Following regulation of the mortgage market in 2004, many people predicted the end of mortgage networks. Although it is true to say that the network model has undoubtedly changed, the vast majority of good networks have survived the initial years following regulation, and provide a valuable service within the busy and growing market.
Networks have had to rapidly adapt to the ever evolving market, with technological and compliance issues, in addition to issues affecting regulation. Networks have had to become a much broader beast, offering more than a channel for intermediaries to source independent, exclusive deals. They now provide a one-stop shop for appointed representatives (ARs), with a number of networks also opening their doors to directly authorised (DA) intermediaries.
As the mortgage market model has evolved, networks have had to change their propositions. Claims that the model would fall foul of regulation have not come true, although it is true that the number of networks has dwindled. Further predictions that the number will fall further, to between 12-15 within the next 12 months, do not appear unfounded. The larger organisations, including GHL Group and The Mortgage Times Group have both openly stated that they are looking at the market for opportunities to acquire smaller organisations. While the larger organisations have set their stalls firmly on plans for growth and market dominance, smaller networks may have to consolidate their position, offering bespoke packages to appeal to the growing number of intermediaries utilising the services of a network.
Hugh Nichols, partner at Badbury Berkeley Financial Services admitted that the larger firms were likely to grow further, but cast doubts over the smaller organisations. He said: “I think networks are here to stay, but only the large ones will stay, the smaller ones will go. Being a broker at a larger network can offer greater security and more exclusive deals than a small network would be able to provide. With larger networks there is also the added assurance you will get your proc fees paid on time.”
With the Financial Services Authority (FSA) visibly stepping up its enforcement action and gearing itself up for the introduction of principles-based regulation, to accompany its Treating Customers Fairly (TCF) initiative, Payam Azadi, head of marketing at Mortgage Times, argued the future growth of networks would come from directly authorised (DA) intermediaries concerned about the future of the market and how they can affectively and compliantly operate in this market. He explained: “I think the biggest intake for networks will come from DAs. Within the industry we are already seeing fines being issued for being non-compliant. It looks like the FSA is going to get more vigilant with intermediaries, which will increase the demand for networks as broker’s compliance needs become greater.”
He added: “Our network had 70 firms when regulation was introduced now we have 280, that’s a 200 per cent growth. I believe that the larger networks will continue to grow and only a handful will survive. For networks with a big audience and a big distribution they have been able to sustain the costs that regulation has bought.”
The network proposition
With the launch of automated valuation models (AVMS), an increase in the money spent on financial advertising and corporate identity, lenders have launched a campaign to promote the ease of going direct, be it for the borrower going direct to branch, or the intermediary going straight through to the lenders system on behalf of the consumer. Due to this networks have had to reposition themselves, offering a one stop-shop for all of the intermediary, and therefore borrower needs. Azadi explained. “What helps a network to grow is to have other regular income streams; we also offer general insurance, mortgage clubs, and mortgage packagers and secured loans. To keep up it is also important that networks invest. For smaller firms not making such large margins it’s not as easy, investing a million pounds on IT that will only provide 40 ARs is not as cost effective as investing the same amount and supplying several hundred ARs.”
Central to the network model has been the distribution model. Despite market insistence on a more technologically driven marketplace, people still value the bespoke personal service, and distribution is one such way in which networks are able to surpass other organisations to provide benefits to brokers. Azadi added: “As a mortgage network a massive part of your business is mortgage packaging. If you don’t offer it you’re losing your day to day contact with that broker. If you’re an IFA network, mortgages are not a core part of your business so it would make sense to outsource the packaging but for a mortgage network in-house packaging adds value to your proposition.”
Nichols added: “Being part of a network has many benefits, such as packaging, compliance and insurance. A lot of the benefits an intermediary would not be able to afford on there own, being part of a larger network allows small firms to compete with larger firms on equal terms.”
With networks providing a solution to most intermediary needs, it is in no doubt that the model has evolved and embraced the changing mortgage market. However for some intermediaries, networks represent a loss of independence, and claims that ‘the whole of market’ will be out of their grasp. However Azadi disputes such claims. “Brokers who don’t belong to a network are afraid that they may be too restricted, but with a larger network such as ourselves there are over 80 lenders on our panel.”
Darren Pescod, managing director, The Mortgage Broker Ltd, admitted that belonging to a network had helped improve business. He said: “The network has been a breath of fresh air for our company in regard to the speed of processing, the weekly payment of commission, the high procuration fees and life rates we receive and more importantly the assistance we have received in growing our business.
“We receive advice from our dedicated development manager in regard to growing and maintaining a profitable business and have in 13 months increased our business by over 500 per cent. In my eyes, the fee the network take from us is by far eclipsed by the increased rates we receive, the support, the systems, the software and the knowledge that the people running this network are truly focused in making this network the biggest and best.”
Conclusion
As a result of increased competition amongst lenders to deliver the best products, competitively priced, networks provide an avenue for lenders to develop exclusive offers available to a select group of intermediaries. Their support can provide a valuable aid to new intermediaries or those who have been in the sector for years. Intermediaries new to the sector may look to networks as a way of gaining an understanding of the market, while brokers that have been in the market for a number of years may utilise networks for the exclusive deals and range of services that they provide. Conversely new lenders entering into the market might also consider the benefits of being added to a network panel in an effort to give a controlled launch into the market. For a number of lenders entering into the market will mean a rush of applications that can be hard to stay on top of. By being part of a network panel, the applications that are handed in are controlled to a select group, be it the network ARs or associated members, which allows the lender to gain a greater understanding of their own product. While product testing and development will be central to the lenders launch, without actually providing anything to the market, they can not fully gauge demand.
While intermediaries may at times struggle to juggle all of the regulatory requirements with the need to remain at the forefront of the market, balancing the need to remain compliant with the need to sell; networks give ARs and DAs a range of benefits.
Of course some brokers will want to retain everything in-house, but with the increasing burden of regulation and the need to remain competitive, networks can provide a viable and beneficial opportunity to expand in the blossoming mortgage market.
