Know your broker must not compromise diversity
Bob Hunt is chief executive of Paradigm Mortgage Services
Brokers have been so preoccupied with the Mortgage Market Review this year that something which is likely to have just as much of an effect on the face of home loan distribution in the UK has almost flown under the radar – the Financial Services Authority’s ‘Know Your Broker’ initiative, which has placed an increased responsibility on lenders to get to know who they are doing business with.
Put simply, despite the obvious business sense in lenders understanding more than perhaps in the past about their introducers, this initiative could lead to some providers having no other choice but to streamline who they deal with rather than carry out further onerous and costly checks on their entire distribution database.
What started out as an attempt to crack down on mortgage fraud could end up threatening the future of small brokerages, which might be perceived by some as a case of throwing the baby out with the bathwater. At the outset I need to be clear however that the approach of some lenders to this matter is quite different to the approach of others – and part of my role as one of a number of key distributors is to assist both our lender partners and member firms in implementing the best approach for all.
It is not just one-man bands who will be affected by the clampdown either, with larger distributors already being challenged about the way they operate. Directly authorised distributors, Paradigm included, are being asked by lenders to evaluate our membership criteria and share insights regarding the depth of our knowledge and relationship, including the due diligence we carry out on brokers before they are allowed to trade through us.
What is clearly of concern is that some lenders may decide that dealing with clubs, partnerships and distributors is too complicated in light of the new requirements, and may choose to focus their attentions on one regulatory category – in all likelihood networks – who (in their opinion) already carry out such due diligence as a matter of course.
This would without question be to the detriment of the overall mortgage market and one hopes that this type of distribution segregation is not widely adopted. For the record, I regard such actions as misguided to say the least.
What the initiative does allow lenders to do – and in turn will force brokers to do – is to concentrate on the quality, cost and ultimate value of business submitted, rather than pursue a volume-only policy. We have already seen one lender, Abbey for Intermediaries, announce a reward system where superior mortgage performance for submitted business will benefit from better procuration fees and this trend is likely to continue as others focus on quality.
Paradigm has been an advocate of this flight to quality since we launched our distribution business in September 2007 and have long recognised that lenders seek more than just volume from their distribution partners – which is why we have always been discerning about the advisers we welcome aboard.
While we already carry out certain checks into the behaviour and competency of our new members, the new proposals would require a more rigorous screening process that on the surface appears far easier for networks to assimilate into their procedures than DA partnerships or clubs. Not surprising then, as part of our response we are set to announce enhancements to the existing member support and service provided by Paradigm not withstanding that we already operate to a standard most others will find difficult to achieve.
To conclude, one of the UK mortgage market’s major strengths is the diversity of its distribution models – this should not be underestimated in this snapshot of time and circumstance. It would be a crying shame if this strength was compromised in any way by plans that are actually trying to safeguard the industry we all work in.
As Paradigm serves both AR and DA members via its Partnership, I believe we are well positioned to comment. How lenders choose to structure their distribution is an internal commercial matter, but it would be both unwise and perhaps naive if their strategies were dictated by what regulatory stance individual brokers have adopted. Lenders have been more than happy to take advantage of the distribution opportunities that different third-party channels have afforded them in the past, and I am not alone in my opinion, that they should most certainly take this into account when formulating their future plans.
Most distributors have been flexible in the past in adapting to exactly what lenders require and are more than willing to work alongside lender partners, creating exactly the relationship we all want in future, be it quality, reach, value, scale and/or volume. It is important that we continue to get this opportunity in the future and I call on all parties involved to work together for our common good.