Even FSA-approved trail commission would be too much of a risk for brokers

Mortgage Strategy’s cover story in the May 21 issue entitled ‘Trouble with fees’ informed the industry debate which is probably more fervent than any other at the moment.

Even writing from the tranquillity of my garden, I feel I have to take issue with some of the points made by Keith Butler. Going by Butler’s job title of mortgage analyst I assume he represents neither a broker nor a lender. That may explain some naive thinking on his part.

First, why should the payment of proc fees leave brokers open to misselling claims? The charging of proc fees is now transparent so borrowers can see what brokers are being paid for their services by lenders. Of course, proc fees are not paid for services to clients.

Second, Butler suggests the absence of an industry riposte to Alliance & Leicester chief executive Richard Pym’s assertion in 2004 that lenders other than A&L were only enjoying more business because they were paying out higher proc fees was suspicious. Here, Butler’s logic is as flawed as it is insulting to other lenders.

Regarding Pym, I find it ironic that A&L’s then head of intermediary mortgages Mehrdad Yousefi – the man probably most responsible for A&L’s gargantuan strides in the mortgage market over the past 10 years or so – was not saying the same things as his chief executive. Then as now, he knows better. Gaps in lenders’ loan originations are a result of either service issues or uncompetitive product offerings, not rivals’ proc fee strategies.

Even before statutory regulation, the Mortgage Code Compliance Board was adhered to by the vast majority of brokers – in the prime sector, at least. Even then, brokers knew that recommending a product purely on the strength of commission was a serious misdemeanour.

I respect Butler for trying to propose alternatives to the existing commission model but both his ideas are dubious. First, why lenders would agree to a standardisation of fees in a commercial and cutthroat sector such as mortgages is beyond me, especially with so many lender entrants coming into the market.

Why should a lender that has invested heavily and judiciously in technology to cut costs and drive efficiency wave away an advantage by not being able to outperform fatter lenders with regard to the proc fees it offers to brokers? We’ll see communities secretary Ruth Kelly become head of the Royal Institution of Chartered Surveyors before we see commission payments standardised.

His second suggestion – that lenders agree to pay us nothing for finding clients, sourcing the right products for them and taking responsibility for the advice we give – has as much chance of becoming a reality as Gordon Brown has of discovering the art of plain speaking.

That said, I agree with Butler that while not quite broken, the mortgage model needs re-engineering. Many lenders would love to defeat mortgage churn and many brokers would have no problem with a form of Financial Services Authority-approved trail commission that would embed greater value in their businesses.

But to achieve this, brokers would have to overcome the short-term cash flow challenges surrounding a reduction in upfront proc fees in return for a carried interest in the value of a lender’s loan book. It could happen, but it would mean brokers and lenders jumping over a financial cliff together. That could be daunting for brokers.

Kevin Duffy
Managing director (designate)
Robert Sterling Group
By email