T o state the blindingly obvious, procuration fees are an issue close to every mortgage broker’s heart. They are, after all, a broker’s livelihood. They pay for his or her salary, the roof over their head, the car they drive, the food they eat. No fees, no job. It’s as simple as that.
Being such an important part of a broker’s life you would think it is pretty essential for them to know with a reasonable degree of accuracy how much they are likely to earn in fees during the year ahead. Unfortunately, income forecasting is a very imprecise art because of the forces which come into play over which intermediaries have no direct influence. Brokers don’t know whether business volumes will increase or reduce, or if the level of fees for different types of products are likely to rise or fall during the year ahead. How on earth are brokers expected to predict their future income against a background of such uncertainty?
Competing forces
The truth is that proc fees are subject to a number of competing forces, with some forces exerting an upward influence on fees and other exerting downward pressures. Interestingly, despite predictions over the last two years that proc fees would fall, the level of actual proc fee payments has not changed dramatically. Prime mortgages tend to pay fees in the 0.25 per cent to 0.5 per cent band, niche products such as self-cert and buy-to-let pay in the 0.4 per cent to 0.8 per cent band and non-conforming products pay from 0.75 per cent upwards (I do accept that there will be exceptions to these figures; I’m simply trying to make a broad generalisation at this point). Think back to the beginning of 2004 – before ‘Mortgage Day’ – and fee levels were at approximately the same level. However, in early 2004 many people predicted that regulation would cause fees to plummet. So, why haven’t they?
To answer that question we need to consider the forces to which I have just referred. Let’s start on a positive note and look at the pressures for proc fees to rise.
Rising proc fees
Competitive pressure for new business is an obvious factor. The mortgage market is heavily oversupplied with dozens of lenders competing for an increased share of the available market. Unfortunately, despite every lenders’ objective to increase their market share, basic mathematics says this isn’t possible, especially in a market which is predicted to remain static for the foreseeable future.
The CML, in its latest forecast issued in December 2005, is predicting that gross mortgage advances will remain flat at £275 billion during 2006 and 2007. That’s down from £280 billion in 2005 and £291 billion in 2004. Not a great market in which to try to defend market share, let alone increase it. Lenders will therefore consider any option to keep new business rolling in and one way to do that is by increasing proc fees. We have seen this happen in the market in the recent past, and I have no doubt it will happen again in the future.
There is also no doubt that networks and distribution companies have been using their bulk-buying power to negotiate enhanced proc fees on behalf of brokers. Even when proc fees cannot be increased, networks and distributors have been able to exert influence for them not to fall. Individual brokers have little influence when it comes to fees, but when represented en-masse, progress can and has been made on their behalf.
Advisers’ role
Another factor which supports an increase in proc fees is the changing role of mortgage advisers. In the post-‘Mortgage Day’ world, brokers unquestionably have to spend longer advising clients and completing paperwork than they did before regulation was introduced. The drive towards online technology has shifted the front-end application administration off lender’s desks and onto broker’s. It is brokers who now have to key in client application details – not an administrator in a lender’s back office. There is a strong argument, which AMI has voiced on several occasions, that proc fees should be adjusted upwards to take into consideration the additional workload which is now involved in submitting a mortgage application on behalf of a client.
Unfortunately, there are also counter pressures to take into consideration. Lenders are only too aware of the fact that products need to be as competitive as possible in today’s oversupplied market. Again, it’s another unarguable fact that, unless a lender wants to go bust quickly, they cannot afford to offer a market-leading rate, incentives such as free valuation and legal fees and no remortgaging costs, and a hefty proc fee.
Something has to give and that something is likely to be proc fees. Market-leading prime products pay wafer-thin fees and we are also seeing products being dual priced, where consumers can sometimes get a cheaper deal if they buy direct through a branch or over the internet, as opposed to going via a broker.
Cutting costs
A flat mortgage market in which lenders cannot increase market share means the only way they can protect profits and shareholder interests is by cutting costs. One way to do that is by encouraging as much business as possible to be transacted over the internet. Some lenders now insist all intermediary business is transacted online and will not pay proc fees for business which is submitted on paper. Electronic trading will continue to gather momentum and will be a key factor in the proc fee debate. Lenders will continue to disincentivise brokers from submitting applications other than via the internet, which puts a far greater administrative burden on intermediaries – but with no additional reward.
Customer retention is also a growing issue for lenders. At the moment 47 per cent of gross mortgage lending is remortgaging. That’s business being churned that costs lenders millions each year. Lenders are starting to wake up to the stark reality about churning – they need to put a strategy in place to stop it. In simple terms, lenders have two choices: either close the gap between the acquisition pricing and reversion pricing of mortgage products or stop paying proc fees on remortgages. Both options seem unlikely at the moment and it will be a brave lender who decides to make the first move.
However, there is another alternative. Lenders could increase redemption fees to try to lock borrowers in and they could also pay retention fees to brokers if they review a mortgage and recommend a client to leave their mortgage where it is. This option, however, is not only likely to unleash the wrath of the media who have already been critical of fees being charged to clients for closing their mortgage accounts. It also goes against the very essence of what brokers are all about. The role of a broker is to find the best deal available on behalf of their client, not to help lenders protect their client base. What’s more, regulation insists that brokers provide best advice and remain uninfluenced by factors such as fees. However, lenders choose to dress up such a scheme; it would be difficult to see it working in reality.
Opposing forces
So where does that leave broker proc fees? The answer is being pulled between two opposing forces. On the one hand increased compliance costs, an increased workload for brokers and lenders’ desire to protect and increase market share are good reasons for proc fees to increase.
On the other hand, lenders need to ensure products remain as competitive as possible and they also need to cut costs in order to protect profits and shareholders interests. Which means downward pressure on proc fees.
However, brokers are not entirely powerless in terms of influencing the income they generate. One way to push up fee income is by selling more products per mortgage completion. That means not just protection products, but also services such as conveyancing and will writing.
Brokers can also take advantage of other non-financial benefits which are on offer. For example, Mortgage Next’s Passport scheme provides brokers with a whole package of added benefits including free air miles on completed cases, access to a panel of vetted lead generation companies (with free leads), a preferential conveyancing services, training support and even a car leasing scheme. None of this comes at the expense of proc fees, which remain as competitive as they have always been.
Brokers can also increase income by charging clients a fee. Indeed, if mortgage brokers want to describe themselves as ‘independent’ they must make a fee-only option available. Although most brokers still rely heavily on proc fees, an increasing number are also charging clients a fee as well.
The proc fee debate will continue to rumble on. At the end of the day it will be market forces which will ultimately be the determining factor as to where proc fees finally settle. Over the past few years’ pundits have got their proc fee forecasts spectacularly wrong. It will be interesting to see what happens in the future.
Justine Tomlinson is marketing director at Mortgage Next
