There are a number of debates that move around in relentless circles. They never reach a conclusion one way other. Are you Protestant or Catholic? Do you support Liverpool or Everton? Would you prefer life as a prawn or as a shark (see box)?Judging from an article in last week’s Mortgage Strategy, the debate about “independence” in the financial services market can evoke similar emotive arguments. One of our more vocal brokers, Harry Katz of IFA Norwest Consultants, a directly authorised firm, is quoted in the article as saying “I won’t join a network or become an AR. I want to be free to do my own thing”. I would argue that the structure of the mortgage and insurance markets in the UK is such that a small brokerage is simply not able “to do his own thing”. It is a fallacy, an illusion, as I shall try to explain below. First of all, what do we mean by independence? Forget the convoluted and confusing definition prescribed by the FSA. Forget the misleading claims touted around in various financial promotions. A typical example would be a firm of estate agents situated just around the corner from our offices. When they were tied to Provident Life/Winterthur for life business, their permanent window banner proudly proclaimed them to be “independent estate agents”. Just what the public understands by these claims, and how it influences their decision in choosing an estate agent or financial adviser, is anyone’s guess. I suspect the issue of independence is more a state of mind among brokers – an esoteric debate within our industry that means little or nothing to the public. Katz probably comes closest to the truth when he thinks independence enables him “to do his own thing”. Does this mean he wants to have his own agencies with the various lenders and insurance companies, or simply to be able to place business with any product providers of his choice through one of the mortgage or insurance clubs – facilitators such as Premier Mortgage Services and Paymentshield? On the matter of agencies, for small brokers to set up or maintain their own agencies has become difficult if not downright impossible. The product providers are generally large institutions, such as the Halifax or Norwich Union, which simply do not want to deal directly with small brokers. The cost to these product providers of maintaining agencies with brokers who may place a relatively small number of cases a year with them has proved to be uneconomic. Why do you think the BDMs of lenders and insurance companies have, with a few exceptions, become an endangered species? Earlier this year Alliance & Leicester was insisting it would not deal directly with any broker that did not place at least two cases a month with A&L. This is 24 cases a year, which for the average broker is 40% of all the mortgage business they do in a year. If A&L was receiving its normal market share, it should be getting four cases a year from a small broker, not 24. As for the insurance companies, they have been closing down agencies in vast numbers over the past few years. The Pareto Law of 80% of their business coming from 20% of their brokers applied. As a result, they simply decided to cut out the unproductive 80% of brokers, with a corresponding reduction in their marketing, support and administrative costs – hence higher profits. The mortgage-related insurance market today is dominated by a handful of insurance-based facilitators such as Paymentshield, Select & Protect, and the Source. Even the mortgage networks do not have their own direct insurance agencies, expect for a handful of larger ones such as Network Data. The bottom line is, the small brokers cannot get their own agencies and hence have no choice but to join a network as an AR or place business through a mortgage/insurance club with its combined buying power. This blurs the distinction between directly authorised brokers and ARs whose network allows them access to whole of market. Put simply, both sets of brokers are having to place their business through another organisation. For directly authorised brokers to think of themselves as truly independent is a fallacy, an illusion. As much as they like to think they can “do their own thing”, they have to conform to the working practices of the product providers. To access various mortgage lenders and insurance companies, directly authorised brokers need the support and help of other organisations in much the same way as appointed representatives.
Swimming with the sharks
Far away in the tropical waters of the Caribbean, two prawns were swimming around in the sea – one called Justin and the other called Christian.