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Battle over incentives gets serious

Distributors facing growing competition have taken to absorbing legal and valuation costs to prevail in the market, but this could lead to casualties among small players, says Payam Azadi

As competition among distributors toughens, many have taken radical measures to secure business by offering incentives. This year, one of the strategies most frequently used has been absorbing legal and valuation costs. This appeals to intermediaries and therefore secures new business in a cut-throat market.

But is this really the way forward? I understand that it is good for clients and also great to pull in new business. At The Mortgage Times Group, we will continue to use this style of product offering to good effect, but will the industry be able to sustain this practice in the long term? I believe over the next year we will gradually see the knock-on effects of this aggressive strategy and start seeing casualties among smaller members of the sector.

We have seen lenders laughing all the way to the bank as distributors dip into their pockets to prevail over one another. Some packagers have even thrown down the gauntlet and offered 99 valuations. Others have offered free valuations and free legals on all sub-prime business, but the costs are surely rising. I must commend organisations on the aggressive way they have approached the market and admit that they have gained an advantage over smaller packagers by doing so. I also believe it is better for the client and will add value, providing distributors can manage on lesser margins. I welcome announcements by a few that the incentives will continue to run for the foreseeable future.

This is all well and good, but what happens when lenders decide that they also want to buy-in business and go for free valuation and legal incentives? We have already seen this with certain lenders, and I believe this is the way it will go next year. They will trample on top of each other for the Holy Grail of dealing directly with brokers online.

All this hype reminds me of the network battle that occurred just before Mortgage Day, with everyone trying to outdo each other. But this new battle is far more serious, as it involves others in the processing chain, including solicitors and valuers. We have already seen larger distributors exercise their buying power by putting pressure on these service providers, forcing them to jump into the price war with larger distributors. I wonder what effect it will have on smaller, superior quality solicitors and valuers as they find it harder to make margins?

I think a measured approach to incentives will be the way forward. Advanced product development, together with a strong service proposition, has got to be the only way of gaining a loyal and sustainable broker base. Free valuations and legals are great and bring new brokers on board, but where do you go after that? What else will you give away to secure that business? The intermediary market is an unforgiving one and loyalties will be tested as competition intensifies and incentives are cancelled out by distributors. Let us see what happens to this type of incentive over the next year.

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