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Eye on Intermediaries - Mortgages - UK - April 2009

Mortgage intermediaries are experiencing a significant period of change, as challenging conditions in the mortgage and housing markets create a new landscape for mortgage distribution. Having generated a significant proportion of new mortgage lending in recent years, intermediaries have seen their share of the market fall sharply over the last 12 months. Many lenders who transacted exclusively through intermediaries have been forced from the market amid a widespread shortage of credit. At the same time, those lenders who remain active in the market have taken steps to control distribution more tightly with some providing more competitive deals via their direct channels.

As intermediary lending contracts, so too has the number of advisers and mortgage advice firms operating in the sector. Mortgage-only and sub-prime specialists have been among the most badly affected sectors of the market, while those with a more diversified approach have been better placed to withstand the drop in mortgage business. This has led to some rethinking of existing business models among some brokers and advisers, while market pressures have also raised the prospect of a more concerted shift towards fee-based rather than commission-based remuneration. Over the next few months the industry is likely to face increased regulatory attention and pressure, as the FSA looks to take a more tightly controlled approach to financial regulation.

This report examines the impact of the credit crisis and wider economic downturn on the mortgage intermediary sector. It presents an overview of the lending market and considers the approach of different players in the market to the difficult conditions. The intermediary marketplace is analysed and the impact of direct and online channels is assessed. Mintel has also conducted exclusive research among mortgage intermediaries, which focuses on business confidence, challenges and priorities and the intermediary/lender relationship.

Key report themes:

  • A shortage of credit has seen a major contraction of mortgage lending, creating challenging conditions for mortgage intermediaries.

  • Demand for mortgages has also fallen as the UK economy struggles through a recession and consumer confidence remains low.

  • The intermediary sector has been badly hit by the loss of several intermediary-only lenders, particularly within the specialist mortgage market.

  • Several lenders have restricted their most competitive products to direct channels, further damaging intermediary prospects.

  • The number of mortgage advice firms declined by 9% during 2008, as advisers struggled to maintain business levels resulting in cash flow difficulties.

  • Online channels present both opportunities and potential challenges for intermediaries.

  • The financial crisis has raised the likelihood of additional regulation within the mortgage market, which could have a profound impact on the future of intermediaries.

  • However, demand for owner-occupied housing will continue to drive the UK mortgage market in the long term, with many lenders dependent on intermediaries in order to obtain market share.

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Table of contents

  1. Issues in the Market

      • Key issues
        • Abbreviations
        • Future Opportunities

          • Intermediaries need to highlight how they add value
            • Embracing transparency to stay ahead of the game
              • Appealing to an older demographic
                • Communication and transparency could improve lender/adviser relationship
                • Market in Brief

                  • The number of mortgage intermediary firms is in decline
                    • Figure 1: Number of mortgage advice firms and annual house prices (England and Wales), January 2006-December 2008
                  • Intermediary share declines in 2008
                    • Figure 2: Overview of the proportion of gross mortgage advances, by value, by channel, 2007 and 2008
                  • Intermediary market squeezed, as direct products take centre stage
                    • Mortgage lending declines by 29% in 2008
                      • Figure 3: Gross and net lending secured on dwellings, 1997-2008
                    • Lenders pledge support to intermediaries
                      • Regulation moves up the agenda
                        • Growth in demand for online advice
                          • Figure 4: Sources most likely to be used for mortgage advice, January 2009
                        • Financial advice – the consumer perspective
                          • Key mortgage adviser survey findings
                            • Mortgage intermediary confidence is on a downward trend
                              • Top mortgage intermediary challenges and priorities
                                • Intermediaries seek more consistency and better communication
                                • Market Background

                                  • Key points
                                    • Different types of mortgage advisers
                                      • Overview of complex mortgage distribution structure
                                        • Figure 5: Overview of distribution channels within the mortgage marketplace since mortgage regulation
                                      • The DA or AR question
                                        • Growth of specialist mortgages spurs distribution growth
                                          • The balance of power shifts
                                            • Packagers – a sector in decline
                                              • Mortgage clubs provide bargaining power for DA advisers
                                                • Looking forward
                                                • Internal Market Environment

                                                  • Key points
                                                    • Background to credit crisis
                                                      • UK mortgage market seizes up
                                                        • Housing transactions plummet
                                                          • Figure 6: Number of UK property transactions with a value of £40,000 upwards, seasonally adjusted Q2 2005-Q1 2009
                                                        • House prices suffer a dramatic decline
                                                          • Figure 7: Various UK house price indices, annual percentage change, January 2007-March 2009
                                                        • Revaluations cause headache for mortgage brokers
                                                          • Bank base rate falls to an all-time low…
                                                            • Figure 8: Bank of England base rate and three-month (monthly average) LIBOR, January 2003-March 2009
                                                          • …which produces mixed results for mortgage advisers
                                                            • Government support for mortgage market…
                                                              • …but it doesn’t extend to intermediary sector
                                                                • Asset Protection Scheme should help kick-start lending
                                                                • Broader Market Environment

                                                                  • Key points
                                                                    • A deteriorating economy – a summary
                                                                      • Desire for home ownership drives UK mortgage market
                                                                        • Growth in household debt slows in 2008
                                                                          • Figure 9: Total household debt, 1992-2008
                                                                        • Arrears and insolvencies increase as recession bites
                                                                          • Mistrust becomes an issue for the mortgage sector…
                                                                            • …and advisers need to be aware of consumer sentiment
                                                                            • Consumer Sentiment

                                                                              • Key points
                                                                                • Consumer confidence falls throughout 2008…
                                                                                  • Figure 10: UK Consumer Confidence Index, January 2002-March 2009
                                                                                • ...but appears to have bottomed out
                                                                                  • A time for financial caution
                                                                                    • Figure 11: Savings, investment, borrowing and debt repayment – consumers’ expected activity, 2002-09 quarterly indices
                                                                                  • Demand for borrowing remains low
                                                                                    • Drop in bank rate is having little impact on mortgage intentions
                                                                                      • Figure 12: Expected mortgage and property purchase activity, 2002-09 quarterly indices
                                                                                    • Negativity about house prices increases…
                                                                                      • Figure 13: Response to the statement ‘How do you think property prices will perform in the next couple of years?’, 2008 and 2009
                                                                                    • …but property still regarded as good investment in the long term
                                                                                      • Figure 14: Agreement with statements concerning current conditions in the housing and mortgage markets, January 2009
                                                                                  • Regulatory Challenges and Developments

                                                                                    • Key points
                                                                                      • FSA warns of market dangers during the downturn
                                                                                        • FSA proposals could place cap on mortgage products
                                                                                          • Ongoing concerns about quality and suitability of advice
                                                                                            • Commission-based remuneration under scrutiny
                                                                                              • Potential overlap of the RDR
                                                                                                • 2009 brings regulatory changes
                                                                                                  • OFT studies to encompass mortgage intermediaries
                                                                                                    • Mortgage fraud cases tarnish intermediary sector
                                                                                                      • FSA raises additional £117 million from firms
                                                                                                        • PPI restrictions could damage income further
                                                                                                        • Lending Market Overview

                                                                                                          • Key points
                                                                                                            • Mortgage lending declines by 29% in 2008…
                                                                                                              • Figure 15: Gross and net lending secured on dwellings, 1997-2008
                                                                                                            • …but intermediary income falls by around 40%
                                                                                                              • Advances for house purchase fall by more than 50% in 2008
                                                                                                                • Figure 16: Gross advance, by type of loan, 2002-08
                                                                                                              • FTB activity remains low
                                                                                                                • Figure 17: Number of loans for house purchase and number of first-time buyer loans, 2002-08
                                                                                                              • Tightening of lending criteria changes landscape
                                                                                                                • The demise of specialist mortgage sector
                                                                                                                  • BTL market under growing pressure
                                                                                                                  • Strengths and Weaknesses in the Market

                                                                                                                      • Figure 18: Market for mortgage intermediaries – SWOT analysis, 2009
                                                                                                                  • Market Developments and Innovations

                                                                                                                    • Key points
                                                                                                                      • Overall decline in intermediary products
                                                                                                                        • Intermediary lenders withdraw…
                                                                                                                          • …and direct products take centre stage
                                                                                                                            • Steps towards fee-based advice
                                                                                                                              • Lenders assert greater control over distribution
                                                                                                                                • Consolidation in the intermediary marketplace
                                                                                                                                  • Distributors look to strengthen position
                                                                                                                                    • Diversifying income streams
                                                                                                                                      • Increased focus on cross-sale and new business opportunities
                                                                                                                                        • An industry perspective on diversification
                                                                                                                                          • Lead generation grows in importance
                                                                                                                                          • Trade Perspective

                                                                                                                                              • Participating companies
                                                                                                                                                • The lender’s perspective
                                                                                                                                                  • Challenges facing the mortgage market
                                                                                                                                                    • The changing landscape
                                                                                                                                                      • The future of mortgage distribution
                                                                                                                                                        • The mortgage intermediary perspective
                                                                                                                                                          • A lack of supply is undermining mortgage market
                                                                                                                                                            • Balance of power has shifted towards direct channels
                                                                                                                                                              • An evolving market
                                                                                                                                                                • Online channels present opportunity and threat
                                                                                                                                                                  • Intermediaries call for improved transparency
                                                                                                                                                                  • The Intermediary Marketplace

                                                                                                                                                                    • Key points
                                                                                                                                                                      • Mortgage intermediary firms suffer in second half of 2008
                                                                                                                                                                        • Figure 19: Number of mortgage advice firms and annual house prices (England and Wales), January 2006-December 2008
                                                                                                                                                                      • 9% of mortgage intermediary firms close in 2008
                                                                                                                                                                        • Figure 20: Overview of the sector for mortgage advice, directly authorised and appointed representatives firms, January 2006-December 2008
                                                                                                                                                                      • DA firms in decline…
                                                                                                                                                                        • Figure 21: Number of directly authorised retail intermediary firms, by primary category, January 2006-December 2008
                                                                                                                                                                      • …while ARs are gaining ground
                                                                                                                                                                        • Figure 22: Number of appointed representatives sponsored, by primary category firms, January 2006-December 2008
                                                                                                                                                                      • Distribution changes could increase number of mortgage ARs
                                                                                                                                                                      • Intermediary Share of Mortgage Market

                                                                                                                                                                        • Key points
                                                                                                                                                                          • Intermediary share declines in 2008
                                                                                                                                                                            • Figure 23: Overview of the proportion of gross mortgage advances, by channel, 2007 and 2008
                                                                                                                                                                          • Intermediary share declines across all sectors
                                                                                                                                                                            • Figure 24: Intermediary share of new mortgage business, by type of loan, 2006-08
                                                                                                                                                                          • Intermediaries set to be squeezed further in 2009
                                                                                                                                                                            • Possible scenarios for intermediary lending in 2009
                                                                                                                                                                              • Figure 25: Potential scenarios for distribution of gross mortgage advances in 2009
                                                                                                                                                                          • Key Intermediary Mortgage Lenders

                                                                                                                                                                            • Key points
                                                                                                                                                                              • HBOS accounted for 25% of intermediary share in 2007…
                                                                                                                                                                                • Figure 26: Top intermediary mortgage lenders, 2007
                                                                                                                                                                              • …but intermediary lenders undergo profound changes in 2008
                                                                                                                                                                                • Looking forward
                                                                                                                                                                                  • Lenders to provide more funds in 2009
                                                                                                                                                                                  • Key Intermediary Players

                                                                                                                                                                                      • Legal & General
                                                                                                                                                                                        • PMS
                                                                                                                                                                                          • Sesame
                                                                                                                                                                                            • Openwork
                                                                                                                                                                                              • Personal Touch Financial Services
                                                                                                                                                                                              • Brand Communication and Promotion

                                                                                                                                                                                                • Key points
                                                                                                                                                                                                  • Advertising financial advice
                                                                                                                                                                                                    • £19.4 million spent advertising financial advice services in 2008
                                                                                                                                                                                                      • Figure 27: Overview of adspend on financial advice services, 2004-08
                                                                                                                                                                                                    • Direct mail and press are favoured when promoting financial advice
                                                                                                                                                                                                      • Figure 28: Adspend on financial advice (independent and non-independent), by media type, 2008
                                                                                                                                                                                                    • Advertising to intermediaries
                                                                                                                                                                                                      • Advertising to mortgage intermediaries was slashed in 2008
                                                                                                                                                                                                        • Figure 29: Total intermediary-directed adspend, 2004-08
                                                                                                                                                                                                      • The Mortgage Works was the top advertiser in 2008
                                                                                                                                                                                                        • Figure 30: Top advertisers of products and services to mortgage intermediaries, 2006-08
                                                                                                                                                                                                      • Lenders use specialist publications to target advisers
                                                                                                                                                                                                        • Figure 31: Top publications used to advertise mortgage products and services to mortgage intermediaries, 2008
                                                                                                                                                                                                    • Key Advice Channels

                                                                                                                                                                                                      • Key points
                                                                                                                                                                                                        • Current account providers appear to be in pole position…
                                                                                                                                                                                                          • Figure 32: Sources most likely to be used for mortgage advice, January 2009
                                                                                                                                                                                                        • …but intermediaries write more business
                                                                                                                                                                                                          • Figure 33: Overview of main sources most likely to be used for mortgage advice, January 2009
                                                                                                                                                                                                        • Lifestage influences the choice of channel
                                                                                                                                                                                                          • The vast majority of intermediary sales are fully advised
                                                                                                                                                                                                            • Figure 34: Advised sales, by selling channel, April 2007-March 2008
                                                                                                                                                                                                          • Significant growth in the internet as a source of mortgage advice
                                                                                                                                                                                                            • Internet has positive and negative implications for intermediaries
                                                                                                                                                                                                              • Growth in online broking
                                                                                                                                                                                                                • A multichannelled approach
                                                                                                                                                                                                                • The Consumer – Perspective on Professional Advice

                                                                                                                                                                                                                  • Key points
                                                                                                                                                                                                                    • Mortgages are the most popular topic for advice…
                                                                                                                                                                                                                        • Figure 35: Financial matters previously sought advice on and interested in seeking advice on in the future, January 2009
                                                                                                                                                                                                                      • …but future demand for mortgage advice appears much lower
                                                                                                                                                                                                                        • However, there are future opportunities for mortgage advice
                                                                                                                                                                                                                          • More than a third opt to do their own research
                                                                                                                                                                                                                              • Figure 36: Attitudes towards professional financial advice, January 2009
                                                                                                                                                                                                                            • The cost of advice
                                                                                                                                                                                                                            • The Mortgage Adviser – Overview of Business Confidence

                                                                                                                                                                                                                              • Key points
                                                                                                                                                                                                                                • Mortgages account for less than 50% of business, for half of all advisers
                                                                                                                                                                                                                                  • Figure 37: Proportion of business currently generated from mortgages, March 2009
                                                                                                                                                                                                                                • Mortgages look set to decline as a proportion of overall business
                                                                                                                                                                                                                                  • Figure 38: Proportion of business expected to be generated from mortgages in three months’ time, March 2009
                                                                                                                                                                                                                                • Confidence in mortgage market declined over the last six months…
                                                                                                                                                                                                                                  • Figure 39: Mortgage adviser confidence measure for the mortgage market as a whole, March 2009
                                                                                                                                                                                                                                • …but individual prospects appear to be a little more positive
                                                                                                                                                                                                                                  • Figure 40: Mortgage adviser confidence measure for indiviidual business prospects, March 2009
                                                                                                                                                                                                                                • Confidence is linked to business diversity
                                                                                                                                                                                                                                  • Figure 41: Confidence about the mortgage market in future, by percentage of business from mortgages, March 2009
                                                                                                                                                                                                                                  • Figure 42: Confidence about your business in future, by percentage of business from mortgages, March 2009
                                                                                                                                                                                                                              • The Mortgage Adviser – Current Challenges and Priorities

                                                                                                                                                                                                                                • Key points
                                                                                                                                                                                                                                  • Market conditions and low bank rate are the main challenges
                                                                                                                                                                                                                                    • Figure 43: Main challenges currently facing mortgage intermediaries, March 2009
                                                                                                                                                                                                                                  • Mortgage-dependent intermediaries face different challenges
                                                                                                                                                                                                                                    • Figure 44: Challenges currently facing mortgage intermediaries, by percentage of business from mortgages, March 2009
                                                                                                                                                                                                                                  • Diversifying business activities is the top priority
                                                                                                                                                                                                                                    • Figure 45: Mortgage adviser priorities over the next six months, March 2009
                                                                                                                                                                                                                                  • Mortgage-dependent intermediaries less likely to consider additional training
                                                                                                                                                                                                                                    • Figure 46: Main priorities, by percentage of business from mortgage/other activities, March 2009
                                                                                                                                                                                                                                • The Mortgage Adviser – Perspective on Lenders

                                                                                                                                                                                                                                  • Key points
                                                                                                                                                                                                                                    • Two fifths expect lender numbers to fall further
                                                                                                                                                                                                                                      • Figure 47: Based on current market conditions, do you envisage more or less lenders in the intermediary market in three months’ time?, March 2009
                                                                                                                                                                                                                                    • Advisers would like greater consistency from lenders
                                                                                                                                                                                                                                      • Figure 48: Mortgage intermediary perspective on lender activities, March 2009
                                                                                                                                                                                                                                    • Procuration fees a greater issue for mortgage-dependent intermediaries
                                                                                                                                                                                                                                      • Figure 49: Mortgage intermediary perspective on lender activities, by percentage of business from mortgages, March 2009

                                                                                                                                                                                                                                  Companies Covered

                                                                                                                                                                                                                                  • Abbey
                                                                                                                                                                                                                                  • Alliance & Leicester
                                                                                                                                                                                                                                  • Association of Mortgage Intermediaries
                                                                                                                                                                                                                                  • Bank of England
                                                                                                                                                                                                                                  • Bank of Ireland
                                                                                                                                                                                                                                  • Barclays Bank plc
                                                                                                                                                                                                                                  • Birmingham Midshires
                                                                                                                                                                                                                                  • Bradford & Bingley plc
                                                                                                                                                                                                                                  • Cheltenham & Gloucester plc
                                                                                                                                                                                                                                  • Council of Mortgage Lenders
                                                                                                                                                                                                                                  • Financial Ombudsman Service
                                                                                                                                                                                                                                  • Financial Services Authority (The)
                                                                                                                                                                                                                                  • Friends Provident plc
                                                                                                                                                                                                                                  • Gfk NOP
                                                                                                                                                                                                                                  • GMAC-RFC
                                                                                                                                                                                                                                  • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                                                                                                  • HSBC Private Bank (UK) Limited
                                                                                                                                                                                                                                  • John Gilbert Financial Research
                                                                                                                                                                                                                                  • Kensington Mortgages
                                                                                                                                                                                                                                  • Legal & General Group PLC
                                                                                                                                                                                                                                  • Lehman Brothers [UK]
                                                                                                                                                                                                                                  • Lloyds Banking Group
                                                                                                                                                                                                                                  • Merrill Lynch (UK)
                                                                                                                                                                                                                                  • Misys Plc
                                                                                                                                                                                                                                  • Mortgage Express
                                                                                                                                                                                                                                  • Nationwide Building Society
                                                                                                                                                                                                                                  • NatWest
                                                                                                                                                                                                                                  • Newcastle Building Society Limited
                                                                                                                                                                                                                                  • Northern Rock plc
                                                                                                                                                                                                                                  • Norwich Union
                                                                                                                                                                                                                                  • Office of Fair Trading
                                                                                                                                                                                                                                  • Outdoor Advertising Association of Great Britain
                                                                                                                                                                                                                                  • Royal Bank of Scotland Group plc
                                                                                                                                                                                                                                  • Skandia UK
                                                                                                                                                                                                                                  • Stroud & Swindon Building Society
                                                                                                                                                                                                                                  • Tenet Group Ltd
                                                                                                                                                                                                                                  • UCB Home Loans
                                                                                                                                                                                                                                  • Woolwich plc

                                                                                                                                                                                                                                  Eye on Intermediaries - Mortgages - UK - April 2009

                                                                                                                                                                                                                                  £1,995.00 (Excl.Tax)