Three-quarters of the mortgage networks in business before the introduction of mortgage regulation are no longer with us today. This consolidation in our industry is poised to intensify even more – the pace of change shows no sign of stalling.
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Just two years ago when mortgage regulation was introduced there were in excess of 80 mortgage networks. Around 15 have survived and forecasts suggest that this number will halve with the remainder either merging, acquiring new business or folding. April’s network ranking reflects this shift with networks either growing or dropping their numbers of appointed representatives for Q1 2007. Pink Home Loans and The Mortgage Times Group are among the most recent to announce plans to double their size by the end of the year.
There are reasons why the survivors have managed to stand their ground. Consolidation is primarily driven by swings in the property market – and with the market so strong last year – management teams and boards of directors would have been unlikely to feel any great compulsion to reconsider their distribution strategy. This is further evidenced by those ailing financial planning so-called specialists who, failing to write sufficient protection and investment business, have switched their focus to mortgage advice in order to make a quick buck.
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Many have embraced the current climate and risen to the challenge of regulation.
Pre-regulation
Pre-regulation the market was complacent, offering brokers an abundance of choice. Now, two years down the line, the costs have started to bite. Networks have now had the chance to assess whether their models are profitable. Now there are only a handful of profitable and cutting edge networks and savvy brokers will be heading their way as a result of the changing market conditions.
Mortgage professionals view further consolidation as a positive development. Facing ever more competition, and fuelled by the shift towards e-transfer of money and data, experienced mortgage specialists agree that there needs to be further consolidation to achieve the scale and size to meet the investment and service challenges of running a first class network.
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Whether this will continue in 2007 as the housing market eases – who can say. But it is telling that in his closing comments, the outgoing chairman of the Building Societies Association told members that chairmen of societies are being educated in the governance issues around consolidation.
The current climate of consolidation has come about through the scramble for the most effective distribution channels from lenders – as well as economic factors such as the booming housing market, increased sales and values – which have contributed to a smaller number of firms dominating the market. Realistically speaking, only networks with 200 or more sellers can generate income and profitability to survive.
Market pressures
Why has the market consolidated and how does this affect the mortgage industry?
Consolidation doesn’t just stop at mortgages. The market pressures forcing mortgage networks to consolidate affect associated businesses such as life and insurance companies and lenders as well. They too will want to reduce costs; benefit from economies of scale, more technically literate networks and heightened professionalism. Fewer networks mean fewer companies and operating systems to deal with, while lower acquisition costs mean that economies of scale can be reinvested into improving technology, systems and products to benefit customers.
Two years ago, as mortgage regulation was introduced, there were more than 80 mortgage networks. Just 21 have survived.
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Pre-regulation, complacent distribution networks churned brokers as frequently as they rebroked their mortgage books. Today, mortgage distribution is a highly specialised discipline requiring considerable investment and expertise to meet the technological, regulatory and service standards of brokers and consumers. Economic factors such as the booming housing market and increased sales, dictate that only a small number of specialist distributors will dominate.
One of the main shifts we will see is that consolidation will bring about increased specialisation from providers. Assurance companies will focus on assurance. Product providers will focus on manufacturing. An example is Friends Provident, which has decided to focus on manufacturing. Likewise, SJP has decided to focus on wealth management.
Inevitable
While it was perhaps inevitable that some of the smaller networks would withdraw from the market – either because they had no appetite for a regulated regime or because they feared the additional costs of an increasingly specialised and more competitive market – the rapid pace of change in distribution, requiring scale as well as size, has come as a shock to those firms who thought distribution could be run easily alongside their primary business.
There are winners and losers. For those that have already folded, a common theme throughout is that their business model could not carry the additional costs of regulation. The majority have not prepared for it and have failed to understand efficient distribution and economies of scale.
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To stay ahead of the game, networks will have to make significant investments into new technology and training. Network’s systems have to be significantly superior to persuade the broker that they would be better as part of the network than going it alone.
Larger networks will only secure their futures by promoting greater professionalism and investing in their people.
Less choice?
Does network consolidation mean less choice for intermediaries and consumers?
Despite the critics warning of a huge reduction in choice for the consumer, I believe the reverse. Consolidation does not reduce numbers of providers and lenders in the industry; it reduces bureaucracy and red tape. Lenders would prefer to deal with one business representing 200 than deal with 200 individuals.
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More importantly, consumers will benefit from a more streamlined multi-tie arrangement which offers a slicker and safer sale. For many, the range of distribution channels available has proved a minefield with too many routes on offer. Consolidation means business will be more concentrated so that only a limited number of networks will be there to carry out the legwork for the consumer.
Consolidation will allow businesses to concentrate on what they understand. Customer service should improve, as the best brokers will be vying to work for bigger players who will focus on specialist areas. Fewer networks also means better support for brokers in terms of consistency, ‘Treating Customers Fairly’ systems in place as well as procedures for monitoring, training and compliance. This will relieve the admin burden for brokers and expose them to less risk.
Consolidation in mortgage distribution does not necessarily reduce the numbers of brokers, providers nor lenders in the industry. But I am convinced it will bring an end to single tie – an arrangement completely inappropriate for mortgage brokers who need to be able to offer customers something tangibly better than what is available from their local bank or building society – and reduce administration, bureaucracy and red tape.
Streamlined
Some brokers fear that fewer networks will result in a cartel-like approach to setting fees and commissions. I disagree. Good networks understand the benefits of sensible negotiations to underpin mutually beneficial business-to-business relationships. The better networks will use their proposition to attract brokers and retain business, offering absolute transparency in their contract dealings to enable brokers to walk away should the relationship prove unsatisfactory, rather than punitive restrictions.
Consumers will benefit because they will enjoy a more streamlined, timely, consistent and bespoke service from their brokers, made possible by the focus and specialisation of the distribution network.
Mortgage distribution consolidation and specialisation allows networks and brokers to concentrate on the business they understand.
To stay ahead of the game, networks will have to invest an enormous amount into new technology and training. Larger networks will only secure their futures by promoting greater professionalism and investing in their people. They will need to provide better technology and back up support than the broker can secure independently. Otherwise brokers might as well operate independently. Take successful businesses such as St James Place Capital wealth management and Positive Solutions technology based proposition, then you will see that these companies add value to mortgage intermediaries.
