Introduction

Intermediaries are crucial to the mortgage market, in particular to niche mortgage sectors where consumers are in greater need of advice and guidance. These players are currently facing a number of challenges as the mortgage market evolves. This report examines the strategies of UK mortgage lenders and intermediaries, analyzes the various challenges and provides an outlook for the future.

Scope

*Quantifies the size of the different distribution channels in the UK mortgage market.

*Gives insight into the future challenges lenders and brokers will face in the UK mortgage market.

*Uses Datamonitor's mortgage intermediary survey to understand intermediaries attitudes in the market.

*Looks at what intermediaries look for from lenders and how both lenders and intermediaries can work together to maximize business.

Highlights

There has been a substantial decrease in the number of networks since M-Day. There have not been enough intermediaries with AR status to support the relatively large number of networks in business for all of them to compete successfully.

Despite the importance of packagers in the mortgage distribution landscape, there is still much debate about their future, as they face a number of threats. While packagers have been very successful, changes in the mortgage market are putting their very existence under threat. However, packagers have adapted in the past and can do so again.

It is well known that keeping an existing customer is more cost-effective than acquiring a new customer. For this reason customer retention is of utmost importance to lenders. As a result lenders are incentivizing intermediaries to prevent customers from remortgaging to another lender.

Reasons to Purchase

*In-depth analysis of UK mortgage intermediary distribution showing where the opportunities lie, thus assisting you in devising strategic plans.

*In-depth analysis of the major issues in the mortgage intermediary market, such as customer retention, quality of advice and the future of packagers.

*Gives the reader insight into the views of intermediaries in a variety of areas across the market.

CHAPTER 1 INTRODUCTION 11
What is the scope of this report? 11
Who is the target reader? 11
How to use this report 11
CHAPTER 2 THE UK MORTGAGE INTERMEDIARY MARKET IN CONTEXT 13
Introduction 13
The structure of mortgage distribution is dynamic 13
The advent of the FSA mortgage regulations has given rise to two types of regulatory status for those intermediaries advising on and selling mortgages 13
Various types of player operate in the mortgage intermediary channel 14
Intermediary size varies across the market, but the typical player is small 16
Networks have gained more power since M-Day 18
However, many networks have now ceased operation 19
The number of networks is expected to continue to fall 19
Yet AR numbers are rising 20
It is important for networks to focus on how they can survive in the long term 21
Packagers have a strong influence in niche mortgage sectors... 21
There is a variety of packagers in the mortgage market but they provide three basic functions 21
Datamonitor's Intermediary Mortgage Survey reveals that the majority of intermediaries use a packager to assist them with their business 23
...yet there is much debate about the future of packagers 26
Datamonitor's Intermediary Survey 2006 reveals that it is unlikely that there will be major changes in the use of packagers over the next 12 months 27
Packagers will have to change their focus in the future so they can still add value to the mortgage market 31
New lenders to niche mortgage markets need packagers to be successful 31
Packagers can convert themselves into lenders 32
Another way for packagers to evolve is to form closer relationships with lenders 34
Datamonitor believes that larger and innovative packagers will succeed in the mortgage distribution channel by rising to the challenges 35
The intermediary channel is crucial to the mortgage market 36
Just over 53 per cent of all mortgage borrowers first contacted their current lender via an intermediary 36
Mortgages are complex products, which need face-to-face advice 37
While face-to-face contact is the key distribution channel its hold over the market is being eroded 39
Non face-to-face forms of direct distribution offer a low cost alternative 39
Intermediaries are becoming more and more crucial in the mortgage market 40
Intermediaries offer a number of benefits for both lenders and consumers 41
Despite a contracting mortgage market in 2005, new lending in the intermediary channel grew by 0.7 per cent to £150.8 billion 43
Sizing methodology explained 43
Intermediaries marginally grew their business in 2005 43
The increase in new mortgage lending generated via the intermediary channel is supported by the fact that the majority of intermediaries surveyed by Datamonitor felt that their business had grown in the last 12 months 45
Furthermore, intermediaries are confident that their businesses will continue to grow 45
The intermediary channel plays an even greater role in niche mortgage markets 47
Intermediaries are confident that niche mortgage markets will perform well in the future and hence they will control an even greater section of the distribution of the mortgage market 47
However, lenders should listen to intermediaries' thoughts if they want to capture a greater share of the sub-prime mortgage market 48
It is therefore essential for lenders to get their intermediary proposition right 50
Lenders need to tailor their proposition based on the various factors that influence the intermediary's choice of lender 50
Intermediaries look for lenders who are customer-focused and provide intermediaries with a good quality of service 50
Intermediaries also highly rated the fact that lenders have a wide lending criteria in order to accept the majority of their customers 52
How fast applications are processed is very important to intermediaries and many lenders are looking at improving the speed of transactions in an effort to woo them 54
A number of factors can persuade an intermediary to change lender 59
An increasing number of lenders are addressing their retention strategies in order to curb churn within the intermediary channel 60
The impressive growth of remortgaging in the UK mortgage market has, increased the importance of customer retention for lenders 61
Lenders are incentivizing intermediaries to prevent customers from remortgaging to another lender 62
However, incentive fees may go against the FSA's stand on treating customers fairly 63
There is concern that in the long term, these incentives will lead to reduced income for intermediaries 64
Meanwhile, off-balance sheet lenders will have to adopt a different strategy 65
The largest mortgage lenders continue to dominate the intermediary channel 65
Not a lot has changed in a year 66
Service is directly linked to intermediaries' choice of the most used lenders 68
Birmingham Midshires and GMAC-RFC are the leading specialists according to intermediaries 69
Birmingham Midshires is the leader in the specialist market 70
Conclusions 70
CHAPTER 3 REGULATORY CHALLENGES IN THE UK MORTGAGE INTERMEDIARY MARKET 71
Introduction 71
The FSA's reviews into the sale and advising processes of mortgage intermediaries in niche sectors have revealed a few flaws 71
The quality of advice intermediaries have been giving has come under fire 71
The FSA has raised concerns about malpractice in the self-certfication mortgage area 72
An FSA mystery shopping exercise showed that intermediaries need to improve their sales procedures and the advice they give on self-cert mortgages 73
Intermediaries interviewed believe that brokers need to improve procedures following the FSA's findings 73
The FSA has found flaws in the sub-prime market, but intermediaries have been trying to improve the quality of service they provide to customers in the sub-prime mortgage market 75
The sub-prime mortgage market is a popular area for intermediaries to operate 75
Intermediaries have introduced the necessary measures to improve the way they conduct their sub-prime business 76
The quality of advice in the equity release market is not what it should be but it is improving 78
The complexity of the equity release market, along with a negative image means that many intermediaries do not participate in the equity release market 79
Less than half of intermediaries have taken an exam relating to equity release mortgages 80
Intermediaries operating in the equity release market are confident enough to remain in the market 82
Brokers are going to have to improve the advice they give to clients 83
The mortgage intermediary channel is also facing compliance issues brought up by the use of third parties 83
Just over a third of intermediaries use a third-party consultancy for their compliance 83
Intermediaries have not necessarily been choosing third-party consultants for the right reasons 84
Using a third-party for compliance can provide complications for intermediaries 86
The FSA is getting tough on failure to meet compliance 87
Worryingly, Datamonitor's survey reveals that a significant proportion of intermediaries do not have any process in place to ensure they still have some control over their compliance procedures 88
Regulatory pressure is likely to bring about new challenges for intermediaries 90
Regulatory pressure will lead to a number of changes in the intermediary market 90
Moreover, the introduction of Home Information Packs will impose new challenges for the intermediary channel 90
The HIPs saga continues 90
Estate agents are believed to benefit the most from HIPs 91
Conclusions 93
CHAPTER 4 APPENDIX 94
Supplementary data 95
Tables relating to Chapter 2: The UK mortgage intermediary market in context 95
Tables relating to Chapter 3: Regulatory challenges in the UK mortgage intermediary market 102
Definitions 104
Appointed Representative 104
Buy-to-let mortgage 104
Directly Authorized 104
Fixed rate mortgage 105
KFI 105
Mortgage club 105
Mortgage intermediary 105
Mortgage Network 105
Non-standard 105
Packager 105
Self-certification mortgage 106
Research methodology 106
Relevant readings 106
UK Mortgage Market Map 106
Key Features 108
For futher information 109
Current reports 109
European mortgage reports 109
UK mortgage reports 110
UK mortgage briefings 111
Other reports 111
Relevant links 111
Datamonitor's custom research capabilities 111
The retail banking team 113
List of Tables
Table 1: Direct and intermediary distribution in niche mortgage markets, 2005 47
Table 2: For which mortgage sectors do you currently use the services of a packager? 95
Table 3: For which of the following reasons are you using a packager? 95
Table 4: Proportion of all mortgages according to the distribution channel of origin at the end of year, 2002 and 2005 96
Table 5: Method of first contact used by consumers to obtain their mortgage, 2002 and 2005 96
Table 6: Proportion of mortgages advanced during 2002 and 2005 split by distribution channel 97
Table 7: How do you see new business in the intermediary channel for the following mortgage sectors move in the next 12 months? 97
Table 8: How far do you agree with the following statements on the sub-prime mortgage sector? 98
Table 9: How important have the following factors been in your choice of lender? 99
Table 10: Which three factors from the following list would tempt you to offer another competitor's products more often? 100
Table 11: Gross advances for remortgaging and house purchases in the UK, 1993-2005 100
Table 12: Which three lenders do you most commonly use? 101
Table 13: Which three lenders offer the best all round service to their intermediaries? 101
Table 14: Specialist lenders most commonly used 102
Table 15: Intermediaries' opinions on the FSA mystery shopping and review into the self-certification sector, 2006 102
Table 16: The changes intermediaries have made to their sub-prime businesses, 2006 103
Table 17: What major factor has influenced you in choosing your external consultant? 103
Table 18: What measures do you have in place to ensure that you have a hands on approach on the compliance of your firm? 104
List of Figures
Figure 1: A conceptual illustration of distribution in the UK mortgage market, 2006 15
Figure 2: Most intermediaries have a customer base of up to 1,000, 2006 17
Figure 3: The mortgage intermediary market is populated by a large number of relatively small entities, along with a small number of very large players, 2006 18
Figure 4: Network Data is by far the major network in the UK, October 2006 20
Figure 5: The majority of intermediaries surveyed use a packager, 2006 23
Figure 6: Packagers are mostly used for sub-prime mortgages, 2006 24
Figure 7: The most common reason for which intermediaries use a packager is to give their clients more product options, 2006 25
Figure 8: Only just over a third of intermediaries using packagers are planning to give more business to packagers in the coming year, 2006 28
Figure 9: Packagers are generally not that appealing to intermediaries that do not already use their services, 2006 29
Figure 10: Intermediaries have a split opinion on the future of the packager market, 2006 30
Figure 11: Advantage offers a range of mortgage options, 2006 33
Figure 12: Over half of all mortgage loans as at the end of 2005 were distributed through the intermediary channel , 2002 and 2005 37
Figure 13: While the majority of mortgage customers made their first approach to a lender by face-to-face contact, more and more are using the phone to make contact, 2002 and 2005 38
Figure 14: The proportion of borrowers using intermediaries has increased over the last four years, 2002 and 2005 41
Figure 15: New lending via intermediaries increased by 0.7 per cent in a contracting mortgage market to account for £150.8 billion in 2005, 2004-2005 44
Figure 16: The majority of intermediaries thought that over the past twelve months their business had grown, 2006 45
Figure 17: The majority of intermediaries surveyed expect their businesses to grow over the next twelve months, 2006 46
Figure 18: Intermediaries expect all niche mortgage markets to grow over the next 12 months with the sub-prime and equity release sectors expected to witness the fastest growth, 2006 48
Figure 19: Intermediaries feel that lenders in the sub-prime sector should be more flexible about their processes and products, 2006 49
Figure 20: The pricing of products is very important for lenders when it comes to choosing a lender, 2006 51
Figure 21: Intermediaries' opinion on whether lenders have changed their lending criteria is mixed, 2006 54
Figure 22: GMAC-RFC provides intermediaries with a comprehensive guide to its POS system, 2006 57
Figure 23: Edeus has an online demonstration of its POS intermediary technology, 2006 58
Figure 24: Lenders that offer better rates are the most likely to attract intermediaries away from other lenders, 2006 59
Figure 25: Remortgaging has grown in importance to the mortgage market over the last decade, 1993-2005 61
Figure 26: Halifax and Abbey are the most commonly used lenders by intermediaries, 2006 66
Figure 27: Birmingham Midshires, Halifax and GMAC-RFC are the best providers of service according to intermediaries, 2006 68
Figure 28: Birmingham Midshires is the most popular lender among intermediaries, 2006 69
Figure 29: The majority of intermediaries advise on mortgages on a self-certification basis, 2006 73
Figure 30: Intermediaries believe that they need to improve many aspects in the way self-certification mortgages are sold, 2006 74
Figure 31: The majority of intermediaries advise on mortgages on a sub-prime basis, 2006 76
Figure 32: Most intermediaries have made an effort to improve the way in which their sub-prime business is conducted, 2006 77
Figure 33: The majority of intermediaries do not advise on equity release products, 2006 79
Figure 34: Just over half of intermediaries who advise on equity release schemes have not taken any equity release-specific exam, 2006 81
Figure 35: The large majority of brokers operating in the equity release market plan to continue to operate in this market going forward, 2006 82
Figure 36: While the majority of intermediaries do not use an outside compliance consultant, a significant proportion does outsource their compliance processes, 2006 84
Figure 37: A number of factors influence Intermediaries in choosing a particular third-party compliance consultant, 2006 85
Figure 38: Meetings are used by the majority of intermediaries to ensure they still have a hands-on approach to their compliance procedures, 2006 89
Figure 39: 60 per cent of intermediaries interviewed believe that HIPs will offer the most opportunities to estate agents, May 2006 92
Figure 40: The UK Mortgage Market Map covers a wide range of mortgage sectors 107
Figure 41: Mortgage sectors covered within the UK Mortgage Market Map 108
Figure 42: Datamonitor's core consulting capabilities 113