We’ve come a long way, but there’s still a long way to go…
Duncan Crocker, managing director of Legal & General Network, the UK’s largest mortgage distributor, looks at how intermediary distribution of mortgages had developed over the years and where it might be going in the future
If you could wind the clock back to the 1970s you would find yourself in a mortgage market almost unrecognisable from the one we are in today. Mortgages were severely rationed.
Almost all lending was done by building societies - banks used to refer mortgage customers to their local society branch (no, really, they did!) and very little business was squeezed out to the tiny intermediary sector. But, strange as it may seem, it is in this undersupplied and constrained market that the roots of the current mortgage distribution market lie.
It took until the mid-1980s before the market started to see supply equal, and then exceed, demand – firstly by the aggressive entry into the mortgage market by the banks at the start of the decade, and then the formation of the new breed of centralised lender – The Mortgage Corporation and National Homeloan Corporation, for example – tapping into the wholesale markets and bringing new lending capacity to a starved market.
As a result, following a couple of decades where it was really difficult to get a mortgage, suddenly the brakes were off. Consumers could pick and choose, both amongst traditional lenders, and from the new breed of centralised lenders. Mortgages had become commoditised – you didn’t have to save up with a particular building society for years before they would consider you – and you could make your choice from amongst a range of lenders.
Life insurance firms
So, in this more frenetic market, how did the new lenders find a way to distribute their products? They had no branches themselves, and their experiments with selling mortgages direct to consumers over the phone did not produce the required volume of business.
Step forward the sales forces of all the major life insurance companies operating at the time – Allied Dunbar, Commercial Union, Royal, Legal & General, Sun Alliance and many more. Presented with a product the consumer wanted, and with the ability to sell an endowment policy alongside, this combined sales force built a huge market share – initially working with the new centralised lenders, but latterly, particularly following the market downturn of the early 1990s, with the traditional mortgage players, building societies and banks.
By the mid-1990s the pattern for distribution was firmly established. A proportion – probably less than half – of mortgages continued to be sold through bank and building society branches, and the balance – well over half, came through intermediaries – offering consumers choice and advice.
By 2007, the share of market coming through intermediaries was reaching 70 per cent, and for some well known lenders individually, over 90 per cent. Some people may argue that this was an unhealthy state for the market, that distribution held too much sway, but no intermediary ever sold a product that a lender hadn’t produced.
The 2007/2008 crash took care of that however. As the market again moved from oversupply to undersupply, the entirely understandable stance of lenders was to prioritise their own branches for the restricted supply of mortgages that were available.
Notwithstanding this dramatic downturn, which also resulted in around a third of active mortgage intermediaries leaving the market (a drop from circa 30,000 advisers down to around 10,000 now according to the Association of Mortgage Intermediaries), intermediary distribution has remained resilient, still accounting for around half of all mortgages last year.
And if you thought it was an unhealthy market when intermediaries held too much sway, how good is it that the pendulum has swung so far the other way and that we have a less competitive market, where eight lenders are providing nearly 90 per cent of the volume?
Intermediary distribution has held up so strongly – and it’s worth asking why that might be? It is true to say that lenders dropped the ball many years ago. It is difficult to think of a mortgage brand that consumers would beat a path to the door of isn’t it? Consumers have got used to choice. They have got used to a series of short term deals, and to moving lender or product each time they move home or need to remortgage.
Lenders, through their highly competitive actions, have made it seem the norm for borrowers to move from lender to lender at the end of a “deal” period. Very few have succeeded in building value-added services into their products which make customers think twice about leaving – flexible and current account mortgages being a notable example here, but one which has not reached mass market acceptance yet.
Now it may sound as though the intermediary sector has had it all its own way, but that is not the case at all. Financial service distribution generally has had a pretty tough time over the last five years. The crash itself took out a large number of intermediary firms, and the impact of regulation – the Retail Distribution Review (RDR) in particular – is putting many more under stress.
Not many networks report healthy profit figures these days. It is a tough business to make a living in, unless you have another source of revenue (such as estate agency and surveying for the property groups) or the backing of a manufacturing company, as in the case of our own network.
We believe that the next couple of years will see further fall out in the network sector, as a result of RDR and of the continuing general economic malaise, particularly of the UK property market. It will get tougher and tougher to make a profit year on year.
Know your broker
And a further pressure has now come to bear – with implications for both the lender and the intermediary sides of the market. This is the “Know your Broker” initiative from the Financial Conduct Authority (FCA), whereby they expect lenders to have much better knowledge about who is actually selling their products. Lenders have recently become very active in measuring and monitoring their business sources, and active in deciding if certain sellers or firms should no longer submit business to them.
This is still a work in progress, and the combined impact of RDR and of “Know your Broker” is likely to leave the distribution landscape looking quite different by the end of 2013. Winners will be firms with a diversified business model, earning fees and commissions across a range of products, not just mortgages, and able to demonstrate the investment in compliance management that delivers consistent quality mortgage business to their lender partners.
We believe there is further consolidation to happen in mortgage distribution and that this is necessary to build sufficiently robust scale firms able to support the sales quality infrastructure that lenders will increasingly demand. We believe lenders should be quite selective in who they choose to do business through. They should prioritise strongly funded, well run firms who produce the real quality of business they require. And “open to all” approach runs the risk of the lender doing mortgage business with a firm that might itself go out of business, leaving their joint customers in the lurch, and without access to advice.
Just as lenders need now to be more intrusive in enquiring into the finances of their mortgage applicants, they should perhaps be doing the same with their distribution partners and getting a good understanding of the compliance management infrastructure that they employ. Both parties need confidence in each other - lenders and distributors - above and beyond what modest comfort FCA regulation and permissions may provide.
The outlook for the UK mortgage market should be one of slow steady recovery back up towards the sort of levels of gross mortgage lending that supports the long run average of house moves. The market is currently sitting at around £50 billion to £70 billion gross lending per annum away from this.
We estimate that to get back to a more normal market, where people move home every seven to ten years (with all the attendant spin off expenditure that keeps the UK high street healthy) we need around £220 billion gross lending every year. It could take several years to get back to this level – perhaps in say another five or six years time we may be almost there.
But beyond the pure economics of the lending market, change has become a constant, and distribution firms have to recognise this to prosper in the future. Leaving aside economy and regulatory change for the time being, there are some huge changes coming over the horizon at us.
Future generations of homebuyers, armed with new technology, may not want to transact business with mortgage intermediaries in the way they have in the past. They will want clicks and information – rapid decision-making, over mobile devices, where and when they demand them. Go to a branch to talk to a man in a suit? Get real!
As such, we believe that there are two huge challenges, and opportunities, for mortgage distribution looking forward: consumer attitudes and brand trust.
The consumer of tomorrow will expect to be able to get their needs fulfilled in a variety of ways and a variety of times that suit them. There is a marketing saying that the consumer of the future will be more different on two occasions than two different consumers on the same occasions. In other words, they may want to deal over the phone for some things, but completely online, or indeed face-to-face for some other things. Whoever is going to provide service to these consumers needs to have a proposition that meets this need for flexibility. Being able to deal with the customer how he or she wants and when he or she wants is the challenge.
And brand? Well I mentioned before that there are no really strong brands in the mortgage market. No brands that make consumers say, “I really want to get an XYZ Co mortgage next time around.” So if lenders have abdicated this space, could an intermediary brand step into the void?
At a local level this happens already. We have many good partner firms who run strong client banks of loyal consumers who come back time and again, and who introduce friends, family and colleagues. These firms have customers who are really satisfied with the service their adviser provides. We believe this model is scalable, with the right investment and support.
We have seen advisory and distribution businesses making moves into the national space. Indeed, there is definitely now some consumer awareness of national brokerages, but I don’t think these have gained widespread national brand recognition yet (in the way that say, the High Street banks have). There remains a huge opportunity for an organisation with the resources to make a national impact on consumer consciousness and to have the resources to deliver the service to back it up.
We think lenders should be working with distributor firms who are able to attract a ready stream of customers. Firms with strong brands able to reach out to consumers and who can provide the advice service that customers need, where and when they want it. Face-to-face advice won’t go away any time soon, and it may never, but it needs to be supplemented by excellent phone service, good internet service and through continued deployment of new technologies such as VScreen and Skype.
We believe lenders still need intermediary distribution – perhaps even more in the future than has been so in the past. Strong brands, flexible business models, offering cost effective access to markets for lending, and producing consistent quality mortgage business will prosper.