For any organisation to be successful, whatever the industry, they need to have a good distribution strategy. In other words, an outlet and distribution channel to ensure that its customers and potential customers are able to purchase its products and services. A distribution strategy or model should not be seen as something that is set in stone when the company launches; it will be something which evolves as the particular industry changes and adapts.
If we look at the mortgage market, at one end of the distribution chain is the lender, providing the funds and mortgage products. At the other end is the consumer, requiring the right product to suit their individual circumstances. It’s the steps in between that are not so clear. It can be as simple as the lender just dealing direct with the consumer by branch or phone, however the lender may choose to distribute their products and services using an intermediary strategy, such as a direct-to-broker offering. They may decide to distribute their products via a mortgage club or network or they may even decide to use a packager.
Distribution choices
How a company chooses to distribute their products will be dependent on a number of factors, for example, whether they are a new entrant to the market, the size of the company and whether they are operating in new or existing markets.
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In response to the changing market and to ensure that they hang on to, and if possible, grow their market share, many lenders have diversified into new sectors, utilising differing distribution strategies. An example being Salt, the intermediary brand for the Derbyshire Building Society. It went onto launch an adverse offering, initially via a pilot scheme, utilising Pink Home Loans’ packaging operation.
Recent research has highlighted that the direct-to-broker channel is predicted to experience enhanced growth over the next few years as technological advances allow access to more customer information; however it is thought that packagers will continue to be a fundamental part of many lenders distribution strategies, with their ability to offer multi-lender cascading.
Regulatory impact
Following regulation, brokers had two options available to them; to become directly authorised (DA) with the Financial Services Authority (FSA), or to become an appointed representative (AR) of a network. For the broker who chose the latter option, they were choosing to enter into a tied distribution arrangement, whereby they could only use the lenders on their network’s panel.
That is unless they have a reason to go ‘off-panel’, for example, if they have an enquiry for a lender who is not on the panel, or one that does not fit with any of the lenders on their network’s panel. For those who chose to become DA by the FSA, they had the option to go to any lender, mortgage club or packager in the market.
I very much doubt that even the more informed members of the industry could have visualised just how diverse the distribution of mortgages has become following regulation. It only seems like yesterday that all that everyone was talking about was the launch of regulation and for many the much dreaded ‘Mortgage Day’.
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Many thought that this would mean the end of ‘the packager’ as we once knew it and for some their fate was to come as regulation drove up costs and generated consolidation. However, for many it was the beginning of a new era, which prompted the phrase ‘evolution of the packager’ and hence a changing distribution model.
Times have changed
Having spent 10 years working for a company, which started out life as a ‘packager’ and has evolved with the market to become a mortgage distribution and packaging company, I often contemplate what will become of Pink over the next 10 years. One thing I am sure of is that packaging still provides an important service within the industry and will continue to do so.
The same can be said for several others in the market, a number of which have diversified, offering a host of products and services to establish themselves.
If we take a look back at the role of a packager all those years ago, it could be considered as an extension of the lender, carrying out an administration function, creating ‘clean cases’ and simplistic products, using manual processes and the underwriter’s interpretation of the case. Due to changes in the product market and the growth of non-conforming mortgages, packaging in the present day tends to be for the more specialist cases and complex products.
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With more data available, credit checks as standard and advances in technology, the underwriter’s role has changed significantly from days of old. Products tend to be more complex and packagers are often provided with on-site underwriters from the lender to help interpret cases that computer systems can’t handle.
If we just look at the adverse sector, and go back a decade, a consumer would have been either ‘credit worthy’ or ‘non-credit worthy’. Whereas now, we have a spectrum of adverse solutions from near-prime to heavy adverse – we’ve moved from a simple market to one that is more complex.
Leading the ‘pack’
It is clear that technology is driving the marketplace forward. To ensure survival and continued growth within an already crowded industry, packagers must offer the customer what he or she wants in regard to quick decisions. Recent industry technology triumphs include the introduction of automated valuation models and the completion of the industry’s first 24-hour mortgage and it is a fact; technology has and will reduce the time it takes for a mortgage to complete. Packagers, therefore, need to understand how technology can help, for example, investing in online decisions-in-principle, Key Facts Illustrations (KFIs) on and offline generic mortgage applications, online product selection and case-tracking.
Looking for support
It seems that the dust has only just begun to settle following this year’s Packaging Summit, when the packaging community were ready to have their voices heard. Sourcing systems were criticised by packagers for not being ‘up to scratch’, with Trigold and Mortgage Brain being given a unanimous vote of no confidence.
The Professional Mortgage Packagers Alliance had plenty to say and attacked lenders that have failed to deliver in terms of the technology available to packagers.
There was also plenty of debate at the Summit around dual pricing of products ranges and accreditation to business development managers of business placed through mortgage packagers.
The Summit helped to raise some burning issues for the packaging community, many of which were to do with technology. Let’s hope that they are dealt with over the coming months to ensure packagers are given the support they need by their lender and supplier partners to deliver the service that brokers and ultimately their clients deserve.
A strong future for packagers
Going forward, mortgage packagers will continue to offer smaller lenders, or new lenders coming into the market, a dual purpose; to assist in the administrative side of the business and therefore reducing overheads, but also to act as a distributor and marketer of their products and services. For larger lenders, mortgage packagers are essential for supporting distribution in what has become a fiercely competitive and busy market.
Due to lenders’ product lines becoming more and more complex and with widely anticipated growth in the more specialist markets, in particular buy-to-let, packagers have a huge contribution to make and are a key part of an ever-changing distribution model. Packagers can provide lenders with support in resourcing and, as many lenders are having to adapt their systems to deal with developments such as client retention schemes and acceptance of non-conforming criteria, adapting their legacy systems, following the introduction of online mortgage applications.
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The recent launch of a standing committee to represent packagers by the Association of Mortgage Intermediaries (AMI) is a fantastic development for the packaging sector. It will help to unify the industry and prepare it for the regulation of packagers, which industry experts think will happen by the end of 2007.
It will also help to ensure that mortgage packagers remain a firm part of lenders distribution models and that their voices are heard loud and proud for many years to come.
David Copland is sales and marketing director at Pink Home Loans
