How’s your network?

It is only a matter of days since the fifth anniversary of ‘Mortgage  Day' (M-Day). Funnily enough, the occasion was not marked with mass  hysteria or a string of street parties, but looking back on this period, it is evident that the market has undergone numerous
twists and turns.

Of course, to chart these five years would take more than a whole article. However, one constant since the heady days when the FSA stamped its initial authority on the mortgage market is the debate over the pros and cons of firms being directly authorised (DA) or an
appointed representative (AR).

In the years since M-Day, we have continued to see companies move from AR to DA and vice versa, and there are some firms who constantly evaluate whether or not to switch their status, as the regulatory implications and the challenge of the current economic climate take effect.

Since regulation was introduced, the FSA has cast a considerable shadow over the mortgage market, in terms of compliance and procedures, and with the flood of recent news stories about enforcement action, it certainly seems that it is now making a real show of its fight against tackling those who work outside regulatory boundaries.

To illustrate this, only a matter of weeks ago, the FSA withdrew the approval for
a director of the now defunct Premier Network Group, to perform the roles of
chief executive and the ‘apportionment and oversight of responsibilities', because
it found that he lacked the necessary competence and capability.

The regulator said that the director in question failed to manage and control an expanding network of mortgage brokers to acceptable standards. As a result of these failings, the FSA noted that some of the network's ARs took advantage of the weak systems and controls by submitting fraudulent mortgage applications and recommending unsuitable mortgage
contracts. This is a worrying indictment, but regulatory action has certainly not
been confined to networks as an unprecedented amount of enforcement action has
been taken against a number of brokers with various degrees of permission and
regulatory status.

2009 has been a tough year for networks, with Network Data and more recently Mortgage Times hitting the headlines for the wrong reasons. But to be fair, it is not only networks that have suffered amid challenging market conditions;  far from it, all firms operating in the broker and distribution channels have experienced  difficulties in some form or another.
Looking back, the FSA released figures  on the numbers of brokers leaving the
industry in the first three months of 2009. The  vast majority of headlines emanating from these statistics highlighted that over 300 DA brokers had left the industry.

However, when looking closely at the figures, they also showed that 119 ARs had left the industry over the same time period. Essentially, when broken down, this meant
that only 4.5% of DAs had left the market compared to 2.5% of ARs. Hardly the
greatest of headline grabbing differentials, especially when you take into account the
number who may simply have naturally come close to retirement age.

In terms of shifts in regulatory status, we at TMA launched our inaugural DA
broker survey earlier in the year, which found that an overwhelming 89% of
those currently trading as DAs were not considering changing their regulatory
status soon. Only 4% of respondents said they were considering changing their
regulatory status, with 7% stating that this was maybe a consideration due to current
market conditions.

When prompted to explain the reason behind the decision, the 11% who responded ‘no' or ‘maybe' pointed to increased FSA regulation, allied with the perception that the FSA wants
them to become ARs as the top reasons.  Interestingly, less than a fifth thought that
they would be better off financially by joining a network. The survey also found that a mere 4% of those currently trading with DA status do not value the services offered by mortgage
clubs. Results found that an overwhelming 82% of DA brokers responded positively
to the benefits offered by mortgage clubs reporting that they found the services
offered to be great value, while 14% stated that they were unsure of the full benefits.
Additionally, almost two-thirds of DA brokers reported that stories regarding
some networks withholding proc fees have reaffirmed their commitment to DA
status.

Nearly three-fifths of those surveyed reported that such stories had reaffirmed
their commitment to remaining DA, while only a quarter reported that the issue had
not affected their thoughts on regulatory status. Only 17% responded by saying that
maybe they have had some effect. While these results were gathered a few
months ago, I firmly believe that if we were to undertake this research again tomorrow,
then the results would be very similar, with  possibly even more commitment being
illustrated to the DA market.

Another factor in a potential regulatory shift is the increased amount of consolidation
that we are seeing in the market. Deals happening in the current mortgage sector
are far from uncommon; we have seen Openwork become a prime mover in this
area with the addition of GHL earlier in the year. Mortgage Intelligence and Mortgage
Next also merged relatively recently to create a large network offering.

We have also very recently seen Sesame  complete its acquisition of Bankhall
and PMS which has created a so-called ‘distribution giant'. I suppose the $1bn
question remains how AR and DA brokers alike are coping with all the change in the
distribution landscape and any potential effects on their business models. At times
like this, intermediaries - whether DA or AR - need to consider all aspects of their
business very carefully and make sure that they are aligned to like-minded organisations
by carrying out considerable research on firms they do business with.

Choosing stable business partners is something that is increasingly problematic
for the intermediary market, and it is likely  that there will be further consolidation,
particularly within mortgage networks with more IFA networks circulating
the mortgage market. As consolidation persists, it is vital that firms place great
emphasis on choosing their strategic partnerships and affiliations wisely. Wellbacked,
structurally sound, professional and well-supported firms will remain in demand as the flight to quality becomes even more pronounced.

There is no doubt that the majority of mortgage  intermediaries certainly
feel the pinch, and have to look at their business models closely, and ultimately this
will cause them to question their regulatory  status. For many, the answer is simple,
but for the others, it is vital to weigh up the options carefully. Networks are a good fit
for many firms, but more than ever, there is a great deal of support in the market for
directly authorised firms in the form of  trade bodies, mortgage clubs and a number
of outsourcing opportunities.

Flexibility and the freedom of choice are key to DA offerings and as such we believe
that DA firms remain in prime position to explore new sectors and develop relationships
with high quality business partners in order to gain access to additional income
streams. However, whatever the status, it is vital that a good club or network offering should
offer a real sense of added value and in these uncertain times this reassurance
and confidence could prove the difference between survival and success.

Phil Whitehouse is head of The Mortgage Alliance