It’s almost time to draw a curtain on 2008 and for the majority of the industry it is a welcome relief to put the events of the year firmly behind them and to be able to look forward to 2009 with a glimmer of optimism.
In terms of distribution 2008 certainly turned out to be a tumultuous year for various channels and the fall-out is still being felt by a number of packagers and networks as credit issues remain an extremely prominent and industry-wide problem.
When reviewing distribution over the past year the first ‘major’ event took place back in February when the Treasury confirmed that Northern Rock was to be nationalised. The move followed advice from investment bank Goldman Sachs, which concluded that a temporary period of public ownership was the best match for the Government’s objective of protecting taxpayers.
This decision created a general feeling of uneasiness in the market which certainly worsened by Northern Rock’s move to have a ‘much smaller presence in the intermediary market, concentrating on its most important partners.’
Outlining the future direction for the troubled bank, Ron Sandler, executive chairman at Northern Rock, said an active mortgage redemption programme would be established to downsize the balance sheet and repay Government loans, while protecting the quality of the mortgage book.
Unforgettable
It is difficult to forget the images both in print and broadcast of the queues and general consumer panic outside the branches of Northern Rock and these images certainly resulted in the first real signs of consumer confidence draining from the market.
Other lenders also had to come to terms with market conditions and how issues were impacting on their business models and plans for 2008. Caution became evident and increasingly widespread in the marketplace as many lenders began to cut back on marketing, exclusive products and began to streamline elements of their business.
2008 lending targets were understandably lowered with some lenders reducing the amount of organisations that could distribute their products by restricting panels. Lenders that were being overwhelmed with applications even had to take the decision to stem their volumes as they were no longer able to manage business levels. A good example of such a case was the Woolwich when it made the decision not to accept any new directly authorised (DA) broker registrations in March.
This decision lasted until the beginning of October when we saw the welcomed reopening of its registration service for new brokers after sufficient implementation of service improvements including better alignment of the needs of brokers and the skills of Woolwich employees.
No easy answers
This period of Spring/early Summer proved that there were no easy answers to lending dilemmas and as a result distribution became a minefield with lenders constantly changing criteria and pulling products which resulted in widespread confusion regarding product availability and which distribution channels to use.
This gave rise to the ‘hot topic’ of duel pricing. Now this issue isn’t a new and sudden innovation to the mortgage market but noticeably more intermediary focused lenders started trying to maximise their mortgage allocation through their own branches and going directly to the consumer. This upset many intermediaries who stood up and suggested that this was foul of ‘Treating Customers Fairly’ principles.
However, when addressing delegates at the Building Societies Association annual conference in Manchester in May, Hector Sants, chief executive of the FSA, said many intermediaries had contacted the regulator to query how cheaper direct prices not available through brokers could be treating customers fairly, but argued that lenders had no obligation to use advisers. He said: "There have always been certain lenders who choose not to offer their products through brokers, and others who differentiate pricing depending on the channel. If certain lenders decide to offer their direct customers cheaper deals, we do not see that customers' best interests would be served by preventing this."
This statement angered intermediaries further and the debate raged. As with anything there are usually two side to the story. There is the view that those lenders operating a dual pricing policy are doing so out of necessity, because they just do not have the money to lend and have to make sure they are not flooded with applications they cannot deal with. The alternative view is that they are using the liquidity crisis as a blind to deliberately push brokers out of the door.
Reality
The reality is that lenders of all sizes are feeling the pinch and just did not, and still do not, have the money to lend at levels of the vast number and range of products the industry has come to expect over previous years. In a commercial sense lenders are having to do what they believe is correct and while it is difficult for intermediaries to swallow I’m sure that when credit returns, products will also return and lenders will still need intermediaries and intermediaries will still be bound by TCF to recommend them. Some brokers even went as far as vowing never to use certain lenders again but that was an unrealistic threat given market conditions. Some sourcing systems advertised their possible solution to this dual pricing issue by including high street products on their system but whilst I am not sure if this appeased brokers, at least gave some degree of encouragement.
Dual pricing continued to be a major talking point as the Northern Rock episode died down but in a positive development the number of lenders/products available only to branches started to reduce towards the Summer/Autumn.
In the meantime lender caution had become even stronger as it became obvious that the issues concerning the global credit market were far more deep-rooted than it was first thought. As these concerns grew lenders moved to reduce loan-to-values and tightened criteria even further.
This increased ‘caution’ and the uncertainty over how long credit issues would continue led to growing concerns by brokers and distributors over the affects it was having on their business models.
Diversification
Alarm bells really began to ring as it soon became apparent that many brokers/distribution companies found themselves living off the pipeline of business from earlier in the year as more cases were completing than new applications were being taken. Clearly firms had to react and, as is usual practice when business levels are consistently falling, many started to reduce staffing levels and look at cutting other expenditure.
Diversification became the buzz word of the early Summer and alternative revenue streams were having to be increasingly scrutinised and a raft of training seminars ensued to help brokers to cross sell other financial services products on the back of each mortgage transaction.
Brokers also began to look very closely at shifting to a fee-charging model and in some market areas/locations this proved possible but not for all. Brokers still need to look forward and try to evaluate how their business model will sit if there is a further shift in lender attitudes to the payment of procuration fees. This means that directly authorised intermediaries who may have previously discounted the option of moving to a fee charging business model, should undertake a proper evaluation of this option and it should not be dismissed out of hand. Brokers need to take the time to research how this will affect their clients and their business. It is an area that must not be ignored in the current climate and for forward thinking brokers it is one that has been looked at thoroughly and in some cases business models shifted accordingly.
Matters started to take an even more serious undertone as the Summer months came to an end when more bad news filtered through from the US and rumours circulated about HBOS. B&B, A&L etc. The events that followed proved to many just what a mess the market was in.
Government intervention was called for and steps were taken to try and assist albeit very slowly and questions posed over whether the government really understands the depth of the issues and what needs to be done to solve it? This brought with it numerous national front page headlines as consumer confidence took another sharp fall. Although, despite concerns from some areas, the acknowledgement of the seriousness of these issues and the world government interventions just may have given the intermediary market some degree of hope for the future.
AR or DA?
2008 has also given rise to the perennial debate revolving around whether brokers should be Appointed Representatives or Directly Authorised by the FSA. If anything market and monetary issues may have made some brokers speed up their choice as to the best route they wish to take rather than waiting any longer for the market to naturally help them decide.
Brokers have had to make a number of difficult choices this year. Many have responded by embracing diversification and moved successfully into opening up revenue streams in new markets but to the same extent some have, allegedly, even started to take part time jobs to supplement their incomes. Unfortunate closures of intermediary firms continued and the estate agency market has taken a massive hit as house sales plummeted and repossessions started to increase.
Some lenders and distribution companies posted profit warnings and indeed have now sadly closed/gone into liquidation. In particular the packager market has been affected due to the very few number of lenders now active in the sub-prime and specialist markets. This also has affected the Second Charge market in a similar way.
Choosing stable business partners is therefore becoming more problematic for the intermediary market. Successful companies may well survive if they have the right amount of tight control and are well capitalises and are fully compliant. There has been a general flight to quality for organisations and the end of cheap and cheerful deals just to hit targets.
Looking to the future forward thinking brokers have already assessed the potential impacts of charging under the Retail Distribution Review and any European directives. At TMA we have also started to hear of brokers extending their FSA permissions to be able to advise and sell investment products and become IFAs. At the same time, lenders are also talking about brokers promoting their savings products to boost the much needed retail deposit stream as wholesale markets were as good as ‘closed for business’.
All in all 2008 has proved a massive challenge for all corners of the market and 2009, initially at least, looks likely to provide more of the same. However, looking on the brightside there are still opportunities out there, but we will all have to work that bit harder and smarter to find them.
