There has been a lot of talk about how the Mortgage Market Review will affect lenders and its impact on brokers, but one area that hasn’t been debated is how the balance of the broker/packager relationship might change with the introduction of the MMR and whether it would be curtains for the packager market as we know it?
Under current legislation packagers do not need to be regulated – some of course choose to be as they may have their own advice arm directed at the general public, but at the moment many are not.
So why do packagers still exist? My view is that those left still plying their trade have reinvented themselves and often employ very experienced mortgage staff who have a wealth of knowledge and some high level contacts within lenders.
I often think, especially in this market, that we rely far too heavily on the results of a sourcing system when it is criteria, LTVs and scorecards that dictate where a case is placed.
It is often when a broker has exhausted his or her panel of lenders and contacts that a broker will turn to a packager to help with the placement of a case. In many instances the packager comes up trumps and my view is that the packager has helped the broker as part of his or her research process. I see nothing wrong with this pre- or post-MMR, however I am unsure that the rest of the sales process and the flow of monies will fit in with the new rules.
Traditionally, the concept was that lenders were outsourcing some administration work and paying a fee to packagers for this work.
Often this involved the packager having direct contact with the customer to collect bank statements, wage slips and arrange for the valuation to be carried out.
I have heard of occasions currently where the packager still deals directly with the customer which, even under the current rules, is dangerous – especially if the client asks for reassurance about the lender or product they are applying for. Under the new rules I would caution any regulated intermediary over allowing a third party packager to have direct access to their client.
Now to remuneration. Packagers provide a service to the broker, therefore the broker should be paying the packager a fee for providing the research and placing his case, not the lender pay the packager and the packager then pay the regulated body (broker or network). Under the current process the lender will usually pay the packager who will then pass on an agreed amount onto the broker, sometimes missing out the regulated network if the broker is an appointed representative.
Isn’t it time to bring in trail commission for mortgages?
Lenders are falling over themselves to lend at the moment – even if it is still predominantly at low LTVs. Many advisers are busier than they’ve been for a long time dealing with the amount of business they have coming through their doors, so is now the right time for advisers to start recruiting people and building their businesses again?
The broker market is certainly not going away. In a market where we did £144bn of business last year, some £73bn of this was done by brokers. In fact some commentators have said that if new entrants, such as Tesco, really want to make an impression on the market they will need to go through brokers to do so.
However it can be hard for advisers to grow, if only because of the time it takes to bring someone on board. Even if you’re bringing in a fully qualified person, the gestation period from first seeing a client to getting paid on a successful case can take at least three months, longer still if an adviser brings on board an inexperienced person who needs training. This is quite an investment to make, so how do brokers fund expansion?
The way advisers manage this in the protection world is by choosing to take an indemnity and take their commission up front rather than trail commission. The flexibility for advisers of being able to choose whether to take their money as trail commission or receive it all at the beginning gives them the ability to manage their business cashflow and fund their growth.
Some more mature mortgage brokerages can be cash rich and the principal is looking to build value in his or her business, whilst this can be achieved with a protection book and a general insurance book, due to the market’s remuneration terms, it is more difficult in mortgages so maybe, it is time that lenders introduced trail commission to the mortgage market.
This would not only be helpful to advisers in terms of their cash flow, but it may also have an influence on what products are sold.
A mentality was built up in the market pre the credit crunch that clients cannot see any further than a couple of years and selling two year products allows you to re-broke regularly as it provides an additional form of income. The reality has been that some of those clients with high LTV mortgages or an impaired credit history are now mortgage prisoners.
There still is little financial incentive to sell the longer term fixes that the government has been so keen on in the past, or any other sort of mortgage that may last for longer than your two to five years. It really is time for lenders to take a leaf out of the books of protection providers and have a closer working relationship with the advisers providing them with business, which would give advisers more flexibility in running their businesses. In turn this would benefit the mortgage lender.
If mortgage advisers were to receive trail commission, it would help them to manage their cash flow which in turn would help them to expand if that was the right decision for their business. It would also provide an incentive to sell mortgages that would last for a longer period of time, such as an offset, and provide the stability that the government has been saying that we need.
It is time we came up with more innovative models of remunerating the adviser market. Without them the mortgage market would be much smaller and, arguably, there would be a lot of people on the wrong mortgage as they would not have had access to whole of market advice, only an individual lender’s product range.