I have written before about what can be termed a ‘credibility crisis’ and when I used that terminology it was in reference to the collapse of Bear Stearns and the fact that Alan Schwarz had said on a Tuesday that there was no problems with the bank (reminding me of the Alfred E. Neuman ‘what me worry?’ pictures) and then come Friday they were nose-diving into closure.
Credibility is a large part of what the worldwide financial crisis is about, and how that plays itself out in the market is something that should concern everybody because the foundations of any economy are not just the laws or the constitution but instead they are also the financial and economic management structures.
Solicitors of the world may disagree with me however, I would argue that wealth of itself has little to do with civilisation and advancement, because countries like the Democratic Republic of Congo, Nigeria, and Iraq are incredibly wealthy nations in terms of what they potentially have but due to money not flowing (and political corruption of the economy) they will remain poor indefinitely. Resources have only a minor correlation to actual economic wealth of a nation, Switzerland for instance doesnt have much in the way of any natural resources and yet they have had, and seem to perpetually have, an excellent economy.
Credibility also has to do with transparency and probity, and in today’s blog I will name and shame the banks who are currently behaving in a manner that will only serve to undermine transparency and probity in the Irish mortgage market. Unfortunately the competition authority will not act to protect the consumer nor will the Financial Regulator (FSA in the UK set the precedent) because this is being viewed as a ‘Commercial Decision’ by banks, and on that basis Joe Public has no front-line defence, and that is actually a failure on behalf of the state, however, for the readers of this blog you will be able to make financial decisions in the full light of the present situation.
The first area where there is going to be a failure in transparency is in the direct v.s. intermediary channel, in the past lenders offered a standardized price, this allowed people to use independent advisors in order to make decisions regarding their mortgage choices, now though we are seeing the infiltration of ‘dual pricing’ into the market.
What is ‘Dual Pricing’? Simply put a bank will offer a client a cheaper mortgage rate if they go direct, the reason behind it is that they are willing to forego some of their profit because when you go direct they get the opportunity to cross sell you for margin rich products such as the banks own ‘mortgage protection’ scheme, and that is why we are starting to see the emergence of a ‘direct price’. Going direct doesn’t infer that the bank gets distribution more cheaply, in fact there are many reasons why this is a total ruse and the lenders serve only to expose themselves by doing this.
Dual pricing is a copy-cat idea which was taken from the U.K., Irish lenders total lack of innovation aside, we need to look at core facts, and why an erosion of the broker market is in fact an erosion of the free-market.
Fact 1: Banks have reduced broker commissions.
True, and for this reason the reductions (in many cases up to 50% reductions) mean that brokers (who are already a low cost distribution model) are a much cheaper distribution model, banks don’t pay for a brokers advertising, leases, insurance, salary roll etc. in fact it is brokerage which truly brings about efficiencies in the market because in essence the expensive banking ‘sales staff’ are outsourced and brokers only get paid for performance. The queue you waited in yesterday at the bank for 20 minutes in order to do something that takes 10 seconds is indicative of the total inefficiency of the branch network, branches of any bank are not ‘mortgage specialists’ despite what their advertisements may tell you.
Fact 2: Aren’t Brokers are ‘cost free’ to banks?
Debatable, the largest lenders in the country have strong broker relationships, the ones that don’t are actually bottom table lenders by market share. So when you hear about NIB having the best rate for something, it’s probably true (notwithstanding whether or not you will qualify for their loan), and in an efficient market they would therefore have the majority of market share but they don’t. Even if brokers do come at a price that price is justified for a lender because the option to ‘not deal with brokers’ is one that shareholders need to query, because its overall effect is to actually reduce market share.
Fact 3: Banks are trying to erode transparency.
Brokers get slated often under accusations of ‘commissions’ being too high, now that we have fallen in line with the UK in terms of commissions we are getting slated because of talk of introducing fees, but this is also the model of the UK which so many pundits were calling for! Banks on the other hand don’t have to reveal to clients how much they are making on the loan, they can show the interest payable over the life of the loan but they are not forced to reveal the profit and that is a total downfall of the Irish banking system and a murky area that will hopefully one day be exposed. Brokers will eventually move to a ‘Customer Agreed Remuneration’ model (CAR) and one thing you will see is flat fees with commission being given back, thats transparent and honest, you will never see a bank do this.
The solution: My belief is that the way to expose banks and the blatantly unfair practice of ‘dual pricing’ is for brokers to do as follows, charge a mortgage consultation fee, something reasonable, and in return go through all of the facts and figures of a persons mortgage, if the best deal on the market is a ‘direct deal’ then send the client to the direct lender whoever that is, that would be transparent and totally honest, and also while doing the meeting give the clients options on insurance products available and the costs of same.
The simple fact of the matter is as follows: banks want direct clients so they can cross sell, this will be either via high margin/low cost things such as ‘group mortgage protection’ (and it’s dirt cheap for a reason!) or via other opportunities such as pensions etc. But this is where banks fall flat on their faces, pensions, savings, investments and other financial tools vary widely from lender to lender and while its simple to compare mortgage interest rates, getting proper investment advice requires an expert and banks cannot comment on the wider market, so for this a broker is vital, and I believe any savvy person will refer back to a broker.
After a few months of realising that dual pricing still only gets them the mortgage of a client and nothing else the lenders will be forced into giving everybody the same price, and in order to not turn it into a PR and share-price nightmare that price will have to be the lower price.
So for the short term some banks may see an uplift, however, in the longer term they are reducing their credibility within the wider market, brokerage, and with their shareholders, granted there may be some gain, but when Joe Public spots these manoeuvres for the joke that they are the sands will shift in favour of the broker channel, as long as brokers can diligently pursue total transparency the broker channel will again (as it has every year for the last decade without fail) gain market share, and we will do it on the basis of honesty, credibility, and probity, something many banks could do well to learn from.