Andrew Seymour is managing director of MPS
The days of the mortgage club are numbered. The strength of high street lenders' own brands threatens to make clubs redundant. In effect, lenders are paying over the odds for business they would receive anyway.
The club concept came about in the 1990s, as life companies developed the strategy of increasing their life policy business through non-tied mortgage brokers. The club delivered bigger procuration fees to members who agreed to distribute the life company's products.
Back then, the club concept was well and good for lenders riding the back of the early 1990s recession. The life companies had broker consultants on the road and a desk in the office to manage applications. They offered service and took care of selling and field management for the lender.
But since then, the need for bigger profits combined with cost-cutting and staff reduction has changed the original mortgage club premise of service and added value.
The consultants have all but gone, the desks have closed and any additional value to the lender has evaporated. All this leaves of the mortgage club is a legacy of brokers who are conditioned to simply place a sticker on an application form for a higher procuration fee.
Lenders will not see a reduction in business if mortgage clubs are no more. In fact, all they will see is an increase in profits for their shareholders as they stop paying such big procuration fees. In the short-term, lenders are in a position to level out procuration fees for all brokers. We are talking about big brands who are going to get the cases anyway, so lenders can afford to get rid of the clubs and create a level playing field. If lenders do stay with the club structure, they need to demand that the club adds value to both lender and broker other than just big procuration fees.
And mortgage clubs are not really helping brokers. Other than the newsletter, to my knowledge clubs do nothing to assist brokers with compliance. With such significant changes in the industry I find this disappointing.
In the longer term, it will take one bold lender to rethink their distribution and pay the same procuration fees to all clubs or even pull away from clubs altogether.
It is true that lenders don't want to rock the boat while clubs give them high levels of business. My point is that if brokers are truly acting in the applicant's best interest, these lenders would get the broker's business in any case.
Brokers know the majority of lenders are having trouble servicing existing business levels. Why not stop the additional costs of mortgage clubs and channel the savings back into improving service and staff numbers for the benefit of the industry as a whole?
Clubs need to get their act together to survive. They add no value for brokers other than larger procuration fees, and with big compliance issues just around the corner, the industry is right to expect more.
David Copland is sales and marketing director of Pink Home Loans
With regulatory changes via CP121 and 146 set to have significant impact on the way intermediaries write business, mortgage clubs will not die out. They will simply have to adapt to the changing landscape, as they have always done.
Mortgage clubs were formed as a consequence of the introduction of centralised lenders such as Citibank, National Home Loans, HMC and TMC in the mid-1980s, who distributed their mortgage products through existing life companies and procuration fees were almost non-existent (unless you had a high street agency). At this time, free distribution was available to lenders as intermediaries earned their commissions from life protection products and savings plans such as endowments.
Perhaps as a result, life companies tended not to put a huge emphasis on mortgage expertise and their mortgage desks were often the haunts of the new recruit. This, in turn gave rise to small packager firms who offered such expertise. While many life companies were packaging mortgages at the time, this new competitive marketplace made them realise the value of distribution and many dropped packaging and the inherent costs in favour of receiving distribution fees.
This led to the beginning of what I would call 'pure' mortgage clubs from the mid-1990s, including Scottish Amicable, Legal & General and Norwich Union. DBS were also early players. Independent mortgage clubs soon followed. Players such as Mortgage Next and Pink Home Loans now have clubs writing several billions' worth of mortgage business. Sourcing systems are the latest entrants into this area of the market – the likes of Mortgage 2000 and Mortgage Link.
Mortgage clubs are responsible for a huge proportion of intermediary business, estimated at over 50% of this sector. No doubt regulation will drive change in this sector as many clubs currently operate an 'open distribution' policy. Networks and other organisations seeking to close distribution will present a serious threat to clubs. It is also common practise for dual registration to exist with many intermediaries going off-panel for better products or fees via a club. This practice will not be possible in the proposed regulatory environment.
In anticipation of these changes, several clubs are seeking alliances with other organisations such as IFA networks and life companies that face similar regulatory threats. Examples include Pink Home Loans and The Exchange and Mortgage Next and Axa Equity and Law. Building societies are also seeking opportunities to look after clients who may not be suitable for their own product ranges.
Smaller life companies, IFA networks and building societies that wish to follow recent successful business models to secure distribution have a choice of either building their own lender panels, involving the employment of additional resources to set up and manage new relationships, or to 'white-label' panels from existing clubs.