The proc fee debate

24 Nov 2024

Specialist UK Mortgages...

Julia Harris, mortgage analyst at moneyfacts.co.uk – the money search engine, investigates:

“Recent research from Mortgage Trust revealed 96% of advisers received commission from lenders, pocketing on average £428 per case. With every lender adopting a different procuration fee structure depending on the product type, mortgage advance and even the introducer, the market is becoming very competitive.

“Procuration fees can range between flat fees per case of £150 to £500, or percentage fees of anywhere between 0.2% of the advance up to as much as 2.25% for some sub prime deals – and of course individual deals are often negotiated between specific lenders and intermediaries.

“With less than a fifth of IFAs operating solely on a fee-based revenue (fee charged to client for advice), a major source of income for many advisers will be the procuration fees paid by lenders. So at what point does a procuration fee become a consideration in the advice process?

“In today’s dynamic and complex mortgage market, it is inevitable that advisers play a key role in its success. With almost 3,000 prime mortgage products to choose from and 7000 sub prime deals, each with very different rates, fees, incentives and features, it can be a daunting prospect for a consumer to look for the best deal themselves.

“Since the launch of MCOB (mortgage conduct of business) in October 2004, the intermediary has become further entrenched in the application process, taking on board a raft of regulation and in the near future the possibility of providing automated valuation models (AVMs) at the point of sale.

“There is a healthy cycle of competition in the mortgage arena, with brokers competing for clients and lenders for brokers. But does this competition always benefit the consumer? Of course competition between lenders will lend itself to more competitively priced deals, but as lenders also compete for brokers, not by the competitiveness of their product but on the income paid, there seems to be a conflict of interests.

Survey

“While regulation prevents abuse of the system, if there was no impact on the level of business generated by offering a higher procuration fee, why are lenders continually increasing their fees? The table below shows how some of the major lenders have changed their procuration fee over the last 10 years (table only includes fees for standard mortgage deals, different fees may also be payable).

	Mar-97	Mar-02	Mar-07
Bank of Scotland	Over £500K of mortgages pa - 0.25%. Over £750K of mortgages pa - 0.40%. Up to £35 per case if prearranged target achieved	Min £300	Min £300
Abbey	N/A	N/A	0.35% of advance. Flexible 0.45% of advance
Lloyds TSB / C&G	N/A	Min advance £25K - £175 per case. For advances min £100K - £500 per case	0.3% of advance. 5 & 7 year fixed - 0.35%. (min £150)
Northern Rock	£100 per case	£100 per case	Min £100. Together mortgage £150
The Royal Bank of Scotland	Up to 20 completed mortgages £130 per case, over 20 cases £200 per case	Advances up to £40K - £130. Advances to £75K - 0.3%. Advances to £100K - 0.4%. Min £100K - 0.5% (max £1250)	0.4% to 0.7% of advance
Alliance & Leicester	£100 per case	Min £100	Over £25K - 0.25% (max £1K). (online apps only)
Bristol & West	£100 per case	0.25% of advance (min £100). Flexible 0.5% of advance	0.3% of advance. Flexible 0.5% of advance. (min £150)
GMAC-RFC	N/A	0.35% of advance	0.35% of advance.
Britannia BS	No commission payable	No commission payable	No commission payable
Clydesdale & Yorkshire Banks	N/A	£200 per case	No commission payable
Portman BS	On fixed and discounted rates £150 per case	0.25% of advance	max 0.35% of advance (max £1750)
Yorkshire BS	£150 per case on capped rate	Advances up to £50K - £100. Advances over £50K - 0.2% of advance	No commission payable
Skipton BS	£100 per case	Min £100 per case	Advances up to £100K - min £260. Advances over £100K - min £350
Leeds BS	£100 per case and £125 bonus on completion of every fifth mortgage	Advances up to £60K - £125. Advances over £60K - 0.25% of advance	Advances up to £50K - £125. Advances over £50K - 0.25%
CHL Mortgages	N/A	Min 0.5% of advance	Min 0.5% of advance
West Bromwich BS	0.35% of advance (max £300)	0.35% of advance (max £500)	0.35% of advance (max £1.5K)
Principality BS	Neg	0.35% of advance	0.45% of advance
Average mortgage advance (Source CML)	£54K	£74K	£130K

“Other major lenders, such as Nationwide, Halifax, Woolwich, Coventry BS, Standard Life and Chelsea BS, also pay commission, but the fee structure will depend on the relationship with the broker introducing business.

“The results show a distinct move from flat per case fees to percentage fees, which in a time of rising house prices and thus mortgage advances, appears to indicate that broker income has been increasing at a healthy rate. But, this is of course only half of the story as the mortgage market has been very changeable over the last 10 years.

“Not only has the competitiveness of the market increased, so too has the complexity of mortgage cases and products, but undoubtedly the biggest impact will have been M-Day. While we have seen brokers fees rise, so too has their costs, as compliance has meant increased processing, documentation and additional training.

Future

“Retention fees have been a hot topic of late, with two very different views on their place in the market. So long as the adviser still completes the full fact find, and the existing lender remains the most competitive deal, then in no way should they be penalised by not offering this to their client. With rising upfront fees, staying with an existing provider may become a more cost effective solution for many more borrowers in the future. Research by Troika confirmed 79% of lenders believe retention procuration fees will become an industry standard in the future.

“The sub prime market is also growing, both in the number of clients and lenders. As these cases are both more complex to fact find and assess the best deal, it is fair to assume a larger fee is paid to an adviser. But whilst sub prime fees will understandably be greater than for a prime case, fees which increase in line with the level of adverse are perhaps more questionable.

“There is also some talk of other strategies coming into play. Lenders that don’t pay commission but pass on this cost saving by way of better rates, can only be a source of good news for the client. There are also lenders which reward for mortgage accounts that don’t fall into arrears, basically paying commission over the longer term for good account conduct.

Summary

“Lenders are taking broker business seriously, with new intermediary only lenders entering the market, and large lenders such as RBS and West Bromwich are launching intermediary arms.

“But I wonder how many consumers completely understand the intermediary market. Are they aware of the variety and level of fees paid by lenders, or that their adviser will normally only select products from a panel of lenders, not the whole market? Are they paying the adviser fees for their advice? Are they aware that they don’t necessarily get a preferential rate by using an adviser and that sometimes better deals are available directly from the lender?

“For any consumer considering taking advice, it is wise to have a fair idea of the mortgage market to begin with. Using sites such as moneyfacts.co.uk – the money search engine, will give a good indication of the products available.

“On a marginal case between lenders, the difference between receiving commission of say £150 or in excess of £650 , could potentially be the factor that swings the deal. The fact that the FSA is investigating this topic indicates that procuration fees are interfering with advice and choice. Lets hope when its discussion paper is published later this year, the FSA finds a solution and quickly. Surely a flat fee or even a cap would be great comfort to the consumer.

Clive Briault, managing director of retail markets at the FSA has commented: “we are keen to understand how far commission structures between provider and the distributor influence the decision of the distributor. To what extent does commission lead to detriment?

“The very fact that major product providers increase their commission levels to gain business share suggests that commission influences business flow. But do all commission arrangements result in detriment to the end customer? And if so, what are the alternatives?”

NOTES TO EDITORS:

Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.

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Based on 0.5% of average home mover mortgage of £130K

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