In the run up to regulation of the mortgage market by the Financial Services Authority (FSA) in October 2004, a plethora of changes were predicted. A rapid drop in the number of intermediaries within the mortgage advice market was one such prediction, as was a rise in appointed representatives (ARs) who would look to networks to help with the introduction and integration of the new regulatory rules. However, conversely, one of the most debated topics was the supposed consolidation, and crash of the mortgage network model.
None of these prophecies have so far come true to the extent predicted, although it is fair to say the market in general underwent a considerable period of consolidation following the advent of FSA regulation. Some brokers left the market altogether, but were replaced by those keen to enter the advice arena. Some firms opted out of regulated activity, instead focusing on other market areas. But, as many have pointed out, regulation also rid the industry of the ‘cowboys’ once associated with the market. Other firms took the business decision to follow different routes within the financial services sector, but one thing that has remained is the mortgage network, albeit in a slightly different form.
Benefits
Mortgage networks have a vital role to play in the market. From helping their respective ARs with compliance and training controls, to initiating white-label websites and promotional materials and offering exclusive products from a panel of lenders, the mortgage network model provides brokers with a base through which all activity can be completed through.
As Payam Azadi, head of marketing at Mortgage Times, says, networks have a crucial role to play. He explains: “Networks provide a range of services under one roof, with compliance being one of our main offerings. If you are a one-man broker, there is a lot to understand on what the FSA requires you to do from a legal perspective. A network will help a broker adhere to those regulations. Another reason for us is that we negotiate deals on behalf of ARs, providing better product offers than they would otherwise get. We are like a brokers ally; we are like big brother really. The market has become so competitive that it is important for the broker to have someone they can contact and discuss issues with. We also have a Financial Promotions officer they can call up to help them with making their advertisements compliant.”
Complete Mortgage and Loans Service director, Bill Warren, adds networks can reduce the time spent per case, enabling brokers to transact more business, at a reduced cost. “There is a combination of financial benefits available when you join a network, for example, a reduction in personal indemnity (PI) insurance as well as fees payable to the FSA, which would in include fees to Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS). Brokers will also receive fees from the network for completed cases; at Complete we pay £15 for each completed mortgage application. The other benefits include access to better terms, whether it is procuration fees, exclusive products, or speedier processing because of the IT processes a network might have.”
With the FSA seemingly keen to increase its enforcement action, networks can aid their ARs, and in some cases, directly authorised (DA) intermediaries in keeping up-to-date and compliant with the FSA rulings. Indeed, with the FSA also keen to improve advertising, following its review of Financial Promotions across the financial sector, networks are also able to provide guidance on this area, with a number of networks responsible for setting up workshops, white-label initiatives and guidance through hotlines and seminars.
The future of networks
However, networks cannot afford to stand still. Following 12 to 18 months of consolidation, assessing the true impact of regulation of the mortgage market, the industry as a whole is back in the throes of growth. Intermediaries are constantly searching for ways to increase their earning potential by looking into future markets. Most recently the buy-to-let (BTL) market has seen a renewal of concerted interest, and all indicators point to this rise continuing. The equity release and home reversion market has also been muted for possible growth and networks must match this increased diversification in the market.
With general and continued growth within the market, Warren believes the network proposition is set for a positive future. “I’m positive about the future. Two years ago people were predicting there would be no networks. The networks that have a robust business model have survived, will survive and will continue to survive.”
However, Azadi paints a picture of caution for those networks who do not keep up with market advances. He warns: “I honestly believe there are a few networks out there standing way ahead of the others. All networks are talking the same language – the question is can they deliver? It would be interesting to put aside the great salesmen and actually see who can deliver. Since the FSA bought in regulation, some networks have stagnated while others have grown dramatically. The trend is the ones that are growing will continue to grow and the ones left will diminish.”
Adding claims to Azadi’s argument was the recent FSA action taken against four networks who agreed to cease recruiting ARs. As part of its review, the FSA visited 12 networks, with four of these voluntarily agreeing to suspend AR recruitment until improvements were made to the process. The regulator expressed its disappointment with some of the practices, and in a statement, said: ‘We have seen firms who have not taken up evidence of previous competence and instead simply transferred ARs from other networks. Insufficient checks into the relationships ARs have with other networks can lead to ARs not having Multiple Principal Agreements (MPAs) in place. A MPA must be in place where ARs work for more than one authorised firm, as it is important for responsibility to be allocated if AR customers are to be treated fairly.’
Despite the regulator still having concerns over some practices, the network remains a valuable option for many intermediaries.
While commentators still point to a further consolidation of networks, arguing that within the next two to three years, the number of networks in operation will have fallen, networks still have a valid role to play within the market and can help with all aspects of your business, from training and competence (T&C), regulation, right through to product exclusives and assistance with Financial Promotions materials.
