Are brokers paid high enough proc fees?

Mortgage lenders are being urged to review the procuration fees they pay brokers, with some advisers saying they are effectively losing money on the business they do - particularly for product transfers.

The call for action on the commissions paid follows a decision by longer-term lender April Mortgages to respond to broker feedback and simplify its procuration fee structure.

Brokers will now receive an initial procurement fee of 45bps at completion, plus an additional 30bps on every fifth anniversary of the mortgage, for the remainder of the fixed term, said April Mortgages. They will receive an initial procuration fee plus one additional 30bps payment for a 10-year fix, or two additional 30bps payments for a 15-year fix. It has also launched a simplified procuration fee rate of 45bps for both product transfers and further advances.

“We are passionate about making the mortgage market more simple,” said James Pagan (pictured left), its director of product & portfolio management. “We want brokers to feel the same peace of mind and security from a longer-term fixed rate as their clients.”

Why should lenders pay greater procuration fees to brokers?

Broker Gindy Mathoon, from Create Finance has called for a review of the procuration fees paid by lenders, pointing out that product transfers have become ‘bread and butter’ business for advisers in recent years, due to the circumstances of a large number of clients. The amount of work involved is not inconsiderable, he suggested.

“Although the application process may be easier, our regulatory requirements aren’t too dissimilar to a new mortgage application with another lender,” said Mathoon (pictured second from left). “Our advice has to be justified and documented and client documentation needs to be added to their file.”

Mathoon believes the gap between the different fees paid by lenders for a product transfer needs to be narrowed – some pay 0.2% and others, 0.35%, he said.

“For every £100,000 of borrowed, that’s £150 a broker loses,” he noted. “If, let’s say, an established broker completes 30 product transfers on the lower proc fee, that’s £4,500 of gross income they are worse off per year compared to the higher figure. A review is needed around this.”

Samuel Gee, an independent financial adviser at Manning Gee Investments, supports a call for lenders to rethink their fees.

“Now that interest rates are back to longer-term levels it would be a good time for lenders to overhaul a system which better reflects the value brokers bring, while still offering value to clients in a transparent and fair manner,” said Gee.

He emphasised that procuration fees essentially cover the costs of brokers packaging cases to the lenders’ requirements.

“The cost savings to lenders for this is significant,” Gee commented, “some lenders having much more customer due diligence requirements than others. In many cases this does not cover the packaging costs that brokers incur, without considering the advice liability, which is often charged to clients directly via a separate broker fee.”

He sounded a note of caution, however, about April Mortgages’ fee structure.

“Ongoing proc fees every five years can only be justified if the broker provides ongoing support or service to the client, such as reviewing the mortgage deal periodically or advising on product transfers and further advances,” Gee said.

“If the broker’s role is passive after the initial sale, the additional payments may raise concerns about fairness. If these ongoing payments reflect the liability brokers hold and the advisory oversight they continue to offer, then there may be a stronger case for them, but automatic payments by default would be seen by us as a business risk.”

For Helen MacKenzie, consultant at MacKenzie Mortgages, her location near Inverness in Scotland, has a bearing on what she earns, because of the way procuration fees are paid.

“House prices are generally lower in my area, compared to other parts of the UK, and this usually means mortgage borrowing is lower,” explained MacKenzie (pictured second from right). “Therefore, the procuration fee paid by the lender is lower. I still offer the same service as other mortgage brokers in the UK, but because I live and work in an area with lower house prices, my income is lower overall for providing the same service. 

“It would be helpful to see how lenders could address this in some way to make procuration fees fairer for all brokers.”

MacKenzie is encouraged by April Mortgages’ commitment to providing brokers with an additional payment for longer term mortgages, which she believes can only be positive for brokers.

“As we continue to have more and more processing requirements,” she said, “this will only help brokers’ longer term income, which they currently do not receive from other lenders who offer 10-year fixed rate mortgages.”

Read more: Coventry to pay proc fees on further advances

Will other lenders review their procuration fees?

April Mortgages’ revised fees were welcomed, too, by Colin Baxter, mortgage and protection adviser at Mortgages in Lincoln, but he doubted other lenders would follow suit.

“I think that the new range of proc fees from April are more realistic, and reflect the fact that mortgage sourcing and submission is more complex than it has ever been,” said Baxter (pictured right). “It would be good if other lenders followed their lead, although I’m sure that they will contend that the market is too competitive for any alterations.”

Michelle Lawson, mortgage adviser and director at Lawson Financial meanwhile commented: “I think April’s is a great model- we introduce the business to the lender ,we should get paid - and fairly paid. Mortgages are getting more complex and more demanding, with more time spent on researching, processing and administering now. Proc fees for both new business and PTs haven’t changed with the times or inflation for years, so really do need to be reviewed to ensure we are fairly paid for the work we do.”

For Stephen Perkins, managing director at brokerage Yellow Brick Mortgages, one of the major challenges April Mortgages faces in getting brokers onside is what he perceives as the potential loss of repeat income over the term of the mortgage, from remortgages every two to five years, when recommending a long term 10-15 year product.

“It’s refreshing the lender consulted and listened to brokers ahead of launching their new structure,” Perkins said. “Proc fees in general haven’t been reviewed by many lenders in a long time - and given all the extra work In growing regulations and circa 80% of applications now via brokers. Product transfers in particular need uplifting given the workload is very similar to a remortgage now. April’s initial 0.45% is encouraging.”

Some other lenders have previously addressed the issue. Family Building Society, for example, last year announced an increase to the commission it paid brokers for mortgage product transfers, to match the procuration fees paid for new business purchases and remortgages - 0.40% for owner-occupier mortgages and 0.50% for buy-to-let mortgages.

“We’ve appreciated the hard work that intermediaries have had to do in this ever changing interest rate environment,” said Darren Deacon, its head of intermediary sales. “In the wake of Consumer Duty, the advice process that intermediaries have had to follow for arranging a product transfer is very similar to arranging a new mortgage.

“Broker feedback has been very positive and many have said that they wish other lenders would adopt a similar approach.”