Despite the reluctance of some networks to be open and honest about membership levels, the fact is that mortgage intermediaries are not committing as quickly as we all would have liked. The key question for the networks must be – why is this the case?
We believe that there is significant demand from mortgage intermediaries for the various network propositions but our research suggests they are delaying making a commitment to any network on financial grounds.
The crux of the issue seems to be that intermediaries are not prepared to pay now for benefits that they don't actually need until FSA regulation comes into force on October 31 and I can understand their point of view. This is an important concern intermediaries have raised with us at various exhibitions and conferences and we have addressed the issue by offering them the opportunity to join Mortgage Intelligence free of membership fees until Mortgage Day.
The Manchester Expo was the turning point. Until then the feedback we had from intermediaries was that they were still unsure about whether to go down the AR or DA route and undecided about which network suited their needs. But since then many seem to have made their minds up one way or the other.
Intermediaries have also told us that even though the FSA hasn't issued any 'minded to approve' letters to the networks, they are willing to commit to their favoured network but don't see why they should start paying until Mortgage Day. Therefore, given that we have addressed the financial issue, I expect intermediaries to start to commit to us.
Last week, Mortgage Strategy speculated that intermediaries are delaying committing to a network because they expect the networks to launch various short-term discounts prior to Mortgage Day. This remains to be seen but I suspect that margins are already tight for the networks offering a comprehensive package due to the amount of competition in the marketplace. I don't think there is much scope for permanent discounting post M-Day. Those networks that do discount will have to make the numbers stack up one way or another so my advice to intermediaries would be to take a long, hard look at what you are actually getting for your money. It stands to reason that if fees are heavily discounted, the quality of the overall package will suffer – as will the level of service.
Another reason why intermediaries are delaying is fear of the unknown, which I can understand. Many have not experienced a regulatory environment before. They are concerned that they are going to be dictated to by the networks. But whether an intermediary chooses the AR or the DA route, there will be a regulatory process to follow. The difference is that for AR the network will have put those procedures in place. The AR will only need to know how to access them and will be trained in this area, but will benefit from the knowledge that they are fully compliant.
As I have said in previous articles in Mortgage Strategy, I expect a significant number of networks to fall by the wayside over the next year or so. Even the most cursory investigation by the FSA into the substance behind many of the so-called regulatory solutions would reveal little more than a virtual network built on a weak infrastructure. The fact is that setting up a viable, long-term regulatory proposition is an expensive and time-consuming commitment and one that shouldn't be taken lightly by either those setting up and running the organisation or by brokers when considering which principal to join. Mortgage Intelligence has spent over £1.3m developing its Fusion IT system.
I also suspect that some networks are not taking a longterm view and are only in it for the potential short to medium-term financial gains associated with selling the network. I reckon they intend to sell up soon as they have built a flimsy membership base.
So, rather than delaying their decision in the hope of a fee discount, I would encourage brokers to focus on asking searching questions of their shortlisted networks. Look at their IT systems and their compliance infrastructure. Assess what clout they are likely to have with lenders in terms of being able to negotiate exclusives. Look at the size and breadth of their mortgage and insurance panels. Go and visit their offices. Look at their financial stability. Ask to try out their IT system for functionality and ease of use. After all, changing principals will be costly and disruptive.
While short-term special offers such as Mortgage Next's decision in principle initiative to attract brokers are fine, the fact that some networks are already offering the earth for next to nothing in terms of standard fees makes me sceptical about their long-term viability. Brokers should make sure they compare like with like as pricing structures vary and can be difficult to compare.
One possible outcome of continued delay by intermediaries is that they may not end up with their first choice network. For example, in an extreme case, if brokers delayed their application until late September it would be a problem for the networks. There will come a point at which the networks have to say that they can't guarantee membership by M-Day.
Furthermore, intermediaries may go through the network's application process only to find that the network is not offered principal status by the FSA. They would then be back to square one but without the time to go through the whole process again. The result of this would be that the broker will be committing a criminal offence should they trade.
Perhaps the networks with the best chance of survival once the floodgates finally open are those with established brands and solid reputations that are already known to brokers. People are inclined to favour those that they know and can trust to do a good job, as this reduces risk and uncertainty. That's what building a brand is about. Therefore, without the right sales proposition, new entrants will find it tough to compete.
So my message to intermediaries still undecided is as follows: now is the time for action. Commit to an established network now, but we don't expect you to start paying until M-Day.
Why brokers are holding back
What is stopping intermediaries joining networks now?
They are not prepared to start paying now
Networks may offer discounts at some point
Fear of the unknown
Why should intermediaries act now?
They don't have to start paying until Mortgage Day
Discounts are unlikely due to tight margins
Network may not be able to guarantee membership by M-Day
First-choice network might not be approved by FSA