Paul Brett is someone from Freehold
Hands up anyone who does not want to earn higher procuration fees for the mortgage business they write and get access to lenders which would not normally grant them individual agencies? There you have the raison d’étre for all mortgage clubs in a nutshell – namely the pooling of business from a wide range of intermediary sources through a central conduit (the mortgage club), which as a consequence, commands greater broker procuration fees and wider access to lenders.
Very few intermediaries have been immune to the logic of using mortgage clubs in the years since they came on the scene and the function they perform is, by almost universal agreement, one which serves the whole lending community extremely well. For lenders, in return for improving the standard procuration fees which would normally be paid, they can work with one source, which, while not controlling mortgage distribution, allows lenders to market products to a database of intermediaries to which they would not normally have access. For intermediaries, as we have seen, it is a no brainer. With no cost of entry or minimum requirements in terms of business targets to meet and for the extra work of simply ensuring the lender is aware that the business is coming through a mortgage club, the intermediary has an enhanced product portfolio to show his client and is better rewarded, in the main, than if he had been able to go direct to the same lenders.
Perhaps it is too easy too oversimplify what mortgage clubs are and it would probably bear looking at the evolution of the breed and the changes that have taken place. The mortgage club of today is a far more sophisticated beast than its forbears.
History
Back in the mid 1980s, on the back of the sale of endowment policies, life offices were the first mortgage packagers and working closely with the new centralised lenders, carried out the administration function of putting together ‘packaged’ application forms as well as the distribution of lender products through their own national sales teams. The decline in the popularity of endowment business coupled with the property market crash of the early 90s, resulted in life offices terminating the administration functions of their mortgage desks while, in many instances, retaining the facility to be a conduit through which lenders would want to market products. Life offices still represented huge opportunities for lenders to market products and so the mortgage club was born. Many life offices like Legal & General and Scottish Amicable went down this path.
As the packaging of mortgages moved away from life offices and into the hands of entrepreneurial intermediaries, the new mortgage clubs allowed intermediaries to access non-packaged lenders across the whole mortgage spectrum. The basic blueprint for mortgage clubs was established and the basic service has changed very little. The application of a sticker to an application form, ensuring the lender was aware that the application came from a particular source, was all an intermediary had to do to benefit from using the mortgage club. The ‘sticker’ culture survives to this day, but the simplicity of the basic model was a great success, demonstrating that there could be a win-win scenario for all parties in the transaction.
As the second anniversary of formal mortgage regulation hovers into view, the healthy position of today’s mortgage clubs was not reflected in the views of many pundits who believed independent mortgage clubs would find it hard to survive in a post-regulation world dominated by large networks of appointed representatives (ARs). There was also the question of whether there might be a regulatory issue. However it became clear that mortgage clubs did not engage in direct communication with the actual borrowers and therefore did not carry on any regulated mortgage activity. As their main purpose is the provision of information and products exclusively for the use of intermediaries, they were never going to be in a position to need to be regulated as the relationship was always with the intermediary and never with the borrower.
In terms of the perceived AR dominance of mortgage distribution after ‘Mortgage Day’, as we know, this turned out very differently. The expected numbers of ARs never materialised and contrary to the wisdom of the day, healthy numbers of intermediaries both large and small opted for direct authorisation (DA). When added to the large directly authorised IFA community, who are mortgage orientated, the mortgage clubs not only managed to survive but also flourish in the post-regulation world.
Favouring ARs over DAs?
The only real fly in the ointment is the differing treatment of mortgage clubs and networks by some lenders when it comes to the level of procuration fees they pay. Evidence suggests that lenders favour AR networks over independent mortgage clubs in this way. One of the arguments put forward for this anomaly is that lenders believe that they are better protected in a regulated environment by dealing with networks, who control the compliance risk for their members, rather than independently DA intermediaries reaching them through an independent mortgage club. Hence they are prepared to pay more for this ‘extra’ security. In real terms, the percentage differences paid on these fees are not great, particularly on prime business, and no doubt this anomaly will disappear as lenders recognise the difference in regulatory risk of dealing with ARs rather than DA intermediaries is minimal.
While it is still early days, the DA community of intermediaries is a vibrant marketplace and continues to grow as more intermediaries find that AR status was not what they expected. Mortgage clubs have been keen to show their support for the DA market, with John Malone at PMS and Nick Baxter at Mortgage Promotions particularly vocal in their support of the DA option for intermediaries in the run up to ‘Mortgage Day’. Their main contention was that DA was the best option in terms of allowing intermediaries the freedom of choice, which is so important to controlling a mortgage business. Intermediaries were wrong to believe that the weight of the compliance burden would be too great and that compliance support could be found at a price that would allow them to confidently opt for DA status.
As it transpired, more intermediaries opted for DA status than AR and the mortgage clubs have been quick to add new services such as compliance services to meet the growing demand from DA brokers to be able to compete with their AR counterparts. So apart from the core offering of access to lenders and higher procuration fees, the growth in services has included compliance support, which can cover anything from the provision of a compliance manual for the business to training and competence manuals and regular visits to prepare for Financial Sevices Authority (FSA) inspections as well as screening of advertising and promotional material. Other services include access to exclusive products and research facilities, as well as cut price offers for mortgage sourcing systems as well as administration and conveyancing services. Access to facilities to offer home and contents, mortgage protection and life term assurance are also available.
Fulfilling an important market role
According to Baxter, one of the key roles of mortgage clubs is assisting them to remain DA. “Mortgage clubs like ours are in the best position to help DA intermediaries to stay out of the AR envelope by offering them the best services. Our success will be measured by the number of intermediaries who not only remain DA but also by the numbers who decide to move away from their existing AR status to become DA.”
The future looks good for mortgage clubs. They continue to fulfill an important role in the mortgage chain in providing distribution opportunities for service providers by bringing together intermediaries into groups which are attractive to lenders. At the same time, mortgage clubs give brokers access to better services, products and procuration fees. The key to future success is the consolidation of that role and the constant affirmation of value to lenders and service providers on one side and on the other to engage with intermediaries to support them with the range and quality of services to enable them to develop their business better than their AR counterparts.
