This week Ulsterbank again made news in announcing that they were ‘leaving the broker market’ as of the end of May 2008. From the perspective of this brokerage you ‘can’t leave something you didn’t have’, Ulster had less than 5% share of the market and they never really secured a product/service offering that gave them significant inroads into the broker arena, for that reason, getting out of a channel they would never be able to operate in successfully is a wise decision.
In a statement they mentioned that they will instead focus on their existing client bank, what that means is that if you hold an Ulsterbank Account you can expect a phone call some time soon inviting you for a ‘financial review’ or something along those lines, while it is an excellent idea to review your finances always be aware that direct product producers such as Ulsterbank are not obliged to let you see what is available on the wider market, in fact, their advisors need only offer whatever limited options the bank create. Its like having a sweet-tooth and going into a chocolate shop that only sells Mars Bars, if you want choice make sure you get to a reputable Independent Broker.
Ulsterbank had cut broker commissions (in a statement that like their cessation of trading with broker announcement last week) went out by email, it would almost be laughable if it were not so serious. I guess if that’s how they treat their distributors then it doesn’t speak volumes for what customers can expect.
First Active also reduced commissions by 50%, there was no negotiation or real warning, that particular blow has meant that brokers will have to quickly re-think how they do business in general. It now looks likely that we will see an almost instant emergence of Broker Fees becoming standard. This is not really welcome news because the markets are already tight, banks have increased their margins, and now to get genuine independent advice the consumer will have to pay. It looks like the woes of the credit crunch will be ultimately borne by the consumer and in the case of the USA and now likely the UK it will be borne by the taxpayer.
RBS (the parent company of Ulsterbank and First Active) had made an announcement this week that they wanted to raise at least £5 billion, but perhaps up to £12 billion in funding so that they will have a capital base, this move is believed to have been prompted by further write-downs by RBS which amount to £2.4 billion already, The Bank of England and the British Government are in talks to consider the use of Mortgage Assets as security for Government Bonds in an effort to improve the liquidity position of lenders.
The frustrating thing is that the Irish lenders in all of this were not really exposed to the sub-prime problems that have at the root of the crisis, however, RBS was, and because of that their Irish subsidiaries will have to pay part of the price, and when they pay the price it manifests itself as follows.
1. The consumer gets shafted: rates are jacked up even though there were no movements in ECB rates, this is due to Interbank money markets but also in order to get more margin to stem the bleeding balance sheets.
2. Brokers get the shaft: Reducing costs by cutting brokers is a simple tool, a shotgun solution rather than a surgeons knife, and by keeping the money the broker would have made they save themselves a little more.
3. Job losses: It hasn’t really happened yet but swathes of job losses in the financial arena are going to come next, because now that brokers were cut out and the consumer was levied the next way to cut costs is to remove people on the payroll.
The first place to look for this will be CitiGroup and Merrill Lynch, both whom have a large presence in Ireland. Naturally RBS will likely shed some staff as well, if any financial institution has the money to hire people there will be a good quality pool from which to choose I suspect.
Bank Of Scotland also raised rates this week, they removed fixed rates and levied tracker mortgages, on the ad ‘I don’t know what a tracker mortgage is’ we can now answer ‘it’s a thing of the past’ rather than having to go into what they are or are not. Oh, lest I forget, brokerage also got slashed in the Bank of Scotland move.
Next up ICS/BOI are likely to announce cuts etc., is this collusion? Not at board level but certainly at market level banks are keeping a very watchful eye on developments and the knives are out. Ptsb raised rates as well, so it’s safe to say that for at least 2008 the ‘switcher’ is dead, all of the lenders that were jockeying for new business can now not afford to take it on.
The scary aspect of all of this is that we will likely see ‘credit freezes’ come next, where banks don’t actually have the money to lend out, or perhaps they will have ‘€10 million’ this month and once that’s gone then tough luck, if that happens they will start to cherry-pick the credit they take on. It could be a temporary return to the 80’s, I would be happy if the only reminder of the 80’s were some of today’s retro haircuts and fashions.
So now as a firm, and indeed all Mortgage Intermediary firms in the country, we will need to decide how we get through this, if at all. The options are to move to fees, and then the consumer takes the hit, even though the banks hit the consumer I would say that there will be a bigger outcry against brokerage doing the same. Secondly brokers could try to live in a new reality where every income is halved but their costs are not, the solution there would be to pear down to the bare minimum in overheads and staff, but that will cost jobs and exacerbate an already shoddy situation, or diversify, but into what? And how fast can that be done?
It is certainly interesting times for brokerage, we will need to redefine our place in the new world if we are to have a future at all.