As the procuration fee debate rumbles on, what is in no doubt is that despite advancing technology, mortgage brokers still play a key part in the mortgage selection process and therefore deserve a level of remuneration on a par with other professionals involved in the property market, such as solicitors, surveyors and estate agents. Indeed, with mortgage products becoming more varied and complex, the intermediary’s role becomes ever more important.
As Nino Cuffaro of Mortgage Finance Corporation points out: “Around 60 per cent of all new applications come through the intermediary channel, showing that broker advice is both sought after and valued in the marketplace.”
Non-conforming
When it comes to non-conforming applications, it’s only fair that remuneration provided by lenders reflects the amount of work packagers and brokers have to do. James Watts, of packagers Pro-Active Mortgages, says: “The higher procuration fees payable on non-conforming applications are still very much justified regardless of improvements in technology and cascading systems. In our experience, brokers prefer to deal with efficient and professional packagers as each specific case can be discussed at the outset. This ensures a smooth process which concludes in a speedy offer being produced and a satisfactory product for the broker’s client.”
“With all cases, prime or non-conforming, the work involves sourcing, arranging a decision-in-principle, tracking the case through to completion and beyond,” says Cuffaro. “That’s without the time taken by the sales process and dealing with compliance requirements. With non-conforming deals it goes one step further in that the packager almost takes on the role of a branch for each lender.
"Referencing and instructing valuations may seem fairly straightforward tasks to perform, but as packagers we are responsible not only for the execution of these tasks but also the manner, speed and efficiency with which they’re completed. The hours of constant chasing and thorough checking prior to lender submission shouldn’t be forgotten. Brokers and packagers take a great deal of the work away from lenders, allowing them to concentrate on delivering efficient service levels, competitive products and speedy offers.”
“Remember we’re not just talking here about the extra work in processing,” adds Simon Mouncher of em financial. “A packager will go to a great deal of effort to market a wide range of products on behalf of a growing number of lenders. That takes resources that must be funded somehow – if not from procuration fees, then where?”
Future of payment
While accepting that intermediaries deserve to be paid fairly for their professional work, the fact is that how they will be paid in the future is a complex issue. The real world for lenders is one of margins being squeezed by heavy competition, set against the costs of protecting and growing their market share and of the constant re-investment demanded by fast evolving technology. Clearly raising rates is not possible in such a competitive environment.
Yet another challenge for today’s lenders is mortgage churn. When procuration fees first appeared after the abolition of the Building Societies Act, mortgage customers initially stayed with the same lender for some time, just as the previous generation had done. Now that remortgaging is so popular, the cost of losing and replacing customers is a growing issue for lenders.
Against this background, how do lenders continue to fund the current levels of procuration fee? The answer is, beyond the short term, they may well not be able to. But with fewer than one in five IFAs currently operating on a pure fee-to-client basis, some major head scratching will be necessary to find a remuneration system that is acceptable to brokers, packagers and lenders alike.
Retention
Retention fees is one possibility being considered by some lenders; rewarding brokers based on their ability to reduce churn in the marketplace, but opinions about viability are divided. If the broker carries out the usual factfind and can show that staying with the existing lender is indeed the best deal for their client, then rewarding the broker for doing that is perfectly reasonable. Critics argue however that retention fees will never be as attractive to brokers as upfront procuration fees – causing potential conflicts under regulation.
Trail commissions, where the broker is paid in ‘instalments’ over a relatively long period, are also a possibility for the future. But for this to work it would require lenders to invent a new generation of products which have much greater incentives for borrowers to stay with their lender long term.
Another idea that could be borrowed from the investment sector is factory gate pricing. Under this system, the broker agrees with the client a total price for the product which includes a broker ‘mark up’. Clearly however, this would bring compliance issues, along with obvious problems for current lender systems.
All these and more models will be fully considered as replacements or amendments for procuration fees in the near future. The debate will run and run, but most lenders would agree that the only option we don’t have when looking at procuration fees is to go on doing nothing.
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