The title of todays post is of course from George Orwell’s book ‘Animal Farm’ and in it the Pigs used this rationale to place themselves above the rest of society, the Pigs wanted one set of rules for themselves and another set for everybody else. And in the end the Pigs reigned supreme, the behavior of the Pigs was amiable in the early days, but it wasn’t long before there true colours came out.
Finance of course is a separate matter but I think that George Orwell struck on a common chord in his view of Socialism because when we see any sector of business society start to treat others less ‘equally’ it is reminiscent of how the Pigs fared, and the fact that although in the short term the Pigs might have the upper hand, that ultimately they end up on the table as pork chops.
I have the misfortune of seeing imbalance starting to creep into brokerage, in the UK it has started already, Halifax, Nationwide, and Cheltenham & Gloucester are all offering substantially better rates to direct clients. In the UK there are pricing gaps of almost 50 basis points on certain products! Lenders there are saying that ‘they remain committed to the broker channel’ all I can say is the have an awfully funny way of showing it.
The AMI (Association of Mortgage Intermediaries) is now looking to the OFT (Office of Fair Trading) for a response on ‘dual pricing’, the issue here is that you can now literally get a different price for the exact same thing, something that did not exist in the market in the past. Andrew Strange of the AMI says he ‘doesn’t understand why a lender would choose to launch a range of products undercutting, and undermining, its own intermediary product range’.
In the UK the FSA (Financial Services Authority – the British equivalent of our own Financial Regulator) has a tenet that they impose on brokers of ‘TCF‘ which means ‘treating the customer fairly’, and by this there are six guiding principles laid out and to some extent dual pricing is in breach of almost every one of them.
Some banks choose to only deal directly with clients, and for some consumers that is the preferred method, however in the UK over 65% of mortgages are placed via Brokers, so clearly that option is not one that fits the wider market requirements, however, it’s a corporate choice and the fact is that people have every right to shop as they see fit, the problem with dual pricing though is that these banks still want broker distribution but they offer financial incentives for direct consumers and therein lies an instant conflict of interest, not only to the consumer but also to the shareholders.
Commissions have come down to historic lows in the UK and brokers there almost exclusively charge fees, so shareholders should be concerned that brokers don’t start to send people direct, still raise their advice fee, and then the bank shareholders have to bear the brunt of decreased profit margins due to a skewed distribution solution. Some people see it from the angle of it being unfair to brokers, I see it at the angle of being a rip-off to the men and women who purchase bank shares in the hope of receiving remuneration for their ongoing support and instead they unwittingly become the victims of bad management decisions leading to margin compression, which ultimately leads to reduced dividends.
Some advisors are now in the situation of perhaps having to call every bank in the nation to find out what their ‘direct deals’ are in order to give a client 100% thorough and independent advice, that’s a sham and the FSA should do what they can to put an end to it. What happened next? The FSA came out in support of big business…..
Hector Sants, Chief Executive of the FSA told a Building Societies Conference in Manchester that they don’t mind dual pricing, ‘because lenders are not obliged to deal via brokers, and that how providers price their products is a commercial matter’. That is surely not a win for the consumer is it? What he said in effect means that even brokers who specialise in understanding the broader market will now be confused and this will undoubtedly lead to bad advice, banks don’t offer choice or variety, but now even brokers who try to do that will find it hard to determine every nuance of a direct deal versus a broker deal!
The FSA are unwittingly undermining their ability to govern by not taking an active stance in the matter, in fact it is the ‘sit on your hands’ approach that partially lead to the Northern Rock debacle and the end result was that the British tax payer now has to foot the bill for banking errors, the message that sends out to industry is that it’s ‘o.k. to trade recklessly, we’ll bail you out’, the FSA admitted to ‘deeply worrying’ mistakes in how the Norther Rock issue was dealt with and yet somehow this year, despite their admission of fault, they got the same bonus for 07/08 as they did the previous year! This tells the board and the staff of the FSA ‘it’s o.k. to make mistakes, we’ll still pay you handsomely’. I think we should all send in our C.V.’s to them, if after all, they will pay you a bonus even when you are wrong.
In the entire fiasco, not a single person from the FSA was sacked, in fact Michael Fallon (Treasury Committee) asked Hector Sants “The report you’ve done lists a catalogue of failure. You identify a lack of sufficient supervision, a lack of adequate oversight, a lack of sufficient resources for supervising firms and a lack of intensity from the FSA. Sir Callum don’t you think it would have been an acknowledgement of the extent to which you recognise the failures in Northern Rock and the confidence you want to give everybody in claiming new powers, if at least one person had been dismissed?”
So what hope have brokers if the mighty FSA won’t help? And if brokers are endangered then are consumers and independence endangered? The thing bothering me (and possibly the broker channel in this country) is that we are starting to see the ‘dual pricing’ mentality sneaking in, some lenders made their direct prices better than broker prices, it would appear (to continue with the Orwellian theme) that the Pigs are now exerting their power and the work horse brokers, along with the rest of the farm are left wondering what they did wrong?
Bank of Ireland now have one price via brokers and another for clients who go direct, Halifax have prices that beat Bank of Scotland (even though both are owned by HBOS) and it could be a worrying trend for consumers and brokers that others may follow, we have already seen what happened in ‘Magic April’ when every lender miraculously had to reduce commissions and raise rates? Again, the consumer and the broker were hacked. If banks hold all of the cards what can the broker or consumer do about it other than accept it?