The broker fee debate


Since the financial world was turned on its head the spotlight has been placed quite firmly on lenders. Everything from the way they price deals to their customer service has been scrutinised but recently fees have become the main talking point.
Consumers, aware that they are already facing tough times, want to know exactly what they're paying and why. If they're paying for broker advice they want to know how it's priced and how much they're going to be out of pocket.
The Council of Mortgage Lenders takes the view that as long as the price of the mortgage product is transparent and the sales process is compliant with regulatory requirements, fees or commissions are an individual commercial matter between lenders and brokers.
But has the fee-paying culture changed in the last few years? Has the credit crunch made consumers more or less likely to pay?
For years brokers have not charged a fee directly to their customers, instead being remunerated by lenders through a commission on a product fee. For some brokers this is starting to change.
Rob Jupp is managing director at Brightstar Financial. He says fees are now being charged by a large section of the broker community and this seems to be increasing as mortgage and commercial funding becomes ever more complex.
Indeed, few would disagree that the financial services sector is becoming more complex. As constraints tighten the days of easy money are long gone. The banking crisis has also brought the whole industry firmly under the microscope, something that hasn't gone unnoticed by the industry.
"The financial services industry is very aware of public perception and is protective over its professional status, providing a high calibre service comparable to that of the legal profession," says Andy Young, chief executive at brokerage TBMC. "Therefore, many believe that charging fees is synonymous with providing a professional service. Of course, from a financial point of view, many brokers have felt the need to charge a fee as lender procuration fees have reduced significantly over the last few years."
From a broker perspective this is a critical point. Brokers must make a living and if procuration fees are low it's difficult to do this. While some brokers may be moving towards charging a fee upfront many are persevering with lender commission.
But if brokers are paid fees by lenders through commission, should there be more public awareness surrounding this?
Jupp thinks so. "Clients should always be aware of what fee and income an advisor is earning out of a specific transaction," he says. Mehrdad Yousefi, industry commentator and former head of marketing at the Bank of Ireland agrees. "Consumers should be made aware in the interest of consumer protection and good customer service practice," he says. "You will find this is now fully disclosed since mortgage day; October 2004 as far as first charge mortgages are concerned." Yousefi says many second charge and bridging finance companies also disclose this.
Andy Young believes more public awareness around fees is crucial to the integrity of the industry. "In order to maintain the integrity of the non-regulated sector, it is important to be transparent about fees paid by lenders," he says. "Establishing best practice, including transparency, will benefit the sector and help to avoid unnecessary regulation in the future. Consumers should also be encouraged to ask more questions of their brokers about the products being recommended."
Of course transparency only works if consumers understand how fee structures work. "Many consumers are simply interested in obtaining credit to primarily buy their own home or a property as an asset and do not really understand the fee charging structures very well," says Yousefi.
Young says it depends on the individual, their level of interest and the type of product being offered. "Some products can be quite complex in the way the fees are structured, so the simpler the better," he says. "However, it is good practice for brokers to ensure that their clients properly understand when and why different fees are being charged."
Jeff Knight, marketing expert and former director of marketing at G-MAC RFC does not think consumers are aware of how fees work. "I think consumers are too confused about the whole market, with a perceived lack of deals, mergers going on, concerns about interest rates and general issues of mis-trust," he says. "What really needs to happen is to see what clients feel and think about the issue of fees. We could debate this until the cows come home, but I am not sure that the consumer ‐or the broker - is being put first in this whole debate, which is totally wrong."
Charging a fee upfront may mean consumers are more aware of what they are paying but is this a feasible solution? Knight says this is a decision between the broker and their client. "The broker must consider if it fits their business model and market positioning; from a client perspective, it will have to meet their needs," he says. However, he questions why people seem to have no issue in paying for the services of an accountant or solicitor yet find it different with a broker. "People throw arguments about exams and so on, which is nonsense," he says. "They are all experts in their own areas and I really believe more work should be done in terms of shifting perceptions of the professionalism of the broker community as a whole. This is because the polarisation of fees versus commission is, in my mind, not helping matters. The industry has got to have a more holistic self-examination."
The Retail Distribution Review, to be brought in in 2013, raises the issue of charging an upfront fee, giving brokers the option to do so. But Young says it depends on the complexity of the deal and the basis on which the broker is being employed as to whether a fee should be charged up front. "However, brokers should be entitled to receive an overall payment that is commensurate with the amount of work and expertise required," he says.
In the main, regardless of how a fee is charged consumers want to be assured they are not losing out. In this age of austerity, every penny counts.
Has the credit crunch made consumers more aware of fees and what they're paying out?
What the Brokers say:
Chloe Taverner, head of marketing, TBMC
Due to the media attention given to the credit crunch and its impact on the economy, most consumers are aware that access to finance is more difficult than before. However, the overall awareness of fees probably remains unchanged, as consumers generally only consider them when they are looking for a product. But as there is now a more limited product choice and lender requirements are more stringent, consumers may be more accepting of fees being charged.
Melanie Bien, director, Private Finance
Times are hard and soaring inflation means the rising cost of living has made most of us look more closely at where our money is going. Clients do seem to be haggling harder than ever over fees but most are willing to pay a reasonable fee for good advice and excellent service so as long as brokers deliver on these, it shouldn't be a problem.
Fahim Antoniades, group director, Mortgage Centre IFA
I think the credit crunch has made us all more cost conscious of everything. Consumers expect to get the best deal possible and, given that many mainstream brokers are facing competition from direct to consumer offerings such as those from HSBC and the Post Office for example, we have increasingly seen many waiving their broker fees. However, interestingly enough, the other side of the coin has been that in many cases, where more specialist advice is required, consumers are finding it harder than before in getting lenders to accept their case ‐ especially high-street names. In this instance, consumers find that the specialist advice from brokers is worth paying a fee.