It was back in May 2009 that the first consultation was published, in the depths of the downturn of the market. At that time, the far-reaching proposals contained in the consultation were regarded by many as an exercise in shutting the stable door long after the horse had bolted.
But from the outset, the FSA and then the FCA have played reasonably fair with the industry. They said they would consult, and they certainly did. They said they would not implement changes until the market was recovering, and they have held to that, too. So here we now are, with a market changed through a combination of direct regulatory requirements and through actions already taken by lenders over the last few years once they saw which way the wind was blowing.
Big bang
The final changes coming in April will not be implemented as a ‘big bang’ like M-Day was, back in 2004. In fact, from a mortgage broker perspective, most of the changes have already come in as lenders have made adjustments to their lending criteria and case submission practices over the last couple of years. In the next three months we will see the final changes being implemented by lenders, and some modifications to online processes. But in reality, a number of lenders and many brokers probably already regard themselves as ‘MMR ready’.
The major change that MMR brings in is the requirement for all sales to be undertaken on an ‘advised’ basis, apart from a few exceptions. This has been a big push for lenders, who have been faced with getting scores of advisers qualified and trained to give mortgage advice, and implementing suitable supervision and monitoring schemes.
However, advised sales are what mortgage brokers have always been doing, hence there should be little for intermediaries to alter in the way they do business.
It is unlikely that the opt-out to a non-advised sale – because a customer is high net-worth or a mortgage professional, two of the main exclusions – will be used much. After all, people go to intermediaries for advice in the first place, and having a lot of money does not mean that you necessarily know your way around the highly competitive mortgage market. Most broker firms are deciding not to do any non-advised business, and many lenders are not gearing up to accept non-advised cases from intermediaries.
In making this change to all advised sales, the FSA and now the FCA have made it clear that they believe advice is very important for a mortgage transaction. Advice is front and centre and, as such, I believe that the sector of the market that has always done business this way will win out. That is the professional mortgage intermediary sector, whose seller numbers have dropped from over 30,000 in 2007 to perhaps 9000 now. Those who are left in the industry and who have come through the last six tough years are, by and large, very capable, professional mortgage advisers who will be well-positioned to make the most of this recovering market.
Last month the CML published a forecast for gross lending for 2014 of £195bn, and estimates of the final figures for 2013 are around £177bn. So, a £20bn increase is on the cards this year, and in fact it could be more. And pretty much all of this increase will be done through the intermediary sector. This is because lenders are very likely to back-pedal on their branch and direct lending in the first months of the year, to ensure that their new systems work and that their newly trained staff get into the groove of advised selling.
As a result, it is likely that the proportion of business overall done through intermediaries will continue to increase from around 60 per cent that it was at the end of 2013. And over the full year, an out-turn of, say, 65 per cent intermediated may result, but with a higher percentage, in perhaps 70 per cent being done in the first half of the year.
This is the main reason why the future for mortgage brokers is bright – we have a growing market and a growing share of that market to look forward to. Mortgage brokers should seize this opportunity.
But there is an even more powerful opportunity that stems from this. That is the opportunity to demonstrate once and for all to lenders that the intermediary distribution channel is the most cost-effective way of distributing mortgages bar none.
A lender faced with getting all his mortgage-branch and call-centre staff fully qualified, and operating under comprehensive sales and compliance supervision will now be able to see the real cost of mortgage business to them. They will, in due course, be able to compare the cost-effectiveness of both channels – direct and intermediary – and I have total confidence that the value and flexibility of the intermediary channel will be recognised.
Certainly, from my own experience on the lender side of the fence, the true cost of direct and branch distribution has historically not been at all clear, since it is normally muddied up with the overall costs of maintaining a branch network – which has many purposes, with mortgages being just one. Intermediary distribution represents variable cost to lenders – they pay for what volume they get and do not have to maintain a very significant overhead irrespective of the volume of business being done.
Some people have suggested that, faced with clear exposure to the full real costs of originating mortgages through a branch network or call centre, some lenders may decide to go ‘intermediary only’ and just take business from brokers. Certainly, it will lead all lenders to look long and hard at where they expect future market growth to come from.
Remuneration
In addition, lenders may recognise the cost-effectiveness of intermediary distribution and decide to remunerate it better – or, some would say, more adequately. After all, if the intermediary sector is going to be the major channel for most lenders in the future, it would make sense to invest in it to ensure it can be financially robust, and have adequate resources in sales and compliance management. The challenge for intermediaries is to keep up the high standards for business quality that have been achieved over the last few years and not to let these slip as volumes increase and firms get busier and busier.
So, the opportunities for mortgage brokers coming from MMR flow from the growth in the market, with disproportionate growth coming through intermediaries, and the possibility of even more work in the future, together with the possibility of higher remuneration in the medium to longer term.
If mortgage advisers think they are busy now, they are going to be even busier in the future. It really is looking bright for the mortgage intermediary sector.
Stephen Smith is director of Legal & General Mortgage Club & Housing
Key Points
The final MMR changes coming in April will not be implemented as a ‘big bang’ like M Day was, back in 2004.
The major change that MMR brings in is the requirement for all sales to be undertaken on an ‘advised’ basis, apart from a few exceptions.
The MMR will lead all lenders to look long and hard at where they expect future market growth to come from.
