As two and a half years have now passed since the inception of mortgage regulation, the debate continues to rage on about the nature of network propositions, and their performance repeatedly falls under the ever-increasing media microscope.
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The time leading up to ‘Mortgage Day’ was one of uncertainty and anxiety at just exactly what Financial Services Authority (FSA) guidelines would bring to the market; precisely how regulation would look to tighten its grip on an unsure industry left many anticipating severe headaches. Scaremongering has been commonplace, with leading figureheads going head-to-head and fanning the flames in the direction of networks, packagers and other distributors.
The biggest issues brought about by regulation were the minefield of compliance, with the turnaround from the relaxed MCCB voluntary model to the FSA’s mandatory requirements. This led to new and unchartered territory in the mortgage world, and produced a brand new breed of broker who would have to consider regulatory issues at every stage of the process. The rise of compliance departments within organisations meant that the FSA had a significant influence on every aspect of their livelihoods.
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The rise of the network found critics divided into two camps. Figureheads such as Richard Griffiths of Network Data were adamant that joining a network was the future for smaller intermediary firms, and this is a view that I agree with, taking into account the regulatory requirements that are necessary to conduct your business from day to day.
Griffiths also made comments on the future of packagers, implying that they would become extinct after a period of time when networks would buy up their distribution. As we have seen, this has not been the case, and we have seen in the post-regulation environment the emergence of large packagers who are thriving in the marketplace, and working together with networks to ensure they continue to prosper. Talk has been rife recently of packagers becoming regulated; the Association of Mortgage Intermediaries recently stated that bringing together packagers and representing them with a cohesive body will help to unite the industry and form a closer bond of trust with lenders, particularly as research suggests that 80 per cent of brokers would rather deal with a packager – needless to say their success is still prevalent in the market.
Other commentators, such as John Malone, managing director of Premier Mortgage Service, suggested that the market would be dominated by advisers taking the directly authorised (DA) route, staying true to the DA model of business, which has also been an extremely profitable avenue of business in a buoyant market.
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My point is that both strategies seem to have worked; the appointed representative (AR) market is still young however, and when people suggest that the network model is declining, you only have to look at certain companies to see that this clearly is not the case.
Another bone of contention ever since ‘Mortgage Day’ has been how best to view a network’s performance and decipher how good a network really is. Is its size, its profitability, the quality of business it produces or the volumes that is the best method to judge by?
Personally, I believe all of these factors are key to evaluating – there’s no point being the largest network if the ARs you oversee are not writing the required levels of business, or you’re not making large enough margins. Many networks quote the volumes of business that they write, but what kind of margins are they making on these applications? On prime cases for example, maybe one or two basis points of a percentage are made, but on a packaged heavy adverse case, the margins are much higher for the distributor, maybe as much as 1.5 per cent, so the whole argument of who’s writing how much business becomes defunct – you could write £30 billion a year and still be non-profitable this way if prime is your main source of income.
This brings forward another important point in the development of networks and their pricing structures – I’m astonished that these are not openly published as a rule. How can you expect brokers to adhere to the principles of ‘Treating Customers Fairly’ (TCF) to their customers when the network they’re working for is not transparent?
Within the market, there are essentially two models to the network approach – the first is the flat fee payment structure that is adopted by The Mortgage Times Group and Network Data. Others are run on percentage of turnover or payment per application.
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We’ve also seen the emergence of upfront payments which I find a worrying trend. There’s in my experience most brokers are acutely aware of the pitfalls of short-term financial incentives. There’s no such thing as a golden handshake without a tie in; although some institutions at first appear to have more money than God, the likelihood of passing initial cash inducements without the broker selling their soul is unlikely.
I would always question a network that pays advisers to join as the potential exists that the overall proposition is sub-standard. Entrepreneurial business people want to join a network that offers the right proposition for their company; if they do find a sound offering then a firm is likely to earn a significantly higher figure than the upfront fee over the course of time if the broker is competent. I read with interest Justine Tomlinson from Mortgage Next’s comments about only offering a loan to cover the initial running costs – this is a fair point, but upfront fees usually come with a great deal of small print and should be treated cautiously.
Another important factor when considering a network is looking at the pricing structure that exists, and not being blinded by the figures such as turnover and amount of business that is written.
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What’s more important is the remuneration in procuration fees, as well as the commissions offered in insurance. You also need to focus on the support services on offer, such as packaging, the mortgage club on offer, the number of exclusive products at your disposal, and Training & Competence (T&C) and account managers for example. Yes, all networks will say they have these in place, but how on detailed examination will these be robustly in place? How many compliance officers, business development managers (BDMs) and T&C officers exist per broker? It’s vital to compare the level of support on offer and shop around to find the network that provides an adequate support system, as well as all of the other features that go hand in hand with this.
What’s next for the development of networks? Well, there will inevitably be a period of consolidation as competition grows in the marketplace – we’ve seen GHL Group born from the merger of Genesis Home Loans and Guaranteed Home Loans, Home of Choice buying out SJP’s ARs – and I think this trend will continue as larger networks aim to acquire additional distribution channels.
Having recently had the pleasure of a trip to Monaco with many senior network figureheads and talking through the latest issues, I’m confident the network model will continue to grow and accelerate dominance in the distribution market. With the FSA coming down hard on brokers with principles-based initiatives such as TCF, it has a march on tightening regulatory standards, putting DAs under pressure to ensure that business is conducted in the right manner. The beauty of a network proposition is that expertise is on hand to help deal with regulatory issues, leaving time for the important matter of actually writing business.
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Traditionally, one of the biggest misconceptions is that independence is lost when joining a network, which simply isn’t true – as an AR you run your own business, keep your own client books, but you have the option of having someone to call if you need assistance.
The DA versus AR debate will long be here, and I’m sure we’ll still be talking about this when I’m grey and balding. There is no doubt those in a network environment are given a lot more support than your average DA who has decided to deal with the FSA directly. As regulation tightens and the FSA dishes out more fines to those stepping outside of the regulatory boundaries, my prediction is that we’ll see more and more brokers switching over to work with networks. mi
