Paul Shearman is mortgage proposition director at Openwork
The mortgage market in the UK is vast, with over 100 lenders and thousands of products available to the average mortgage broker. With 20 new lenders appearing this year alone, the market looks set to grow and grow.
While more providers should ultimately be good news for brokers and indeed consumers, with increased competition, better procuration fees, more competitive rates and better service, there will also inevitably be disruption as companies fall by the wayside in the coming months. The breadth and depth of the market also provides some interesting dilemmas for networks and clubs when deciding on panel composition.
So, which is more effective – a broad or a narrow panel? What types of lenders should you include? How do you drive value from them? And as a broker, what are the advantages of joining a network/club with a broad versus a tight panel?
No ‘correct’ number
Needless to say there are advantages and disadvantages of both broad and narrow panels and I doubt that there is a ‘correct number’ given how networks and clubs differ in size, geographical distribution and business mix. Two years ago, Openwork was debating its panel, and I was adamant that we should seek to rationalise the number of lenders we worked with in order to drive deeper relationships with a smaller number of providers. In reality, the Openwork panel has increased. This has been driven by the quality of proposition available from some recent joiners and by the fact that a number of lenders on panel, who were not performing, have come up with the goods.
Arguably the primary benefit of a tight lending panel is the value of the relationships you can establish with lenders. If you are providing lenders with a substantial and consistent income stream they will work harder for you. A tight panel should mean tight controls in terms of service relationships and regulation. The fewer lenders you deal with, the more power you have to drive exclusives and bespoke service propositions.
Given that for the majority of brokers, service is the key element in a provider’s proposition, good relationships and guaranteed service can prove invaluable. A lender may offer the cheapest rate in the universe but if the wheels fall off the service truck, customers can lose houses, and thus brokers not only lose sales but damage valuable client relationships. In this respect a tight panel can really pay off.
However too small a panel can be restrictive. A broker looking to diversify into buy-to-let might not be able to with a network/club that only has links with 10 lenders, meaning that growing and diversifying business may be a problem for some brokers. In the same vein, no broker wants to turn business away so if you don’t have access to a non-conforming lender or lenders that are more flexible about affordability as opposed to income multiples, your brokers could be losing valuable business. Regardless of the size of your panel it is imperative that you are flexible, aware of market changes and able to add or indeed subtract from your panel as and when you need to.
Alongside this is the issue of adviser perceptions; too tight a panel and advisers will inevitably lose a larger proportion of business to competitors. Given that too tight a panel can be restrictive for advisers and thus a network’s business, is the answer a broad panel?
A wider panel
A broad lending panel again brings both benefits and problems, in the same way that too small a panel can be restrictive, too broad a panel can often be not restrictive enough, with individual mortgage intermediaries not being important enough to one particular lender.
Another consideration is about product knowledge. Clearly as lending panel size widens, the potential exists for the adviser not to understand the individual lenders’ products in detail. This is particularly true as the market segments and mortgage intermediaries increasingly operate in specialist segments. Deeper market knowledge is particularly attractive to those lenders delivering distinctive products that need additional and detailed explanation with the client.
Another downside of a large panel is that the financial deals and products are also likely to be weaker. One way to overcome this is to ensure that you are important to lenders, being high in the lenders’ rankings provides leverage to drive out higher procuration fees and differentiated service propositions. While there is further to go in this area, most lenders now provide us with dedicated case handlers, direct access to underwriters, fast-tracking of business and top quality exclusives. Clearly, our scale helps to make this a reality, but the larger your lending panel is, the more difficult it is to achieve this level of lender commitment.
So what factors influence the scale of the lending panel? For me the biggest issue is the nature of distribution – the larger and more diversified your business the larger and more diversified your lending panel needs to be. The challenge is to give sufficient breadth of coverage across different market segments, while still ensuring business volumes are meaningful to be important to lenders.
Going ‘off panel’
One option adopted by a number of mortgage networks is to have a panel, yet allow a set percentage of business to go ‘off-panel’. Although this model has its attractions, it is flawed; in part due to the difficulty of enforcing the model but also because of the loss of regulatory control. Time spent negotiating contracts that not only provide absolute clarity over regulatory responsibilities, but also help to ensure certain minimum service standards are delivered are invaluable. Having this depth of contractual relationship with over 100 lenders is a virtual impossibility, thus leaving advisers without the comfort that contracts provide.
The size, depth and mix of any lending panel will depend largely on the demand driven by advisers and the size of an organisation. With 200 intermediaries, you are unlikely to be able to secure competitive procuration fees and service agreements with 40 lenders. With 2,000 intermediaries, it all suddenly becomes more achievable. Whatever the size and mix of lenders that operate on a panel, reviewing those lenders, their offerings and their performance as well as developments in the marketplace is crucial to maintaining an effective and competitive business. Seeking the views of your advisers is a key part of reviewing and ultimately changing your lending panel. If there continues to be a rise in the non-conforming market, is your panel equipped enough to cope?
Another important consideration is the new lenders in the marketplace. With 20 new lenders due to set up in business this year, all will be looking for a slice of the distribution pie, so it is a chance to get higher procuration fees, better products and excellent service. However, adding untested lenders to a panel can be risky so monitoring their propositions closely once they come on board is key.
Given that there are pro’s and con’s to both a broad and narrow panel, and that many decisions on lenders will need to reflect the type of business that you are operating I don’t think there is a ‘correct’ number. The importance for any business if to strike the right balance between quality and quantity of lenders, having enough is important to get the wide breadth of the market but it is also imperative that the service and product proposition from those lenders is good.
We feel that for a network as large and diversified as ours, having around 40 lenders works well. The important thing to remember as a mortgage intermediary however is that whichever network or club you are dealing with, they need to have the leverage and commitment to drive the best deals for you. They also need to actively manage those lenders to ensure that, whether existing or new panel entrants, you are the one benefiting from better service, products and fees.
