With financial services distribution poised once again on the brink of a major development – in the form of the the Financial Services Authority’s (FSA) Retail Distribution Review – there will clearly be winners and losers across the mortgage chain dynamic.
But the inter-dependencies between brokers, packagers, solicitors, estate agencies, networks, lenders and providers have already changed significantly. First, following polarisation and then again, following the introduction of mortgage regulation.
Just like the food chain, the mortgage chain denotes the series of inter-dependencies between the players in our industry. The natural ebb and flow to our business has been displaced by a number of events – most significantly mortgage regulation. Key players in the mortgage chain have been jockeying for position, testing traditional boundaries and developing new lines of business.
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Accelerated development
In contrast to the evolution within financial services that I am sure would barely register on the Darwinian evolutionary scale, there has been an accelerated rate of development in the mortgage industry which has seen the key interdependencies between the major industry players shifting significantly, including .
- The increasing professionalism of advisers;
- Proposed regulation of estate agents;
- New and existing lenders chasing higher margin business;
- The consolidation of packagers;
- Rise of networks and clubs.
Customer is king
An overheated market will potentially create a two-tier property economy – those who can will develop a portfolio of properties while a large section of the population cannot afford to join the property ladder, nor move on.
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There has also been an explosion of interest in property as an investment. Professional property investment clubs are springing up across the country, buying up, managing and building property portfolios both at home and abroad. Buy-to-let is close to usurping first-time buyers as a borrowing demographic and off-plan investors are snapping up new homes with a view to selling them at a profit once they are completed. Property as an asset class now accounts for 60 per cent of the UK’s total assets and is worth £3.575 trillion, states PricewaterhouseCoopers.
There are changing tastes in home design, such as the ratio of one bedroom, one bathroom and a small garden, and the development of traditional no-go areas.
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Protection levels will continue to fall as buyers spend to the limit to afford the houses of their dreams.
Dominant or dodo?
The regulation of estate agents is long overdue but once in place, it will root out the rogues, make the industry more professional and improve standards. At last it will put estate agents on an equal professional footing to mortgage advisers.
Many home owners have decided to stay put, improving their current homes instead of moving on. There are around 65,000 such planning applications on the cards and a proposed new planning policy seeks to streamline the application process. In addition to those who don’t wish to move, there is the group of people who can’t even get a foot on the property ladder. While the mortgage industry might be seen as very healthy, the property market is focusing on a diminishing market share.
In their original format, Home Improvement Packs (HIPs) probably posed a threat of the biggest shakedown in our industry.
Estate agents would have assumed a hugely pivotal role thanks to the heads-up on the customer’s intention to buy or sell and their opportunity to offer a bundled package of services within the fee. Today, they have the option to train as an energy assessor – not the professional recognition that estate agents were necessarily seeking.
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A number of networks, as well as lenders and conveyancers have invested heavily in the HIP process, not least to protect their own market share or exploit a new revenue stream.
I am sure we have all read deeper meaning into the government’s U-turn virtually on eve of launch, and made assumptions about how successful they will be given their much-diluted approach. Whatever their future, it is extremely unlikely now that HIPs will have much impact on mortgage chain dynamics.
Lenders and providers
The key issue of demand outstripping supply has required brokers to develop a degree of creativity to help their clients meet affordability criteria. Investing abroad and using the capital growth as a deposit is not uncommon.
There will by necessity be greater interaction between adviser and borrower and it should lead to a stronger relationship. Not least because lender innovation will rely on brokers’ advice skills and fact finds to communicate complex lending products.
There has always been a critical rivalry between lenders and brokers involving the ring fence of the customer. In the past, advisers played into the hands of lenders by treating mortgage advice as a one-off episode. Today, the professionalism among brokers, and the high standards of customer service being built into business models, means brokers and clients are forging a healthy relationship with more regular interaction and advice across a broader panel of associated services.
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The issue of retention fees did look set to challenge this emerging long-term broker/client interaction but one of its early pioneers, HBOS, has abandoned this approach suggesting that it is not viable.
Remunerated by the proc fee, the broker is doing more of the processing and admin work that once would have been carried out by the mortgage lender
Banks are selling off their mortgage books and there are fears that this could lead to reckless lending. The banks tell us this type of trading is necessary so that they can offer new home finance deals to new customers, but what they don’t reveal is that by selling their mortgage books they are protecting themselves against a potential market crash.
Networks
With the number of appointed representative firms joining networks on the rise, there are around a quarter of the networks that there were two years ago. Rather than spelling the end of the industry, this consolidation suggests that networks are competing with high street providers and successfully distributing appropriate and specialist financial service products.
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The FSA recently issued a warning to directly authorised firms advising them they are far from being under the regulatory radar. I prefer to read deeper meaning into the FSA’s words and interpret this as a vote of confidence in those mortgage networks and clubs offering brokers robust compliance systems in place to reassure customers and the regulator that safe sales processes are being policed.
There is greater competition for specialist focused mortgage networks and clubs as those ailing financial services providers who are failing to write protection and investment business switch to the mortgage market in an effort to generate productivity.
Non-conforming
Brits have more unsecured debt than the whole of the rest of Europe combined so it is not surprising to find that non-conforming lending is one of the fastest growing sectors of the mortgage market, growing from £1 billion to £25 billion in a decade.
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New non-conforming pioneers such as edeus and db are the market shakers and improvers. Where they walk the high street traditionalists will follow, offering more flexibility to the whole market and bringing more competitive rates in their wake for the benefit of consumers
Non-conforming lenders are not the industry players that will be winning service gongs. Most of their customer service function is outsourced – they are technology driven with a small branch network if any. They are usually leaner than traditional lenders and often offer better value for money.
Packagers
Far from lumbering towards extinction, recent research shows that brokers use packagers for one in eight deals and that 60 per cent submit between 10 per cent and a quarter of their business via this route. Their predictions are that a further 23 per cent of brokers plan to increase the volumes they submit.
And last month, the Intermediary Mortgage Lenders Association showed that nine out of 10 packagers believe that by 2009 they will be packaging more deals than at present with 56 per cent expecting growth of more than 25 per cent. Their research also showed that two thirds of brokers expect packaging volumes to remain stable with 23 per cent expecting growth.
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But the current fiercely competitive climate is shaking the industry up. Some lenders are saying privately that they can no longer sustain the fees paid to packagers and if this is the case, then the packager will be an endangered species. The days of the corner shop packager are numbered. I believe they are and I doubt that we will see more than five or six quality packagers in two years’ time.
Only those who have invested in adding value through technology – such as electronic sourcing systems to support brokers who use the on-line systems and cascading facilities properly will survive over the next few years.
Ultimately this will boil down to survival of the fittest and this applies to packagers, brokers and introducers across the board. Those who have access to and utilise the best technology available to meet customers’ needs, are those who will stay afloat.
