Proc Fees: to declare or not to declare, that is the question
Jonathan Sealey is CEO of Hope Capital
The issue of fee disclosure is becoming a contentious issue.
Should brokers disclose to their clients the proc fee that they get paid by the lender or not?
And where does that leave lenders in terms of what information they should then declare on the borrower’s loan documentation?
For lenders that are a part of the ASTL then part of the Code of Conduct that we sign up to is to: “Disclose all costs and fees up front, with no small print or misrepresentation of product offerings.”
However for brokers and lenders not part of the ASTL it is up to them as an individual entity to decide what they tell the borrower.
With the advent of the MMR, the market is increasingly moving towards total transparency and a breakdown of all costs, so is this not a move all unregulated businesses should take voluntarily?
If we do move to complete transparency it would work best if everyone decides to go down the same route at the same time.
There is always the risk that where some lenders disclose their fees openly and others do not that it could it influence where brokers send their business, especially if the broker feels they can charge more if their proc fee is not declared to the borrower.
This becomes more of an issue if the broker also charges a fee.
On the other hand, to play devil’s advocate, as long as the borrower knows up front what their rate of interest is and that they have to pay a 2% arrangement fee, for example, do they need to know that 1% is of that fee is going to the broker?
It seems the problems only occur when the borrower doesn’t know what they are paying.
Most clients never ask if fees are being paid or to whom, they just want to know how much the loan will cost them.
As a lender which likes to be completely transparent with both brokers and clients, we detail all fees but not which bit is going to the broker at the moment, unless the client specifically asks for it.
We feel that it is up to the broker to declare to clients what they are paid but we support the call for greater transparency and the breakdown of fees; I also expect to see the market increasingly move in this direction following the introduction of the RDR at the beginning of 2013 and the FCA’s open declaration in the past few days that they feel UK advisers are failing to inform clients properly on their charges.
While the RDR is aimed and pensions and investments I think it’s only a matter of time until the same standards come across to all parts of the financial advice market.
In terms of where any proc fee goes, we actually prefer to pay the 1% to the broker than go direct to the consumer because of the immense added value that the broker brings.
We have found that a good broker will package the case, speak to both solicitor and borrower and it cuts out a lot of time and manpower for the lender, easily deserving of the 1% we are paying them.
We also don’t feel that the borrower always realises the lengths that the broker goes to on their behalf to ensure they get their loan and receive their funds in the time scale that they need them.
Arguably as long as all fees are up front and the borrower knows and has agreed exactly what he or she is paying then a broker’s remuneration should not be an issue, but it would be good to discuss this issue openly and find a route that everyone can agree upon.
With the RDR, the MMR and then the EU Directive coming just down the line, it could be that this is an issue that is soon taken out of our hands.