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Glimpsing the future of distribution

The future of mortgage distribution is the title of a recent KPMG report commissioned by the Financial Services Authority. This report is in the public domain and the executive summary and web address from which the report can be downloaded are shown in the box below.

In the introduction to the report KPMG states: “This is not a conventional piece of economic forecasting or market modelling which uses empirical data or quantitative research. Rather the work took the form of scenario development in which plausible futures for the retail landscape from 2011 onwards were developed using internal analysis and external research among a small sample of industry participants”.

Reading the report, my impressions vary from feeling that it’s superficial tat to conceding that it’s worth reading through in the hope of finding a few nuggets among the dross.

Notably, KPMG does itself no favours by referring to Home Information Packs as Home Inspection Plans on more than one occasion – a rather bad habit.

Perhaps it picked that habit up from an industry participant who belongs to the rather large crowd of people who don’t know their arse from their elbow when commenting on HIPs.

Working through the bullet points in the box (right), the Section 1 comment that “consumer appetite for debt will persist” will probably meet with general agreement. Another contemporary report – a Datamonitor review of consumer debt – concludes that we have reached the stage at which the number of people classified as sub-prime is at its lowest and this number can be expected to rise over the next few years. This seems to be borne out by statistics on the growing number of people going into bankruptcy.

Section 2, entitled ‘Intermediaries will continue to grow market share’, will no doubt put a smile on your face, as will the comment that “intermediary distribution will continue to dominate”.

KPMG thinks the sub-prime sector will continue to attract lenders and that oversupply (too much mortgage money chasing this sector) will increase broker bargaining power causing proc fees to rise.

Section 3 starts from the premise that the regulator will adopt a more rigorous stance which will cause the number of firms with inadequate compliance performance to fall. But driven by demand for advice, the number of advisers in firms with robust compliance performance will remain stable. Not exactly rocket science, one has to say.

Section 4 contains the controversial prediction that “if the churn (remortgaging) becomes too serious, lenders will disintermediate brokers”.

In other words, if the remortgage market continues to grow from it current level of 45% of all new mortgages, lenders will eventually reach a point whereby their profitable back books – docile borrowers continuing to pay standard variable rates on their mortgages – will have eroded to such an extent that they will be forced to take corrective action.

The industry commentator quoted in this section thinks lenders will stop dealing with brokers and kill off the remortgage market at a stroke.

What a load of rubbish. It was lenders, not brokers, that launched remortgaging in the mid-1990s and they have only themselves to blame for the fact that they now find themselves in this predicament. As for the implied threat of lenders cutting out brokers, all I can say is try it and see what happens in this highly competitive market.

Section 5 says consolidation among lenders in the prime market, exacerbated by fall-ing cross-sales subsidies, will lead to higher rates and in-creased margins.

Growth in capacity driven by new entrants in the more profitable sub-prime lending market will lead to increased lending volumes, but excess margins will eventually be “competed away”.

Section 6 continues this theme by saying a steady flow of international entrants (i.e. foreign lenders) lacking acc-ess to distribution in sub-prime market sectors will increase bargaining power and push up proc fees.

Intermediaries will negotiate volume deals with len-ders and this will lead to a progressive decline in the average panel size.

Section 7 predicts that the complexity of product design including duration, repricing, portability, capital repayment flexibility, fees and status requirements will grow.

Basle II will also stimulate the development of products with more complex lending criteria that reflect risk and affordability.

Section 8, concerning HIPs, has perhaps been overtaken by events since the July 18 announcement by the government that Home Condition Reports will now be a voluntary rather than a mandatory component of the packs. Or perhaps not, depending on whose interpretation of events you believe.

If HIPs come into effect next June, the thrust of the KPMG message is that estate agents will increase their financial services business at the expense of independent intermediaries with no estate agency parentage or connections.

Section 9 concludes the report by saying that large lenders in the prime market will seek scale through consolidation while small lenders, unable to buy access to shrinking panels, will be forced out of the market.

To summarise, the KPMG report relies extensively on the input of the ‘industry commentators’ who are quoted verbatimbut anonymously. But everyone is welcome to their own opinions and although I do not necessary agree with many of the comments included in this report, it remains a worthwhile read.

Main points of the KPMG report

The KPMG report for the FSA can be downloaded from

  • Consumer appetite for debt will persist but there will be no material rise in bargaining power.
  • Intermediaries will continue to grow market share.
  • The number of advisers will remain stable but concentration will increase.
  • Lenders will eventually attempt to rebuild captive distribution.
  • Overall margin across the value chain will remain stable.
  • Intermediary margins for sub-prime business will grow steadily.
  • There will be a slight rise in product complexity.
  • HIPs will give a significant boost to intermediary business.
  • Lender concentration will increase marginally as smaller lenders will exit prime and larger lenders consolidate.
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