There was plenty to talk about in the run up to MCD regulation. From the impact on sales processes to the way in which brokers market themselves there’s been no shortage of discussion but one area has been somewhat lower down in the list of hot topics – remuneration of second charge brokers. The reason for this is that the picture is still somewhat unclear. The industry as a whole has yet to figure out how fees will be affected amid the huge changes surrounding the move to an advised model under MCD.
Let’s look at what we do know.
At present borrowers pay a bundled fee which covers valuations, other third party costs, packager fees and introducer fees. With the greater transparency required for MCD lenders are building their systems to allow for most of these costs to be unbundled and shown to the consumer via the ESIS.
Under MCD rules, the fees model will have to change to give customers the choice of whether to pay fees upfront or add them to the loan.
When it comes to broker fees, the long running debate surround the value of advice will be ignited once again as how each party is remunerated is scrutinised. Being the person offering advice means you hold significant liability. So should this advice be apportioned its own fee?
And with multiple brokers involved in the chain, it opens up the possibility of introducers charging their own fee rather than sharing in the fee charged by the loan master broker.
We ask two leading master brokers how they think MCD will really affect their businesses.
Marie Grundy, managing director, V Loans, says:
The much debated Mortgage Credit Directive (MCD) is now with us – an EU wide framework of conduct rules for mortgage activities designed to foster a single market and to enhance consumer protection. 21 March 2016 was also the date second charge lending was transferred into the mortgage regime and for the very first time a level regulatory playing field has been created between the first and second charge markets – for many this was long overdue.
The new rules applicable to second charge lending will, for the first time, prohibit the automatic rolling up of fees – fees or charges can now only be added to the mortgage where the borrower(s) have positively elected to do so and must form part of the advice process. Ironically under consumer credit law, firms had no choice but to add fees to the loan in the form of a single broker fee – as a result this change has been welcomed industry wide.
Counter to this is the estimation that only 50% of intermediaries pre MCD were engaged with second charge lending, reflected perhaps in the fact that second charge lending in 2015 represented less than a £1bn of lending in comparison to a £52bn remortgage market in the same period. Fees are often touted as one of the barriers for mortgage intermediaries to look for more second charge lending opportunities.
Changes to the rules around fees are only one small part of the outputs of the rulebook now applicable to second charge lending. However, it is also symbolic of the opportunities now available to an evolving market to overhaul the perceptions and legacies associated with second charge lending. It is only right, in my view, that where the costs are being picked up by the borrower, thought should be given as to how this is reflected in the fee structure.
Is it really as simplistic as this though? Second charge firms now face a dramatic uplift in regulatory costs and increased compliance burdens. To achieve better consumer outcomes it is an important consideration for all firms involved in the process to review both the fee and onward remuneration structure to reduce the cost of borrowing balanced against wider business objectives. Should the remuneration structure of a firm also reflect who is taking responsibility for the advice process? There is no easy solution but to progress as an industry some difficult decisions will need to be made sooner or later.
The landscape for second charges has changed forever and it is worth considering how fairness in fees will help increase the prospect of long term affordability for consumers as well as reducing the cost of borrowing. This increases the prospects of directly contributing to further growth in a valuable lending market which continues to serve the needs of many borrowers who may otherwise face significantly more expensive borrowing options.
Nigel Payne, managing director of specialist distributor, TFC Homeloans, says:
First and second charge lenders constantly tweak product design in reaction to levels of business, moves made by their competitors, interest rates, and perceived risks, amongst many other things.
Clearly, most of these factors will be highly variable in the second charge sector in the coming year and beyond, so we can only give a best guess as to how they will interact, against the backdrop of such a significant regulatory shift.
All bets are off following MCD.
In the next few months I don’t expect any tangible changes because the industry will be focussed on getting used to the post-MCD processes and gauging the impact that the new rules are having on business volumes. Plus the threat of Brexit is looming large and leaving business in limbo for the next three months.
Plus we don’t know the role technology will play in sourcing and comparing second charge products, and importantly how clients will react to seconds being raised in what they thought was a remortgage discussion.
Ultimately I expect volumes to rise and for that to eventually impact on product design.
There is clearly more leeway for lenders to make changes to fees than to rates. After all, at 4.5% best buy second charge rates can’t fall much further without being in spitting distance of first charge remortgage rates, but with a potentially greater lending risk attached.
We are likely to see fees come down, including fees to the clients and of course commission to the distributor and broker, particularly if there is any downwards pressure on rates.
This will be minimal in year one, especially as lenders will want to work closely with their most trusted distribution partners, preferring to deal with a smaller number of larger proven brands. The same goes for brokers, who will look to the experienced specialist distributors as a safe haven to help arrange second charge loans.
Another possibility is the introduction of Early Repayment Charges (ERCs) into the second charge loan sector, particularly with the introduction of fixed rates into the market. And we may see clients paying for the valuation. Any of these additions could further complicate the products, and increase the need for a specialist distributor to be involved.
For those of us who operate in the sector, the way that fee structures change for the client, the broker, and the distributor, is simply something we will adapt to.