Large differences in broker income streams are causing “huge” conflicts of interest in the mortgage industry, according to the chief executive of the Association of Mortgage Intermediaries.
Speaking yesterday at FTAdviser’s morning briefing - RDR: State of the advice market 10 years on - Rob Sinclair told attendees that huge differences in broker fees, and the procuration fees received from lenders on different mortgage products, are causing an issue.
For example he noted that the average broker fee charged on a first time mortgage is around £400, this compares to a fee of around £1,400 for lifetime mortgages and £3,000 for second charge mortgages.
“Procuration fees around these are entirely different and therefore the income stream you see from different work sets gives us huge conflicts of interest,” Sinclair said.
In his view, these conflicts of interests, that stem from the different levels of profit to be made from each product, will really challenge both lenders and mortgage brokers once the consumer duty sets in later this year.
What you are doing is transferring the costs of all those frogs we’ve kissed who didn’t turn into a prince, to the one prince you found Rob Sinclair, AMI“Managing all of these through the dynamic of the consumer duty before we get to the end of July will lead to firms having to make some really interesting decisions,” he added.
Partly because of this, Sinclair believes the mortgage industry is behind the investment sector in terms of “thinking through those value propositions”.
Sinclair also noted that independent financial advisers and the investment profession are “further down the road” in terms of succession planning and thinking about exit strategies from their firms than their counterparts in the mortgage industry.
Although there are a number of “pretty big” firms now in the mortgage space, Sinclair said in general terms many businesses are not thinking about exit strategies at all.
He also told attendees that one of the biggest risks for mortgage brokers in relation to consumer duty will be whether or not they have had a “memorable conversation about protection that the customer can recall”.
Sinclair said it is important that brokers broach cover like income protection with their clients and ask them to consider protecting their biggest asset, their “cash machine” when taking out such a large debt - regardless of whether they choose to buy it or not.
Doing so will also protect the broker from a potential run in with the Financial Ombudsman Service further down the road.
Equity release
Turning from residential mortgages to equity release, when asked why competition within the equity release market has not driven fees down, Sinclair said it is partly to do with the cost of buying leads from an aggregator.
“The argument is that in the world of residential mortgages, the cost of buying a lead off an aggregator is £30 but for lifetime mortgages, the cost of buying a lead off an aggregator is probably £300.
“You also have a situation where for residential mortgage leads, probably every second one completes, but for lifetime mortgage leads probably only one in 20 completes.
"So what you are doing is transferring the costs of all those frogs we’ve kissed who didn’t turn into a prince to the one prince you found,” Sinclair explained.
He added: “And in doing that, which is what the regulator generally doesn’t like, you’re transferring that cost onto the individual who completed.”
This is where the higher fees stem from according to Sinclair, who noted that in terms of the sustainability of it, “this is not a clever business model”.
jane.matthews@ft.com
