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Safety in numbers

Thanks to the credit crunch and increasing regulation there has never been a better time for brokers to join networks, says Christine Toner

Like most areas of the finanLcial services industry the broker sector is going through a tough time.

The credit crunch and the resulting turmoil in the mortgage market, not to mention Treating Customers Fairly deadlines, mean there are plenty of things for brokers to worry about.

At times like this brokers need all the help they can get and joining a network is one way of getting it.

“For us it was the sensible option,” says Jonathan Burridge, managing director of Quantum Mortgage Brokers, an appointed representative of Home of Choice.

“In January 2006 we joined HoC for strategic reasons. We needed to gain experience in life insurance sales and we also wanted to grow the business as efficiently as possible.

“Being in a network makes fee collection easier,” he adds. “If brokers are directly authorised they have to go direct to lenders to receive commission. In a network all commission is paid weekly. This frees up our time to grow the business.

“Brokers also have the added benefit of working with other companies in the network. On one level they are part of the competition but you can share knowledge too.”

Alex Cotton, chief executive of Network Data, says networks offer firms the chance to work with other businesses in the same position and provide training and support in crucial areas, bolstering their confidence.

Sharing the burden of regulation and taking advantage of the training offered by networks can help brokers overcome the challenges they face. So why do a number of them remain DA firms?

The costs involved with joining networks is a factor and many smaller brokers may not have the budget to do so.

In some cases networks take a cut of brokers’ proc fees so small brokerages doing a moderate amount of business could pay a high percentage of their income to networks.

But the security that networks provide outweigh the costs involved, says Gerry O’Brien, chief executive officer of HoC.

“What is the price of staying in business?” says O’Brien. “If a network has kept you safe for 20 years, what should you pay for that?

“If the cheapest course is the only criterion firms consider they are seriously misguided.”

The expenditure involved is not the only reason brokers may avoid network membership. Losing their independence is a problem for some.

“There are a number of reasons why I’m not part of a network,” says Danny Lovey, proprietor of The Mortgage Practitioner.

“First, I don’t want to be dependent on anybody else. Second, I want to manage my business my own way. Finally, I don’t want to be tied to anybody else’s panels.

“I want the independence to act freely,” he adds. “I’m just as capable as any network of complying with Financial Services Authority regulations.”

Even brokers who are part of networks recognise they may not be beneficial for everyone. Burridge says it can be beneficial to be a DA firm.

“Sole traders may not get the same benefits from networks as larger brokerages,” he says. “Businesses follow different business models but being part of a network has allowed us to flourish.”

It could be argued that thanks to the credit crunch, if ever there was a need for networks it’s now. Several of them expect member numbers to increase in the coming months.

“Networks are likely to become increasingly important, not only because of the credit crunch but also because of the three-year programme the regulator has announced to monitor DA brokers’ compliance with TCF,” says Cotton.

“They will be interviewing DA firms face-to-face or over the phone to analyse their practices. This will undoubtedly concern brokers who have snuck under the regulatory radar until now.”

Cotton says that while Network Data’s marketing hasn’t been aggressive in the past 12 months it will start to push its services once again to attract ARs considering a move and DA firms that are worried about regulatory burdens such as TCF.

“We have seen an increase in calls from DA firms that have mentioned they’ve been contacted by the FSA for the first time,” he says.

“They are considering their options. I’m sure once our marketing kicks off again we will see ARs approach us to compare their existing networks with what we can offer. This is the pattern we’ve seen in the past.”

Another trend networks expect to see this year is consolidation. It has been on the cards for a while but the downturn in business volumes makes it more likely.

“It is likely we will see some small networks without critical mass suff- er because of the credit crunch and they could start to question their future,” adds Cotton.

“They’ll probably have to review their costs like everyone else in the mortgage industry. This could lead to a reduced service for their ARs and this may persuade some of them that it’s time to move on.”

  • Additional reporting by Mark Skinsley

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