It is perhaps stating the obvious but we conclude there will be further challenges as the global financial crisis enters its next phase. The economic outlook remains gloomy and businesses need to plan for the possibility of a more severe recession.
All this places particular strain on brokers, who have been affected by the weak housing and lending markets. Most report a decline in cash flow in the past 18 months, with on average only around half of their recent income coming from mortgages.
The sub-prime market has greatly reduced their appetite to lend to consumers with risky characteristics. In addition, many lenders reliant on business from brokers have left the market and some mainstream lenders prefer to focus on direct business or larger national intermediaries.
It is no surprise that the number of mortgage broker firms has fallen – in 2008 the sector lost 769 firms (about 9% of the total) – and we expect it to contract further.
We are seeing more firms become appointed representatives which is leading to a rise in the size of some networks at a time when they too are under pressure. We have previously shared our concerns that firms are too reliant on remote monitoring their ARs.
Not only do principal firms need to improve their approach, they need to put more emphasis on compliance to cope with increasing numbers. This includes carrying out due diligence to ensure the quality and sustainability of new members, to avoiding inadvertently taking on a phoenix firm.
Mortgage Strategy covered my speech last year when I spoke about these firms – where directors of one firm try to close it and transfer the business to a new entity, leaving only the liabilities behind – and this is something we are determined to stamp out.
The firms that make it through this recession will be stronger for it. But to do so they need to both maintain their incomes and address the risks we see ahead.
We recommend firms take measures to ensure the long-term viability of their business model, particularly ensuring they have the financial resources to withstand the economic and financial climate, while still treating their customers fairly.
Robust systems and controls must be in place. Firms should resist the temptation to reduce expenditure on compliance given that pressure on income and profitability could tempt advisers to treat customers unfairly or act fraudulently.
Firms should consider whether more needs to be done to ensure the quality of the advice they give, collecting sufficient information from customers so advisers can properly assess their needs and recommend suitable products.
Those wishing to diversify into new areas should make sure their advisers are competent, with appropriate knowledge and experience.
These are the things we will be looking at this year. We will continue to offer support and encouragement to firms, but remain resolute about taking enforcement action against those that do not act with integrity or fail to treat their customers fairly.