted – where there were once innovative and competitive products there are now low LTVs and standard features. And brokers – once the life blood of the industry – are increasingly finding that their services are surplus to requirements.
Indeed, many brokers are having to rethink how they run their businesses if they want to survive and one option they are exploring is joining networks.
Sesame, the largest network in the UK, was formed by the merger of five networks. Cupis says Sesame’s size is down to the fact that it has full Financial Services Authority permissions ranging from investment-only to mortgage, protection and insurance.
But size aside, the success of the network cannot be denied. Cupis puts this down to Sesame’s reputation as a solid company and its strong compliance management.
“We’ve been managing compliance for over 20 years,” he says. “We acknowledge the success and longevity of some of our long-standing members. They have been with us for more than 20 years so we have the experience of managing advisers through the ups and downs of business cycles.
“We have a strong capital base, we are fully funded and have our own capital to support the business of the Sesame network,” he adds. “The quality and reputation of our compliance and business support only adds to our success.”
The fact that Sesame’s advisers have access to a full range of permissions is appealing, especially in the current climate, and Cupis says the network’s ability to manage all types of advisers puts it in a strong position.
And that position is strong indeed. In 2007 Sesame did £19bn worth of mortgages across its network and directly authorised broker business and while 2008 figures are likely to be lower than this, Cupis says it has maintained market share.
As Mortgage Strategy has documented in recent weeks, as the time to renew FSA permissions drew near many brokers debated the pros and cons of going it alone.
And despite being at the helm of a network, Cupis says he can see the merit of being a DA broker. He says he understands that some brokers will prefer to remain DA and Sesame’s mortgage club offering is aimed at these.
“I have consistently maintained that the Sesame proposition serves both DA brokers and the network market,” says Cupis. “It’s not our job to dictate to advisers the best business model for them. There are lots of reasons why brokers might want to be DA and there are also plenty of reasons they want to be in networks.”
The network forms the biggest proportion of Sesame’s revenue and is what the firm is best known for, but its mortgage club also represents a strong proposition. DA brokers can buy a package of compliance support services including reports and updates on a pay-as-you-go or contract basis.
Sesame also offers technology support to its DA brokers and other members in the form of the Key.
“The traditional club model has been based around commission with some exclusive products,” says Cupis. “Negotiating the best rates for DA firms is where clubs have grown, and they have done well in the past few years. But I think the challenge for clubs is to add more value to the members who have stayed with them and supported them. “Our response has been to offer the Key – the point-of-sale system we launched through our network members last year – free to DA firms that commit to support our mortgage club. Our message is – support our club and we’ll support you with a mortgage point-of-sale system which is free.
“There are some conditions attached to them putting a minimum level of business through the club,” he adds. “But in a world dominated by FSA compliance visits, firms that want to comply with the Treating Customers Fairly initiative, keep good records, keep their client bank online on a decent customer relationship management system and use that data to pre-populate insurance and other applications can get help as part of their deal with our club.”
While Cupis is right in saying many DA brokers are happy as they are, if ever there was a time for brokers to consider joining a network, surely it is now. With lenders so cautious about who they lend to, and indeed who they lend through, having the support of a network can be a godsend for brokers.
“Remuneration for brokers in a network is better,” says Cupis. “The trade-off for advisers in a network is increased revenue against the charges we take to cover the services we provide to give brokers a compliant home.”
But this compliance can also be a bugbear for brokers. Some argue that joining a network means brokers have to adhere to two sets of regulatory rules – one from the FSA and one from their network. Cupis is quick to dispute this.
“The key thing a network does is interpret rules and deliver this interpretation across the network,” he says. “We all operate under the same rules – the Mortgage Conduct of Business regulations are the same for everybody. I think the worries brokers have concerning different sets of rules might be to do with networks’ interpretations of the rules.
“The FSA’s rules are principles-based. They are not prescriptive so there’s always going to be an element of interpretation. We look to interpret them in the most positive way for advisers so they can write compliant business. We don’t go out of our way to make rules more complicated.
“The difference in a network is you don’t have to read the whole of the FSA’s Handbook – you don’t have to understand every piece of MCOB,” he adds. “That’s the value a network gives its members in terms of a compliance proposition.”
Compliance and the FSA are not the only issues facing brokers this year. Times are tough and the consensus is that the only way to survive is to diversify. This month and next Sesame will be running seminars focussed on business development to help its members do just that.
“Brokers know how to manage their customer bases,” says Cupis. “They’ve been managing customers profitably for years but these are extraordinary times and our focus will be general insurance, protection products, lead generation, tech-nology and sourcing.”
“One of the biggest challenges for firms that only do mortgages is that their market will continue to shrink. Unless they have a specialist client base – in particular, high net worth clients – whereby they have a regular flow of relationships from a lead source there has never been more need to sell more insurance and other products at the same time as mortgages.
“You have to remember that if you only have mortgage permission you can only sell mortgages, GI and protection,” he adds. “We’ve already seen brokers diversifying into selling more protection products and GI. Protection is a valuable income source and there’s clearly a need for it. Clients need life insurance when they buy houses.”
Cupis says that high quality client management is necessary when brokers are looking to diversify, especially at a time when volumes of mortgage and remortgage business are down.
“Customers are not remortgaging as often as they used to because SVRs are more attractive,” he says. “Finding out customers’ renewal dates on their GI policies is just part of good customer relationship management. In fact, having a good CRM system in place to track renewals is an important part of understanding when GI opportunities will arise. And this can also provide a chance to address other protection needs.”
One suggestion from Cupis about how brokers could use their time effectively is to train administrators to sell GI. Sesame has already piloted such a scheme.
“Advisers who employ administrators who are becoming more expensive can upskill them to sell simple GI products such as household cover,” he says.
“They can do the sales but also discuss renewal dates, ascertain customers’ needs and talk to them about reviewing their financial circumstances.”
Cupis says it is propositions such as this that attract brokers to his network. And indeed, Sesame has seen an increase in the number of advisers interested in joining.
The network has some 200 adviser applications in the pipeline which have been coming in since Q4 2008. Cupis says some of this interest is down to the network’s aggressive recruitment activity, while a number of brokers are simply seeking a safe network they can call home.
“It’s difficult for some advisers to get a good steer from their existing networks when it comes to the state of their finances,” he says.
“The principal of now defunct network Trustguard said everything was OK a week before it went into administration. It may well have been OK then but for advisers it was no use hearing the bad news a week later.”
Interestingly, half of Sesame’s applications are from DA brokers. These brokers, Cupis says, are encouraged to consider full permissions status when joining the network.
“It’s best to come in with a plan and a charging structure that supports that market,” he says. “We can help firms that are confident and capable, and want to move towards broader permissions because we can run the full range in our network.”
And it’s not just brokers who should be planning ahead. Sesame has long-term plans of its own – another attribute that is attractive to brokers.
“We are a long-term player,” says Cupis. “We plan to be in the market for many years. We are owned by a ftse 100 company and the core components of our proposition are our experience and reputation in managing compliance. We have a good relationship with the industry regulator and that has translated into what we offer our customers.
“Also, the technology we give advisers is important. They now have free point-of-sale and sourcing software. Then there’s our competitive charging structure. We are in business to make money. That’s an important point – there’s no point in being in business if you don’t make money and in the present environment it’s pretty obvious that networks that are not able to make money will not stay afloat.”
Cupis says such networks put their adviser populations at significant risk if they go into administration, adding that “even the best and most well meaning owners of businesses cannot deny the fact that if they go bust the administrator will take the money first”.
To join the network, brokers do not need a minimum turnover but those with small turnovers pay higher charges.
“We have minimum charges,” says Cupis. “This encourages a certain level of volume confidence.”
Despite the influx of applications, both the Sesame network and the club have had to make changes to combat the effects of the credit crunch.
“We saw this coming in the summer of 2007 and started to look at our cost base nearly 18 months ago,” says Cupis. “Our first action as a management team was to look at our cost base relative to our income.
“When Northern Rock started to get into trouble we could foresee mortgage volumes starting to decline. We have adjusted our cost base in line with falling volumes and income – that’s the biggest single adaptation we have made. We’ve only invested where we can afford to and this has made us focus on our existing customers.”
It’s not just existing customers that Sesame is looking after. The network recently launched an online mortgage tranche system to help lenders control funding.
“We are noticing that rather than exclusive products being the norm, lenders are increasingly looking to manage their volumes more accurately,” says Cupis.
“Our online tranche management system will support lenders that have limited funds and also allow them to control the adviser groups they distribute their lending to.
The system should enable lenders to control the volume, quality and risk of their mortgage lending in light of the present severe funding restrictions, while providing advisers with the opportunity to reserve funds.
Lenders will be able to use the web-based system to access real-time reservations from Sesame’s adviser base in both the network and DA broker markets. Sesame network members and advisers in the firm’s club will be registered to the service automatically.
As for the rest of this year, Cupis is careful not to make any significant forecasts.
“One thing was for sure in 2008 – all the forecasters got it wrong,” he says.
But he does take note of predictions by the lending community that total mortgage lending in 2009 will add up to between £150bn and £180bn. He predicts the government will come under increasing pressure in this regard.
“The government is already under significant pressure but from now on the heat will really be on it to ensure it gets a reasonable return on the capital it has put into lenders,” he says.
“Unemployment is rising, repossessions are increasing and first-time buyers still can’t afford to buy houses because the deposits lenders require are so high.
“In short, there’s a perfect storm brewing for the government and with a general election looming next spring it will be interesting to see how it reacts.”
Indeed, the whole of the intermediary market, whether DA brokers or ARs, will be with him on that.