The UK’s largest lender, Halifax, recently set a precedent by publicly announcing a cap on how much brokers could charge their clients for advice.
The lender’s decision to cap fees at 1% of the loan amount or £1,500 — whichever is greater — has sparked a debate about whether it is appropriate for lenders to dictate brokers’ fees.
It has also raised questions about the fairness of the fees paid to intermediaries, especially appointed representatives (ARs) and directly authorised (DA) brokers.
We can’t have a market where each lender comes out with a different maximum fee
So, what approach is the market taking on fees, and should brokers be worried that fee caps will become the norm?
‘Can of worms’
Brilliant Solutions group managing director Matthew Arena can see both sides in the fee-cap debate.
“I understand why a lender would need to standardise its approach. The alternative is to assess each case on its merits (not feasible for Halifax) or have an internal policy that is not communicated externally — which would cause never-ending frustration for the market,” he says.
Although Arena thinks a 1% cap is reasonable, £1,500 looks “a little low for some”, he says.
Advice has a material value and we must guard against the erosion of that value
“There will no doubt be brokers with valid objections and specific scenarios, but Halifax is looking at the broader picture. What it does do is open a can of worms in relation to other lenders and their approach.
“The majority of Halifax cases are different from the more complex scenarios seen elsewhere. Yes, some Halifax cases can be complex, but a 1% cap [or £1,500] plus the proc fee does not seem too unreasonable for Halifax as a whole, even if I think the cap should be higher,” says Arena.
Association of Mortgage Intermediaries chief executive Robert Sinclair describes the cap itself as “relatively generous” but is concerned about where it could lead.
“We can’t have a market where each lender comes out with a different maximum fee. We realistically won’t be able to manage that,” he says. “It’s also a difficult message if a lender comes out and gives a maximum fee; does that mean it’s OK for brokers to charge that?”
There has to be a discussion about what constitutes a sustainable level of pay for the job of mortgage distribution
In a statement, Halifax explained why it had introduced the cap: “We analysed customer fees within the mortgage chain as part of our Consumer Duty commitments and introduced a policy that outlines the maximum brokers can charge for providing our products. We believe they strike the correct balance under the fair-value assessment.”
However, Sinclair believes that, under the Consumer Duty, it is the advice firm at the end of the chain that should assess whether all costs — including the total cost of borrowing — are suitable for the consumer.
There may be scenarios where the charging of a larger fee can be justified, he says.
“There could be firms that work in the more difficult end of the market, with clients who have more financial issues, requiring brokers to do more work to get them mortgage ready.
Brokers who deal with lower-value loans, especially those in the North, could really benefit from a minimum proc fee
“There could also be a scenario where a firm that normally advises on high-net-worth complex cases, for example, charges a minimum fee. That minimum fee might disproportionately work out in terms of the work being done for one particular client. Nevertheless, the client might know the firm and be happy to pay for the convenience.”
Sinclair says lenders have always challenged fees they perceived to be high — even before the Consumer Duty. Yet this happened privately and was not a problem for a significant number of broker firms.
AR/DA favouritism?
Following Halifax’s announcement, brokers have questioned in turn the fee practices of lenders towards themselves — in particular, ARs versus DAs.
Paradigm Mortgage Services chief executive Bob Hunt believes this is an area where certain lenders need to assess their own ‘fair value’.
Where lenders are paying networks more than they would pay a mortgage club or distributor, that’s a real issue
“Why do some lenders still feel able to pay more to an AR of a network over a DA broker, when the work is no different, the quality is no different and the outcome is the same for the client?” he questions. “That can’t be right.
“Similarly, with exclusive products, how can it be fair value for a consumer to go into two different advisory firms and only get access to a better priced/more suitable product via an exclusive arrangement at one?”
The debate over lenders’ fees to ARs and DAs has rumbled on for years. However, Hunt says the intermediary market has changed considerably since some of these agreements were made.
“The operational, governance and compliance requirements today are very different from what they were when these differential terms were first established; and, as those justifications for difference have significantly diminished, it’s about time the matter was addressed.”
There will no doubt be brokers with valid objections and specific scenarios, but Halifax is looking at the broader picture
Halifax was unavailable for comment on whether it pays ARs more than DAs.
In the past, some lenders claimed that networks’ greater compliance oversight was behind the decision to pay higher fees to ARs. But Sinclair feels it is not as simple as saying that ARs are paid more than DAs.
“Proc fees are effectively the result of commercial and individual agreements between firms,” he says. “Each network and club can negotiate proc fees with each lender, and what the broker gets will also be determined by what commission is taken along the way. That is how business should work.
There could be firms that work in the more difficult end of the market, with clients who have more financial issues, requiring brokers to do more work to get them mortgage ready
“Obviously, clubs or networks with some scale might be able to negotiate a different fee, or where less work needs to be done to a case by a lender — if a network or club can provide evidence to support its argument,” he adds.
Arena, too, believes the issue is not black and white.
“Lenders pay networks higher commissions than a DA broker in the same way as they do a mortgage club; effectively, the network is a distributor,” he says.
“Some networks have business models that allow them to pass on some of that to their advisers; many do not. In those cases, the broker is still typically getting less (net) than they would if they were a DA. In those cases I see no issue at all. That’s the market doing what the market does best.”
He adds, however: “Where lenders are paying networks more than they would pay a mortgage club or distributor, that’s a real issue and not one that I have ever heard many lenders are able to justify. To my knowledge, the business quality arguments have never really stood up.”
Why do some lenders still feel able to pay more to an AR of a network over a DA broker, when the work is no different? That can’t be right
There are already calls for uniform proc fees from lenders for product transfer and remortgage business — something Halifax already does — but would a wider, standardised proc fee work?
“Brokers who deal with lower-value loans, especially those in the North, could really benefit from a minimum proc fee,” says UK Moneyman managing director Malcolm Davidson. “There is a minimum amount of work the lenders expect us to do, but no minimum payment.”
Davidson highlights the potential disparity in fees between the North and the South. He notes that Halifax’s cap at least allows brokers to continue serving customers with smaller mortgages as it permits a fee of up to £1,500 rather than just 1%.
“For small mortgages, even a £495 broker fee could be more than 1%,” he says.
Sinclair points out that, although property prices and the average mortgage size have increased, the bulk of these increases are in the South, making it harder for brokers in the North.
I understand why a lender would need to standardise its approach
“We also have the Mortgage Charter,” he says, “and the expectation of brokers that, if rates fall during the gap between offer and completion, they can get the customer a better deal. That’s causing significant extra work for no extra income.
“All of this is putting pressure on the intermediary community. There has to be a discussion about what constitutes a sustainable level of pay for the job of mortgage distribution, and for advisers to do the distribution that lenders want.”
Common sense
Although Arena understands Halifax’s decision, he warns: “What we must avoid are scenarios where the risk teams of lenders make decisions that stop aligning with common sense, and the natural worry is that, following this move by Halifax, it is only a matter of time before we see this.”
There is a minimum amount of work the lenders expect us to do, but no minimum payment
He believes the bigger picture with fees is based on how lenders view advice.
“Lenders already undervalue mortgage advisers, as seen in the proc fee paid. Borrowers are often drawn to fee-free propositions already.
“Advice has a material value and we must guard against the erosion of that value.”
This article featured in the June 2024 edition of Mortgage Strategy.
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