There’s no denying that small brokerages continue to dominate the mortgage market, at least in terms of numbers. The majority of firms fit into the one, two or three-man band category and this hasn’t changed much since Financial Services Authority regulation.
But the question is how much longer can smaller firms survive in today’s market? The spiralling regulatory responsibilities authorised firms face must be a growing concern for them.
Capital adequacy requirements – the higher of either £10,000 or 5% of firms’ annual income for those holding clients’ money and £5,000 or 2.5% for those that don’t – are just one example.
Being a directly authorised firm and operating in today’s world demands financial strength. Not only does the regulator demand it but clients want it too.
In a post-Northern Rock world, consumers worry about the financial firms they conduct business with. Perhaps their concerns are misplaced when it comes to brokers, given that they do not look after borrowers’ money or grant them loans either.
But sensible consumers will be concerned about the likely longevity of brokerages, especially since they provide fi-nancial advice. Borrowers will want to know they can seek recourse in the future and still find going concerns to take responsibility should they receive negligent or inaccurate advice.
My worry is that it’s difficult to survive in the market without nerves of steel, significant capital and a willingness to meet the rising costs of necessities such as professional indemnity insurance.
One answer for small brokers might be to seek safety in numbers and join networks, but this might not be the best solution.
While networks may give brokers strength by proxy, they can also lead to a loss of control and a diluted relationship with the regulator, so there could be a high price to pay for becoming an appointed representative.
We must also consider other risks such as questions of client ownership and the fact that some networks can be more prescriptive than the FSA.
So how viable is it to sail your own canoe in today’s choppy waters? Consumers wary of recent market turbulence may be asking whether their brokers will still be around in the future if problems come to light.
There is also the incongruity of clients taking financial advice from firms that are not in a position of financial strength themselves. It’s hardly the basis on which to build trust.
Smaller firms need to look at how they can prove their financial stability and longevity. In the future we can all expect consumers to be more discerning about the reputation, financial standing and durability of the firms they use.
This growing interest in the robustness of firms and their ability to survive could strike at the heart of small brokers in the industry.