UK Mortgage Intermediary Distribution 2009

Introduction

The severe downturn in gross mortgage lending over the last two years has had profound consequences for the intermediary sector. Intermediaries have had to contend with numerous challenges, such as consolidation, falling levels of income and dual pricing. This report discusses all the main issues, and provides a future outlook for the intermediary sector.

Scope

*Presents findings from Datamonitor's Intermediary Distribution Survey to highlight the key issues and concerns facing intermediaries.

*Analyzes the steps that intermediaries have taken to counter the effects of falling business volumes.

*Details the impact of regulatory changes on the intermediary channel.

*Provides forecasts for the value of gross lending conducted via the intermediary channel, as well as intermediary market share.

Highlights

There has been a steep decline in the number of intermediaries specializing in mortgage finance. Those that remain have had to contend with falling business volumes, compounded by a fall in their share of the total market.

Issues such as the ongoing rationing of secured credit, industry consolidation, the collapse in remortgaging activity, and forthcoming regulatory measures have all affected the intermediary sector.

Intermediaries have been particularly affected by the use of dual pricing by lenders to increase the proportion of direct sales, forcing many to diversify into other product areas to maintain income, and prompting a gradual shift from commission to fees.

Reasons to Purchase

*Gain an insight into the views, opinions and concerns of intermediaries.

*Recognize how both lenders and intermediaries have responded to the impact of the credit crunch on mortgage lending.

*Use Datamonitor's forecasts to help plan your future distribution strategies.


Report Highlights
There has been a steep decline in the number of intermediaries specializing in mortgage finance. Those that remain have had to contend with falling business volumes, compounded by a fall in their share of the total market.

Issues such as the ongoing rationing of secured credit, industry consolidation, the collapse in remortgaging activity, and forthcoming regulatory measures have all affected the intermediary sector.

Intermediaries have been particularly affected by the use of dual pricing by lenders to increase the proportion of direct sales, forcing many to diversify into other product areas to maintain income, and prompting a gradual shift from commission to fees.
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Overview 1
Catalyst 1
Summary 1
Methodology 1
Executive Summary 2
2009 has been a difficult year for intermediaries 2
There are several different distribution channels for mortgages in the UK 2
The total number of intermediaries that handle mortgages business is in steep decline 3
Intermediaries have experienced a sharp downturn in levels of activity 4
The volume of mortgages arranged by intermediaries over the last 12 months has fallen 4
Intermediaries are claiming a diminishing share of a shrinking market 5
Datamonitor predicts that intermediaries will account for a gradually increasing share of gross advances 6
Trend: intermediaries are cautiously optimistic about prospects for recovery 7
Insight: intermediaries predict there will be a rise in demand for credit in 2010 7
Trend: intermediaries have been forced to adapt in order to survive 8
Insight: brokers are having to maintain income levels by leveraging their client bases and diversifying 8
Trend: intermediaries believe they are being squeezed out by lenders 9
Insight: lenders are focusing more on direct distribution 9
Trend: intermediaries have suffered substantial falls in income 10
Insight: absolute levels of income have fallen 10
Table of Contents 12
Table of figures 13
Table of tables 14
Market Context 15
2009 has been a difficult year for intermediaries 15
There are several different distribution channels for mortgages in the UK 15
The total number of intermediaries that handle mortgages business is in steep decline 16
Since 2008, consolidation has led to an increase in the average number of customers per firm 17
Intermediaries have experienced a sharp downturn in activity 19
The volume of mortgages arranged by intermediaries over the last 12 months has fallen 19
The total value of mortgages arranged by intermediaries is also at a low level 20
The fall in intermediary gross lending over the last 12 months has affected all types of mortgage 22
Intermediaries are claiming a diminishing share of a shrinking market 23
Remortgages have seen the largest proportionate shift from intermediary to direct distribution 24
Price and service are the key drivers of choice of provider 26
The most important drivers of choice are price, dependability and service 26
Intermediaries tend to use a small number of key lenders 29
Issues Affecting the Intermediary Channel 31
The availability of secured credit remains restricted 31
The credit crunch has had a massive impact upon gross lending levels 31
Consumers have found it increasingly difficult to obtain secured credit 32
Gross lending levels contracted sharply in 2009 33
Datamonitor predicts that intermediaries will account for a gradually increasing share of gross advances 33
Given the uncertain state of the market, Datamonitor has produced two alternative forecasts 35
The optimistic scenario assumes that lenders will increasingly depend on intermediaries for business 35
The pessimistic scenario sees lenders content to rely on direct distribution to maintain sales 35
Specialist lenders have withdrawn from niche markets 36
The downturn has led to a significant degree of industry consolidation 37
Several networks merged or went into administration 37
Remaining networks have managed to sustain their numbers of ARs 38
A low base rate is stifling the remortgaging market 39
Remortgaging activity fell away sharply in 2009 39
The Bank of England Credit Conditions Survey further highlights the collapse in demand for remortgaging 40
Intermediaries will continue to experience low volumes of remortgage business for some time to come 41
The FSA has introduced several policies that have directly affected intermediaries 41
The FSA has launched a wide-ranging review of the mortgage market in the UK 41
The FSA has proposed that advice and selling standards be made more rigorous 42
The MMR advocates extending the Approved Persons regime 42
The MMR does not recommend a read-across of the Retail Distribution Review 43
Industry and media reactions to the discussion paper have been lukewarm 43
Lenders have expressed differing opinions on the impact of the MMR 44
The AMI successfully opposed planned increases in the fees levied on brokers by the FSA 44
Other regulatory changes have had an impact upon the way intermediaries operate 45
Measures have been introduced to restrict the sale of payment protection insurance 45
Intermediaries were divided on how effective the stamp duty holiday was in stimulating the market 45
Trends for Intermediaries and Lenders 47
Trend: intermediaries are cautiously optimistic about prospects for recovery 47
Insight: intermediaries predict there will be a rise in demand for credit in 2010 47
Insight: intermediaries remain concerned about the supply of credit 48
Insight: intermediaries are doubtful that their share of lending will recover in 2010 49
Insight: lenders believe that the dual pricing will become less of an issue 50
Insight: prospects for specific types of mortgage are neutral at best 50
Lenders see an uncertain future for niche mortgages 51
Insight: intermediaries believe that their lending volumes will stage a moderate recovery in 2010 52
The AMI agrees that gross lending will recover to around £220-245 billion over the next three to four years 53
Intermediaries that think their sector share will continue to fall are more pessimistic about future prospects 53
Insight: a recovery towards more 'normal' levels of activity is seen as being some way off 54
Lending in the second half of 2009 was slightly higher than expected 55
Insight: there is no consensus among intermediaries as to when property prices will recover 55
Trend: intermediaries have been forced to adapt in order to survive 56
Insight: brokers are having to maintain income levels by leveraging their client bases and diversifying 56
Lenders have confirmed the trend towards diversification 58
Insight: brokers should attempt to cut costs in order to stay profitable 59
Insight: Intermediaries need to move beyond a purely price-based proposition 59
Insight: brokers could think about shifting from commission-based to fee-based remuneration 59
The RDR may indirectly encourage the move towards fee-based payments for mortgage brokers 61
The move towards fee-based remuneration will be gradual 61
Insight: intermediaries should consider entering into strategic partnerships with lenders 61
John Charcol formed a short-lived partnership with HSBC to offer whole of market advice to its customers 61
London & Country enter into arrangement with Moneysupermarket.com 62
Trend: intermediaries believe they are being squeezed out by lenders 62
Insight: lenders are focusing more on direct distribution 62
Insight: lenders are employing dual pricing to bypass intermediaries 64
The Home Buyer Sourcing Index provides more evidence of the gap between direct and intermediary products 65
Insight: the focus on direct distribution is being driven by the lack of secured credit available 66
Insight: some lenders have bucked the trend towards direct distribution and dual pricing 66
Trend: intermediaries have suffered substantial falls in income 67
Insight: absolute levels of income have fallen 67
The disappearance of sub-prime loans has contributed to the fall in commission rates 69
APPENDIX 70
Supplementary data 70
Definitions 90
Appointed representative 90
Buy-to-let mortgage 90
Directly authorized 90
Fixed rate mortgage 90
Mortgage club 90
Mortgage intermediary 90
Mortgage network 90
Non-standard 91
Sub-prime 91
Packager 91
Self-certification mortgage 91
Methodology 91
Further reading 91
Ask the analyst 91
Datamonitor consulting 92
Disclaimer 92
List of Tables
Table 1: Total number of ARs and DA firms specializing in mortgage finance 70
Table 2: Number of mortgages arranged over last 12 months 70
Table 3: Intermediary share of market, by value 71
Table 4: Datamonitor forecast for intermediary vs. total market lending, 2009-13 (neutral) 71
Table 5: Views on situation over next 12 months 72
Table 6: Actions taken by intermediaries that have seen fall in income 72
Table 7: Whether lenders are focusing on direct distribution at the expense of intermediaries 73
Table 8: Whether intermediaries have seen a fall in income over last 12 months 73
Table 9: Size of current customer base 73
Table 10: Change in size of customer base over last 12 months 74
Table 11: Value of mortgages arranged over last 12 months 74
Table 12: Change in value lent over last 12 months 75
Table 13: Change in gross advances over last 12 months, by mortgage type 75
Table 14: Value of loans arranged by intermediaries 76
Table 15: Value of intermediary loans vs. value of total market loans (£m) 76
Table 16: Importance of factors in choice of main lender 77
Table 17: Importance of factors in persuading intermediaries to switch lenders 77
Table 18: Lender share of mortgage market (based on value of gross advances) 78
Table 19: Proportion of intermediaries using specific lenders 79
Table 20: Quarterly change in demand for and supply of secured credit (%) 79
Table 21: Proportion of customer turned down due to difficulties in obtaining credit 80
Table 22: Monthly gross advances (£m) 80
Table 23: Datamonitor forecast for intermediary vs. total market lending, 2009-13 (optimistic) 81
Table 24: Datamonitor forecast for intermediary vs. total market lending, 2009-13 (pessimistic) 81
Table 25: Size of leading mortgage networks 81
Table 26: Value of monthly mortgage approvals (£m) 82
Table 27: Quarterly change in demand for remortgage credit (%) 83
Table 28: Extent to which stamp duty has boosted sales 83
Table 29: Issues of concern to intermediaries over next 12 months 84
Table 30: Predicted change in intermediary share of gross lending in 2010 84
Table 31: Sales prospects for mortgages over next two years 85
Table 32: Predicted change in value of intermediary lending over next 12 months 85
Table 33: Datamonitor forecast for gross lending, 2009-13 86
Table 34: Predicted change in value of intermediary lending over next 12 months, by predicted change in market share 86
Table 35: When gross lending is predicted to recover to pre-crunch levels 87
Table 36: When property prices are predicted to recover to 2007 levels 87
Table 37: Areas that intermediaries have moved into to deal with loss of income 88
Table 38: Proportion of income derived from commission rather than fees 88
Table 39: Whether intermediaries are losing share of new lending to direct distribution 89
Table 40: Actions taken by lenders to increase direct distribution 89
Table 41: Whether intermediaries have seen fall in average income per product over last 12 months 89
Table 42: Degree by which average income per product has fallen 90
List of Figures
Figure 1: The structure of mortgage distribution in the UK 2
Figure 2: The number of intermediaries specializing in mortgage finance has fallen sharply 4
Figure 3: The number of mortgages arranged by each intermediary fell drastically in 2009 5
Figure 4: Since peaking in early 2008, intermediaries' share of the market has fallen 6
Figure 5: According to the Datamonitor forecast, intermediary gross lending will reach £134 billion in 2013 7
Figure 6: Intermediaries think demand for credit will rise, as will the number of enquiries they will deal with 8
Figure 7: Over half of intermediaries seeing a fall in income have responded by diversifying 9
Figure 8: Two in three intermediaries believe lenders are trying to bypass them 10
Figure 9: Four out of five intermediaries reported a fall in income in 2009 11
Figure 10: The structure of mortgage distribution in the UK 15
Figure 11: The number of intermediaries specializing in mortgage finance has fallen sharply 17
Figure 12: Over half of intermediaries have at least 500 customers 18
Figure 13: Equal numbers of intermediaries have reported rises and falls in customer numbers 19
Figure 14: The number of mortgages arranged by each intermediary fell drastically in 2009 20
Figure 15: 40% of intermediaries arranged less than £2m worth of mortgages in the last 12 months 21
Figure 16: Half of intermediaries have reported falls in gross lending of over 25% in the last 12 months 22
Figure 17: Gross advances have fallen for all types of mortgage 23
Figure 18: Since peaking in early 2008, intermediaries' share of the market has fallen 24
Figure 19: The value of loans arranged by intermediaries has fallen by over 60% from its 2007 Q3 peak 25
Figure 20: As a proportion of total lending, intermediary lending peaked in 2008 Q1 and has since declined 26
Figure 21: Most factors are at least fairly important in driving lender choice 27
Figure 22: Price, product, support and speed are key attractions for intermediaries 28
Figure 23: Lloyds Banking Group is by the largest mortgage provider in the UK 29
Figure 24: Abbey and Lloyds Banking Group are the most popular lenders with intermediaries 30
Figure 25: The supply of mortgage credit contracted throughout late 2007 and 2008 31
Figure 26: One in four intermediaries state that over 40% of their customers have been rejected 32
Figure 27: Gross lending levels were depressed throughout the whole of 2009 33
Figure 28: According to the Datamonitor forecast, intermediary gross lending will reach £134 billion in 2013 34
Figure 29: In the optimistic forecast, intermediary gross lending will rise to £148 billion in 2013 35
Figure 30: The pessimistic forecast sees intermediary gross lending increasing to £119 billion in 2013 36
Figure 31: Most surviving networks have managed to maintain or increase numbers 38
Figure 32: Monthly approvals for remortgaging rapidly declined in the wake of base rate cuts 39
Figure 33: Demand for remortgage credit fell massively in the first half of 2009 40
Figure 34: A third of intermediaries felt that the stamp duty holiday did nothing to boost sales 46
Figure 35: Intermediaries think demand for credit will rise, as will the number of enquiries they will deal with 47
Figure 36: Intermediaries are most concerned about a continued lack of available credit 48
Figure 37: Intermediaries are more likely to think their market share will continue to fall rather than recover 49
Figure 38: Sales prospects for most types of mortgage in 2010 are muted 51
Figure 39: Predicted change in value of intermediary lending over the next 12 months 52
Figure 40: Datamonitor forecast for gross lending, 2009-13 53
Figure 41: Intermediaries that foresee a further fall in sector share are more cautious about the future 54
Figure 42: When gross lending will recover to pre-crunch levels 55
Figure 43: Half of intermediaries think property prices will take up to four years to recover 56
Figure 44: Over half of intermediaries seeing a fall in income have responded by diversifying 57
Figure 45: Insurance and protection are the most popular areas into which intermediaries are diversifying 58
Figure 46: Over the last 12 months the average proportion of income coming from commission has fallen 60
Figure 47: Two in three intermediaries believe lenders are trying to bypass them 63
Figure 48: Three in four intermediaries think that their sector is losing market share to direct channels 64
Figure 49: Actions taken by lenders to increase direct distribution 65
Figure 50: Four out of five intermediaries reported a fall in income in 2009 67
Figure 51: The majority of intermediaries have experienced decreases in per-product income 68
Figure 52: A fifth of intermediaries have seen income levels per product fall by 50% or more 69

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