Weakening links

With mergers and collapses, the mortgage network landscape is changing fast and the long-term success of the concept remains in doubt, says Rob Clifford

Unbelievably, a whole year has passed since the mortgage market was transformed by Financial Services Authority regulation. This is a convenient milestone from which to look back and assess its impact.

The dust from Mortgage Conduct Of Business and Insurance Conduct Of Business rules has settled, making it easier to assess the pros and cons of the two regulatory routes, to become directly authorised or an appointed representative.

In the lead-up to Mortgage Day a host of predictions were being bandied about the industry. One of the more gloomy was that up to 80% of mortgage brokers would opt for the AR route. This failed to materialise. According to the Association of Mortgage Intermediaries the percentage of brokers that ultimately joined a network was between 30% and 40%.

Many of these brokers have been satisfied with their choice of direction as well as network. They have enjoyed wider access to exclusive mortgage and insurance products, potentially higher procuration fees and above all the shelter that a network can provide.

Nigel Hoath, principal of IFA Hoath Independent, is happy with his decision to join Sesame. “The buying power the network provides means we get better deals than we could on our own,” he says. “So effectively the other benefits you get as a member of the network are free.”

The fact that compliance is outsourced also means that the firm’s 14 advisers can concentrate more on the advising part of the job, he adds.

But plenty of ARs have not been satisfied and decided to walk away from their chosen networks. A lot of us know this is not a new phenomenon. When the IFA network movement first evolved in the early 1990s, droves of IFAs joined but subsequently left. This placed a question mark over the suitability of a network as the optimal home for a broker, and 15 years on it is still hanging there.

So why are ARs jumping off the network bandwagon this time? First, the past year has been a steep learning curve for advisers, especially mortgage brokers unaccustomed to regulation. Many realised direct authorisation is no more onerous than being an AR.

Harry Katz, principal of IFA Norwest Consultants has always been directly authorised. “Some mortgage brokers were initially scared stiff of the FSA,” he says. “But it is actually more user friendly than the MCCB. The MCCB was intransigent – it was like dealing with a traffic warden.”

As a former director of the MCCB, I have to disagree, but show my objectivity by quoting this IFA’s view.

UAs well as rising confidence, rising membership costs are also driving ARs to leave the shelter of their networks and take the DA route.

The network-sceptic managing director of Premier Mortgage Service, John Malone, says networks have had to raise their fees as the costs of retaining business are greater than they anticipated. He claims this is mainly attributable to the cost of a network’s litigious responsibility.

“Why do networks think they can control their members?” he says. “An AR has his own business, he is not an employee of the network yet the cost of whatever he does falls to the network. I don’t think principals setting up networks a year ago realised the full implications of this.”

These higher than expected costs, combined with poor cashflow as a result of a stagnant housing market, have led to a dwindling of numbers in the network sector. Some such as Genesis Homeloans and Guaranteed Homeloans, have merged. Others such as Optoma Interpartners sold on their AR client base for a song. And more still, such as Members Mortgages, TMO and The Mortgage Union chose to simply get out as presumably their strategies failed. Of the 50 networks that existed before M-Day, just 12 of significant size remain.

But Ben Stafford, head of policy at AMI, believes consolidation and a revision of the market was inevitable in the first year.

“FSA regulation is not easy to implement and networks are realising that,” he says. “There are plenty of networks left and no sign of an epidemic of ARs leaving them. Some brokers have left networks but others have joined.”

Indeed, Complete Mortgage & Loan Services – a network ranked 14th in size – has enjoyed a successful first year. “We lost one AR who decided to become DA and we had to get rid of one for breach of compliance rules,” says compliance director Bill Warren. “But we are in the process of welcoming other AR firms on board.”

CMLS has also retained its original fee structure, though Warren admits this is likely to rise next year.

So a year after regulation some networks seem to be working. But this can only be sustained if the correct compliance procedures are filtering through from networks to ARs. And according to the FSA, that has been conducting random but regionally focussed monitoring of networks since the summer, in many cases this is not happening. In a speech last month to the Chartered Insurance Institute, FSA managing director for retail markets, Clive Briault, said, “We are concluding from our work in progress that many firms do not have sufficient systems and controls in place to monitor their ARs adequately.”

Briault pointed to a lack of compliance resource, insufficient desk checks and a lack of field visits as some of the prime areas for concern. Although the FSA will not state which networks have undergone monitoring, spokes-man Robin Gordon-Walker confirms nearly all are at the larger end of the market, “probably with upward of 100 ARs.”

Some envisage the survival of just six networks. But if these giants are simply too big to keep in touch with members there is a danger regulatory standards may not be met – in other words we’d be back to square one.

But Hoath’s experience as a Sesame member does not support this forecast. “We get around two visits a month from Sesame and are offered support and training,” he says. “If any networks won’t work it will be the ones that set up after regulation.”

Larger networks and franchises like Sesame and mortgageforce already had years of experience under their belt.

But even the networks that come up to scratch in the eyes of the FSA may be missing a trick when it comes to what’s best for their members, as none offer a single consumer brand. Having a network of franchisees offers safety in numbers but delivers national recognition. Much like a mortgage network, a franchisee owns the equity in their business but benefits from all a parent company offers such as training, compliance and software. Also, the firm receives national brand building and lead generation.

In turn, there is accelerated capital appreciation for franchise owners.

“The power of today’s consumer is immeasurable so the significance of a consumer brand in the sort of market in which we are dealing is huge,” says Duncan Pownall, mortgage development manager for Bradford & Bingley. “Not only will a strong and familiar brand attract the customer initially, but they will also feel confident the firm will provide recompense should they need it.”

Perhaps this is a consideration for the future. After all, we are just one year clear of the advent of statutory mortgage regulation and have plenty of challenges ahead.

In the fairly short term we are likely to see the last of the M-Day fallout settle. In terms of networks, this means further consolidation, mergers, acquisitions of ARs and some more closedowns.

And in terms of advisers, the undecided will finally make up their minds. It is likely that those who choose to stick with a network will be the one or two-man bands that would benefit most from the protection and peace of mind the right network can offer and don’t mind a prescriptive regime.

But then there will be those who remain unperturbed by the changing landscape, digging their heels in for direct authorisation. Katz is one example. “I won’t join a network or become an AR,” he says. “I want to be free to do my own thing and I don’t want to outsource my compliance to someone who might know less about it than me.”

Have networks worked? One year on, and despite the amazing pace of the sector, the jury is still out.

Rob Clifford is managing director of mortgageforce