Have you heard the saying ‘Two’s company but three’s a crowd’? I would like to propose that we scrap this aphorism from the mortgage lexicon and replace it with, ‘Three’s the magic number’. That is because to be successful firms must consider the client, the intermediary and the lender.
This seems to me to be the correct way round and the most appropriate for business success. Now I am prepared for those with a sharper eye to say actually the number should be more like seven or even eight when you account for the lead generator, the packager, the network, the mortgage club, the outsourced administration firm, the securitisation arrangements, etc. However, for me there remains three essential chunks of the pie: the borrower (who wants a house), the intermediary (who acts as the agent of the client to secure the most suitable solution), the lender (to provide the finance).
In my last article I wondered if the three parts could ever work in true co-operation; especially the intermediary and the lender. Many thanks for the comments I have received in the meantime – it seems others share my view and the comment about lenders refusing to pass on information about retention deals has certainly rung bells with readers.
A better way
To quote from a long running ad campaign there must be ‘a better way’. By common consent the professionals in the mortgage market are here to serve the needs of their customers. It is disappointing to hear that some firms do not share this view; that they will seek the highest procuration fees ahead of the most suitable deal or will offer the highest rates without a thought about trying to reflect a borrower’s improving credit record, or will simply look for the fastest way to profit through an ill-judged payment protection offer. These are practices from yesterday that have no place in a regulated, customer-focused market. They damage the entire industry – and one thing is for certain – when an industry loses its reputation it gets over-regulated.
What opportunities exist for intermediaries and lenders to work together, in a compliant and customer-focused way? In my view, many exist but require a view that those involved look upon such arrangements as long-term strategic business partnerships – not a simple expediency for pushing customers in one direction or another.
Trail fees
First, there is the perennial subject of trail fees. The key question for me has always been: what is being paid for? We have already established that, as the agent of the client, an intermediary is under a duty to offer the most suitable advice for their client’s needs. This may be to take the retention product offered by the existing lender or it may be to switch. This is not being a ‘rate tart’ (a phrase I particularly dislike) but is about being a ‘sophisticated consumer’. The work an intermediary does to help their customer arrive at a decision should be paid for. Perhaps this is one reason why firms increasingly charge a fee for their services.
The issue of VAT is never far away from a discussion of fees. Where an intermediary charges a fee it can fall outside the scope of VAT as there is ‘mediation’ taking place. That is to say, although professional advice is being given, it is an essential component in the purchase of the mortgage. The Sixth Life Directive sets out the situation nicely for those who would like to investigate further.
New models for co-operation are also being more openly discussed. These include options such as equity participation in the lender or a particular tranche of business. This is an interesting approach as it may help the capital position and value of intermediary firms.
Another interesting approach is profit share schemes, where the intermediary and lender share the margin on business done together. I have also heard ideas around ‘renewal bonuses’ being discussed, where lenders provide additional payments not on particular cases but across a class of business.
Careful consideration
I worry that these may sound interesting ideas, worthy of further discussion but they need to be carefully considered both from a regulatory and reputational point of view. In today’s world, consumers need clarity around who is paying what to whom. This goes further than commission disclosure in my view and actually relates to complete transparency – one of the reasons why I think lenders should clearly declare their earnings on a mortgage in the way an intermediary must.
The regulator’s requirements mean that some prospective commercial ideas will simply fall out of bounds. For others, firms should consider how they would explain them if challenged in the court of public opinion. That should not stifle innovation and a willingness to discuss new business models – otherwise it would be the consumer who would be the long-term loser.
