Whichever branch of the economy you work in, you will always come across the struggle between competition and monopolisation. If you take an example as simple as a loaf of bread, there are the two competing factors which can help dictate what price you pay for it. It can be argued that lots of competition means that you get the best possible price as the stores are competing against each other for your business. On the other hand, one dominant outlet means it could get a better deal from the suppliers, thereby giving you a cheaper price that way.
The mortgage world is also a competition between these two arguments and none more so in how a broker earns his crust as either a directly authorised (DA) intermediary or an appointed representative (AR). Whichever route he or she takes, they will have various arguments as to why that decision was made. One of the principle factors behind being an AR is the assistance with compliance. Since the advent of regulation two years ago, compliance has loomed ever larger as a guiding force for the industry and many have gone down the AR route.
However, while compliance has had an impact on network numbers in the last biennial, another story has been brewing along which, upon reaching boiling point, will have a major impact on the network landscape – the issue of consolidation. While it may be different to the bread analogy, the network issue displays many of the same traits and demands the same intense rivalry as to whether few or many is better for the industry.
Maintaining independence
Richard Griffiths, managing director at Network Data, says: “I’ve always believed the AR route is best for one and two-man bands as you’ve got the economies of scale. For two years now, I’ve predicted there will be less than a dozen networks.”
Despite these predictions by Griffiths and many others within the industry, networks continue to maintain their independence, with 2006 actually seeing a net increase of one as Premier Network Partnership came into the market. Therefore, will these predictions come true this time around or will the landscape of 2008 resemble the one currently in front of our very eyes?
Richard Coulsen, chief executive at Home of Choice, believes this will be the year of consolidation. He says: “I think the number of networks will be down to single figures this year. There are 25 now and this will definitely be down by the end of the year, maybe in half a year, via consolidation. Unless you’ve got 200 or 300-plus sellers in the network then you are not geared up for a change to a testing economic climate. You look at the number of networks that are nowhere near that size and they will be looking at a merger.”
Mergers
This already seems on the cards as a number of the larger networks have admitted they have been enquiring about buying other firms out. Home of Choice has said it will be making two announcements in 2007, while others have commented on their talks with other companies.
Justine Tomlinson, marketing manager at Mortgage Next, says: “A number of networks need to grow so merging can be the best route. There are also smaller networks who can’t sustain themselves so they are also looking at consolidation but they are holding out for the best bid. There have been conversations between the networks but firms are holding out at the moment.”
This view is echoed by Griffiths, who says: “Over Christmas we were talking to smaller networks and offering to buy their ARs. They said they were making a small profit and that they were happy with that.”
Therefore, despite little definitive movement happening at the minute, it seems the larger networks have an appetite for growth through acquisition. This might mean that the predicted consolidation may finally be on the cards.
John Smith, sales and marketing director at GHL Group, a firm formed by the merger in November 2005 of Genesis Home Loans and Guaranteed Home Loans, believes cheque book power could hold sway in 2007.
“There are several pressures that continue to fuel consolidation throughout 2007, with the housing market being the obvious one. Other pressures may include implementing and maintaining principles-based regulation along with embracing and embedding ‘Treating Customers Fairly’. The cost base of compliance for many networks without the all important critical mass may simply be too high and these networks may succumb to other competitors with a cheque book to utilise.”
The conclusion that seems to be materialising though is one of a marketplace with fewer, but larger players. The starting pistol has been fired and many firms are ready to hand over the baton to those willing to accept a cheque in return. While the larger networks are still talking in terms of critical mass and increasing numbers, it seems they are now ready to put their money where their mouths are and while the die has not been cast, change seems afoot.
