The Bigger Issue
Time is right to recons Should the mortgage industry introduce trail commission for brokers?
As the intermediary landscape consolidates into a smaller number of larger brokers and networks, I believe it is the time is right to discuss again the topic of trail commission versus procuration fees. Given that the top four networks/brokers now account for well over half of all broker business (and nearly two thirds of business with some lenders), and that all these firms are well capitalised or part of much larger concerns, the issue that has historically been given for not looking at trail fees may have fundamentally altered. These arguments are well rehearsed; small brokers cannot
afford to defer parts of their payment, as they would go out of business given the shape of their costs. But it meant that there was little embedded value in firms as the only trail commission or ongoing revenues were usually linked to any General Insurance book (historically with Paymentshield). This meant that firms effectively started creating value again at the beginning of each calendar year.
I do think that part of that argument still holds. Personally, I would like to see lenders provide brokers and networks the choice of trail or procuration fees at a time to suit the distributor. In other words if a broker had a very strong January and February and had received an upfront proc fee then they could opt to receive trail commission in March. Not only would this overcome the issue of cashflow, it would also start embedding value in a firm that could then be realised at sale or exit from the industry. The biggest problem in implementing this transition to trail from
proc fees could yet be with our lender partners. Their proc fee systems are quite rudimentary, sometimes reflecting the speed with which they had to build them and can often only cope with one payment methodology against each individual firm, especially when a network or third party is also involved. However I do think the goal of creating long-term value in distributors using trail fees is something now worthy of further debate.
I’ll leave you with this - commentators should all think about when they got onto the property ladder - as I will all but guarantee it was with a 5% deposit and free valuation!
Nigel Stockton, financial services director,
Countrywide
The debate about trail commissions has been around for some years, which suggests the case for them is far from straight- forward. What is clear is that the current commission model benefits the consumer as the intermediary retains an incentive to review their clients’ arrangements and remortgage clients out of uncompetitive variable rates as soon as they emerge from a redemption period. The inherent consumer danger is that trail commissions reward complacency. In this sense, it is hard to see how they are not contrary to the spirit of everything the Financial Services Authority has done to protect consumers over the past five years. From a broker business perspective trail commissions are not cash-flow friendly. To introduce the trail model would require most businesses to have developed a considerable float to withstand a change-over period of significantly lower revenues. Some brokerages will not be able to relinquish the up-front proc fee because of the way their cash flow works meaning some of them would disappear which would not be good for the market. While it is fair to say that trail commissions offer a means of embedding value into broker business over the longer term, their introduction would also undoubtedly include clawbacks (like protection products). Brokers would need to be prepared not only for the change to trail commission but also for the recompense for moving a client to another lender. This would not be in the consumer’s interest. Finally, from a purely practical point of view, changing over to trail commissions is fraught with difficulties. The investment required from all parties to get trail commissions embedded into our daily way of doing business is beyond most small brokers and (if we are being honest) lenders. A few businesses could afford to do this but it’s hard to imagine that the IT costs do not outweigh the benefit. Sole-traders and small brokers would find it almost impossible.
I come back to the issue of consumer detriment. By deterring shopping around I cannot help thinking that ultimately trail commissions do not put the consumer first.
John Phillips, financial services director, Kinleigh Folkard & Hayward
Our experts have had their say, now it’s your turn to have yours. Visit
www.mortgageintroducer.com and vote for the expert you think makes most 28 morTgage inTroducer OCTOBER 2011
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