Mortgage networks have, since ‘Mortgage Day’, become a significant force within the UK mortgage market.
However, there continues to be debate about just how important networks are. Some argue that they not only provide a cost-effective way for smaller firms to ensure their activities remain fully compliant, but that they are also an effective conduit through which the Financial Services Authority (FSA) can regulate the activities of thousands of small firms
It is, after all, far easier for the regulator to monitor the activities of a few dozen networks, rather than try to keep an eye on thousands of individual mortgage intermediaries.
Others argue that network operations are an expensive luxury and that mortgage intermediaries are far better opting for direct authorisation (DA) with the regulator itself, which not only gives them greater freedom over their own business and marketing activities, but will probably result in a ‘lighter regulatory touch’ from the FSA.
Establishing the facts
So who is right? Perhaps a good starting point is to establish the facts. At the beginning of October this year, the FSA register showed there were 3,251 appointed representative (AR) firms belonging to mortgage networks. This number includes all firms registered to conduct mortgage and insurance business, but not those registered for investment business. It does not, therefore, include IFA networks such as Sesame and Openwork. If these firms are added into the equation the numbers increase dramatically, as firms such as Sesame have just under 2,000 member firms and Openwork has more than 900.
The specialist mortgage networks have been growing by a rate of just over 3 per cent over the past quarter. Not meteoric growth, but growth none the less. There has also been some inevitable consolidation taking place, with the likes of GHL Group acquiring Classic Network Solutions and Manchester acquiring the Professional Mortgage Packagers Network, which will be integrated under the Mortgage Broking Services brand.
Will consolidation continue to take place and is that an indicator of tougher times ahead for networks? It is inevitable that a number of firms will continue to merge to benefit from economies of scale, but I don’t foresee wholesale changes in the sector and neither do I predict a significant reduction in the total number of ARs. On the contrary, I believe we are about to move into a period in which the total number of ARs will grow, as more intermediaries recognise the real value of network membership.
Optimism
My optimism is fuelled by a number of factors. Firstly, I have seen strong evidence in recent months that an increasing number of DA brokers are starting to realise the vulnerability of their solitary existence. Compliance comes at a cost whether brokers are ARs or DA, but for DAs the cost can be counted not only financially, but also in terms of that most precious of commodities – time. In a market in which the emphasis is going to be on generating new business, many intermediaries are starting to realise that their time is best allocated to marketing rather than compliance activities.
Mortgage myth
The idea that DA brokers receive a lighter regulatory touch from the FSA is also starting to be exposed as something of a myth. Although the FSA did focus its attention on larger financial institutions in the period immediately following ‘Mortgage Day’, this does not mean that DA brokers have slipped off the FSA’s radar screen. The FSA has made it very clear that it will be monitoring the activities of small intermediaries very closely in future and, unfortunately, several of the reports issued by the FSA during the past year shows that it has good grounds for doing so.
It also seems inevitable that with a number of television and radio investigations unearthing bad practices among brokers, the regulator is going to be watching carefully for further evidence of non-compliance. Recent fines and closures show that the regulator is not only willing to bare its teeth, but to also bite.
No time to relax
However, none of this means that networks can simply sit back and wait for a flood of new membership applications. To attract new ARs into the fold, networks not only have to be able to demonstrate that they can provide excellent compliance support, but that they can also go beyond their regulatory brief and provide additional added value services. Understandably, in today’s market, brokers are looking for practical support to help them build their businesses and generate new enquiries and the better mortgage networks are able to deliver against these needs.
Any network which opened its doors for business on ‘Mortgage Day’ expecting to make big profits quickly, must be bitterly disappointed. Being a network principal is a long-term game which requires significant investment on an ongoing basis.
Some networks are fortunate in having sound financial backing from larger institutions, which means they can continue to invest in technology developments which may simply be too expensive for those networks which do not have corporate backing. The need to control costs will most certainly be a key factor in any future mergers which are announced.
Technology will also become a key factor in network’s future success. Technology not only enables networks to remotely carry out compliance activities, but it also improves efficiency and drives down costs. For example, compliance software enables networks to assess mortgage applications by taking a dynamic, risk-based approach and it removes the need for audits to be carried out by requesting old-fashioned paper-based files from members.
What about the non-compliance added value services which brokers are expecting their networks to deliver? Perhaps the most obvious is support with new business generation. Brokers are looking to their networks to recommend pre-vetted lead generation companies and even deliver leads themselves.
Intermediaries are also looking for help to drive up the levels of income being generated from each mortgage sale. On average, brokers are generating approximately £700 to £800 per mortgage and yet there is scope to increase this amount considerably, via the sale of associated products such as life, protection, conveyancing and Home Information Pack services. Networks are developing support services to enable members to increase protection sales with the minimum of additional work.
Important interface
Mortgage networks are an important interface between the FSA and their members. Networks have senior level access to the FSA and can therefore gauge which issues are most pressing at any particular moment. Today, for example, ‘Treating Customers Fairly’ (TCF) is high on the FSA’s agenda and 2008 will be the year in which mortgage intermediaries and lenders must categorically prove they have robust TCF processes in place.
TCF is fundamental to the FSA’s approach and brokers therefore have no option but to fully implement the requirements of TCF into their businesses. The FSA’s recent report on TCF demonstrated that there are still a fair few intermediaries who are behind schedule and need to get up to speed.
TCF is a long-term programme which is here to stay and brokers need to come to terms with its requirements sooner rather than later. For example, brokers cannot simply say they treat their customers fairly; the FSA will ask them to prove it.
The FSA will also ask brokers to show that not only do they maintain a complaints register, but that they have taken constructive actions in the light of any complaints they may have received. Documentary evidence is critical in being able to prove good compliance and networks are able to help their members address these types of issues.
Neither boom or bust
Is this a boom or bust time for networks? Probably neither. My best guess is that we will continue to see steady growth among networks as an increasing number of smaller firms recognise the benefits that are on offer by belonging to an organisation which can provide comprehensive compliance and business development support.
The key issue isn’t whether AR or DA status is best, because both have their merits depending on the needs of an individual firm. The key issue is that if a broker decides to become an AR, he or she wants to join a network with confidence that they have the skills and resources to provide a high level of support both now and in the future.
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