It may not have been shouted from the rooftops, but lenders are likely to have been on a ‘2024 footing’ since about mid-October, which is partly why we have seen a raft of rate cuts and activity from them in recent weeks.
Certainly, there is a real focus on what the next calendar year can bring, and while there might be a sincere hope that the second half of 2023 is not replicated over the next 12 months, a number of lenders we have spoken to recently, appear to be planning from a position of little change.
Which clearly suggests a subdued 2024, particularly in areas again like purchasing, although we may see a number of rabbits pulled from hats at next week’s Autumn Statement which have the potential to incentivise greater levels of activity.
If it’s any consolation, those self-same lenders believe 2025 could be a ‘gangbusters’ type of year in terms of excellent business levels, but that still leaves a potentially tricky period to get through for advisers.
And it’s one that firms really need to confront head on if, as a large number of players believe, 2024 is similar to this year. The facts remain that it is clients coming off their special deals that are delivering the bulk of business, and with rates still high – even if they appear to be coming down – Product Transfer (PT) activity is taking a growing share of this marketplace.
It won’t need us to point out that PTs pay less, and if we do have another year of this, how is this going to impact on the income levels of the average advisory firm?
Especially when you look at what advisers recoup from procuration fees in an industry where traditionally they do not charge clients advice fees.
Moving to a more PT-heavy business takes away the opportunity to do this, as what might be the response of the client to being charged a fee for something they could technically do themselves with the click of a button?
Now, of course, we understand that advice counts, and the advice in this situation might well be to remortgage to another lender, at which point an adviser fee might be justified, but with an increasing amount of business recommendations coming out as PT, where does this leave the advisory firm?
Well, predominantly, it leaves them out of pocket. If lenders are thinking their business levels will be 20% down over the course of 2024, how ‘down’ are advisers in a PT-heavy business environment? 30% down? More?
The shift to PTs, with only one major lender offering procuration fee parity, is a minefield to walk through in this context, which is why we should all continue to press for greater PT proc fee levels. We’re not even calling for parity with new business, but lenders might well be asked to at least meet us half-way, and that’s before you even look at whether the big, high-street operators should be paying more procuration fee for their new business.
Our perception is that they don’t, which means half of that amount is even less compelling for PT business, which again is going to be felt hard by those advisory firms who, for example, are not able to make up their income falls with ancillary products and services, such as protection or GI. We’re all acutely aware that the opportunity for those ancillary sales are far less with PT business.
Consumer Duty now simply won’t allow you to be just mortgage-focused, and in this market context that is a real positive because any firm hoping to rely on purely mortgage procuration fees in the months ahead – especially with the growth of PTs – is not likely to be long for this market. Particularly as all other costs associated with an adviser continue to rise, such as regulatory fees, office costs, PI and the like.
We could truly be facing a situation where we see a significant drop in the number of advisers and firms over the next 12 to 18 months, with many trying to hang on until the market shifts. You will certainly need to be well-capitalised to stick around, hopefully for that ‘booming’ market which we hopefully turns up in 2025.
Prior to that, you certainly want to consider all your costs, your regulatory status, and whether there are network/distributor homes for you via which you can benefit from some economies of scale, cost savings and opportunities that are simply not available to firms out on their own.
We should also all continue to shout loudly about procuration fee levels, both for new business and specifically for PTs.
They are too low, they have been for a very long time, and unless there is significant change here, lenders may well be looking for other, more costly, distribution avenues to secure their mortgage business from, because the number of advisers will have fallen to a level that warrants this.
In that sense, lenders contacting clients six months out from the end of the deal, attempting to sideline the adviser, and begrudgingly paying them the absolute minimum procuration fee, in order to cut the cost of acquisition of business, seems like the height of short-sightedness.
Rory Joseph and Sebastian Murphy are group directors at JLM Mortgage Services, the mortgage and protection network
