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					 European Mortgage Distribution – Changing Channel
 Choices

 Market Structure`, Explanatory Factors and Regulation Issues

 Summary of results of a Mercer Oliver Wyman study co-authored
 by the presenter




UNIA, Kyiv
3 September 2007


Hans-Joachim Dübel
Finpolconsult.de, Berlin
                          About the presenter




Fmr. World Bank, empirica (German think tank)

Founder of Finpolconsult (Financial Sector Development);

Author- and Co-authorship of 6 major comparative mortgage sector studies in the EU
since 1995;

Global business franchise in emerging markets;

Ukraine project with EU-Tacis in 2005;

International Economist network in the mortgage credit sector.
  Changing Channel Choices is a comprehensive new study
            on European residential mortgage distribution

About the report                             About the authors
   Comprehensive new study on European          Oliver Wyman
   mortgage distribution                            Leading financial services strategy and risk
                                                     management consulting firm
   Examined thirteen European mortgage
                                                    Supported by Hans-Joachim Dübel
   markets in detail                                 (Finpolconsult)
     Account for over 95% of mortgage          EFMA
      balances                                      The leading association of banks, insurance
   Primary research                                  companies and financial institutions throughout
                                                     Europe
      Interviews with market participants
                                                Fortis
      Lender survey
                                                    International financial services provider engaged
      Customer survey                               in banking and insurance
   Secondary research
     Published reports
     Academic research
                  Structure of the Workshop


1. European Mortgage Intermediaries -Types and Relevance

2. Determinants of Mortgage Distribution in European Comparison

3. Implications for Lenders

4. Issues for the Ukrainian market

5. Regulatory issues
1. European Mortgage Intermediaries
       – Types and Relevance
Remote and indirect channels have grown their share of
  mortgage distribution at the expense of the branch
                       channel


The traditional bank branch is losing ground
  Alternative distribution channels have gained significant share in some of the
   European markets
  Third party distribution now accounts for over 40% of lending (over €500 BN pa)
  Further growth and increasing consolidation of intermediary market expected
Trend towards remote distribution
  Phone and internet distribution has established a small share of applications among
   more sophisticated consumers
  Longer-term trend towards remote distribution in particular online
  Remote channel share driven by financial sophistication, IT access and security,
   technological advancement and lender appetite
Banks forced to react
  Increased focus on serving intermediaries
  Greater investment in remote distribution as part of a multi-channel strategy
   The analysis focussed on the channel of application of the
                        mortgage loan

                          1                   2                  3
Distribution                     Research
value chain                      - General        Applicati
                                 - Specific
                                                                         Closure
                                                    on



Channel
               Direct channels                                Indirect channels
taxonomy

                    Branch                                           Tied agent

                    Remote channels                                  Personal financial advisor

                          Phone                                      Real estate agent

                          Internet                                   Insurance company

                                                                     Solicitor/accountant
                          Post
                                                                     Mortgage company/broker

                                                                     Third party banks
              Tied vs. Independent Intermediaries

Tied agents: advisors who are contractually or through other incentives permanently
linked to one specific financial institution.
   In Spain, many tied agents are operating under a branch franchise model of the
     large Spanish banks but are classified as „indirect‟
Independent agents: offer advice on mortgages to a number of different institutions.
   Loan brokers - focus on mortgages/retail lending, often combined with insurance.

   Personal financial advisors: provide financial advice to – typically – affluent
     customers; mortgages are typically side-product
   Real estate agents: often work together with real estate developers to provide
     mortgage advice to buyers of new property; oldest indirect channel, but fraught with
     conflicts of interest
   Insurance companies: sell mortgages due to the close link with life insurance
     products
   Banks: banks may decide to cease to produce loans or both distribute and produce
     depending on the product and/or customer segment.
   Other: such as solicitors / accountants or mortgage companies
               Other Taxonomy of Intermediaries




With regard to services for lenders one a traditional taxonomy distinguishes:
  „Introducers’ who merely establish contact between consumer and lender

  „Packagers’ who provide lenders with additional support, e.g. ranging from
    customer application and documentation collection to full application processing.

With regard to consumer services, it would be appropriate to distinguish between:
  „Advisors’, who focus on providing the consumer with an (individually) optimum
    choice for his product and lender selection problem
  „Wholesalers’, a class of intermediaries whose model consists of pre-selecting a
    range of different lenders in order to minimize rates while establishing a reasonably
    wide product choice for the typical, rather than an individual, consumer.
      Indirect channels now account for over 40% of European
                       mortgage distribution
Mix of application distribution channel by country, 2006

                 100%

                   80%

                   60%

                   40%

                   20%

                     0%
                                                              Switzerland
                                                  Belgium




                                                                            Poland
                               Denmark




                                                                                     Sweden




                                                                                                                           Ireland
                                         Turkey




                                                                                                                 Germany




                                                                                                                                                  UK
                                                                                                                                     Spain

                                                                                                                                             NL
                                                                                                         Italy
                                                                                              France
                                                            Indirect channels                          Direct channels

Source: Oliver Wyman research, lender survey
                  Case: UK Distribution Market



70% of all UK mortgages are going through intermediary channels
  7,147 firms (from small firms to networks)

  25,000 individual practitioners

Different types of firms
  Sole practitioner intermediary firms

  Network: Appointed Representative

  Mortgage clubs: service and commission clubs on a “as and when” basis

  Mortgage packagers: present themselves as distributors rather than a 3rd party
     administrators. They focus more and more on negotiating products (enhances
     service levels, enhanced proc fees)
Main advantages for lenders
  Scale of distribution: intermediaries provide national distribution reach

  Cost effectiveness: only paying for success

  White labelling: product don‟t have to be offered under own name brand
                                      Case: Dutch Distribution Market

       High concentration: 20% of intermediaries produce >80% of intermediary volume


                     Distribution Channels (in %)                          Markt Shares by Intermediary Type

                     2001        2002         2003        2004     2005   Real Estate Agents:               5%
                                                                          Loan Brokers:                     5%
                                                                          Franchise:                        40%
                                    45.5 44.3
 Banks               51.7 50.8 46.7                                       Life Insurers:                    15%
                                                                          Integrated finance:               14%
                                                                          Other:                    21%
                                                                                Top 5 Intermediaries in NL
                                                                                           (in Billion €)
                                                                                                   2003       2004
                                    54.5 55.7
 Intermediaries      48.3 49.2 53.3                                       Rabobank                  16,1      16,0
                                                                          De Hypotheker              5,4          5,5
                                                                          ABN Amro                   4,0          4,3
                                                                          Postbank                   2,0          3,0
                                                                          ING                        2,4          2,7
Source: IGH Management Consultants, Hypoport AG (Christian Fein)
                            Case: German Distribution Market


B2C                                                        Intra-network agreements between
                                                            different lender types (Bausparkasse,
   Mortgage loan brokerage:                                 Hypothekenbank, Genossenschaftsbank
       late 1990s and early 2000s. Two                     or Sparkasse) to originate for each
        independent brokers - Interhyp and Dr.              other.
        Klein.                                             Mortgage banks as capital market
       Bank-owned broker Planethome and                    specialists without own branch networks
        CreditWeb.                                          used to work with developers
   Personal finance advisors (PFA) aim at                   systematically in the 1980s and 90s. But
   serving upper middle class clients:                      the model ceased to exist due to risk
       developed in Germany in the 1970s,                  reasons and decreasing
        with MLP (Marschallek, Lautenschläger               competitiveness of mortgage banks in
        & Partners) pioneering the market.                  the retail market.
        Today, MLP, DVAG, AWD, OVB and                     “Direct banks” (call center banks) owned
        MPC Capital (not active in consumer                 by banks.
        finance) are the largest PFA.                 Real estate agents, developers and other
   Fee origination by banks:                          non-financial firms play a decreasing role.
       1500 cooperative banks that operate in     B2B:
        an estimated 50% of mortgage                  Matching platforms such as Europace (see
        originations as points of sales in their      text box below) today also enable traditional
        networks for the mortgage banks,              lenders to become fee originators for other
        Bausparkassen and consumer finance            lenders.
        banks that they jointly own.
           Classical Bank Fee Origination System in Germany
                     - Cooperative Banking System

                 Co-operative banking system Germany                                                                           Observations


                                                                                                                     Local banks do origination and
                                                                                                                     servicing.
                                        Holding and central clearing bank                                            Local banks own holding
                                                 DG Bank
Real estate services                                                                 Mortgage & insurance services   structure, with service providers.
                                                                                                                     Local banks act as point of sale:
Real estate            Real estate broker                               Mortgage banks    Bausparkasse   Insurance   • group mortgage bank fund loan
management &           Schwaebisch Hall                                 DG Hyp          Schwaebisch      company
fonds                  Immobiliengesellschaft                           Muenchener Hypo Hall             R+V         position up to 60% LTV.
DG Anlage
DG Immobilien-
                                                                                                                     •4 mortgage banks compete for
management                                                                                                           co-op originations.
                                                                                                                     •Local banks keep second
                                                                                                                     mortgage or consumer loans,
                                                                                                                     providing credit enhancement.
                                             Local Co-operative Banks
                                            Volks- und Raiffeisenbanken
                                  about 20,000 offices in 2,504 co-operative banks                                   Similar joint ownership structure:
                                                                                                                     Totalkredit in Denmark


Source: Duebel, Finpolconsult.de
                      Modern ‘Platform World’ Europace


   Loan volume intermediated per month
                                         Lenders

                                             A             B   C             D




                                                                   B2B platform




                                                 Network           Network

Functions:
• Matching (B2C)
                                         Intermediaries
• Lender-intermediary negotiation
• Other services for
lenders/intermediaries
• Documentation standards
Emerging Europe: Poland
2. Determinants of Distribution Systems in
          European Comparison
 Model to explain distribution mix suggesting that these
        trends will be followed in other markets
Mortgage value chain


             Distribution                               Product
                                   Referencing                           Risk and asset
Consumers     (sales and                               design and                         Investors       Servicing
                                  and valuations                            transfer
                advice)                                origination




Drivers of channel mix




                                        Market     1. Transparency   Consumer                Distribution
      Consumers                         supply     2. Choice         behaviour            (sales and advice)




                                               Policy and regulation

                            Consumer protection                             Other
       We find that we can predict share of indirect distribution
                       using four main factors
 Actual vs. predicted share of indirect                                                                              Explanatory factors
 distribution
Modelled % indirect distribution1


                                                                                                             Lender-related
    75%
                                                                                                               Competition and market
    60%                                                                UK                                      structure
                                                                                                               Bank branch density, cost
    45%                                  DE
                      SW F                                          NL                                         factors
                                       IT                     ES
    30%
                     BE
                                                   IR
                    DK                PL                                                                     Consumer-related
    15%
                               SE
                         TU                                                                                    Product complexity
      0%                                                                                                       Financial sophistication
            0%          15%         30%          45%          60%          75%

                       Actual % indirect distribution2

1 Source: Oliver Wyman mortgage distribution model
2 Source: Oliver Wyman analysis based on lender survey responses, CML, Datamonitor, Consart, mortgage strategy
Competition and Market Structure
          Bank Branch Density, Cost Pressure




Outlier Spain with low-cost branch approach.
          General Cost Pressure - Risk-adjusted Returns of
                         European Banks

     Risk-adjusted return on capital (%)

    25%
               23%
                                22%        22%

    20%
                                                 18%


    15%
                                                       12%
                                                             11%
    10%
                                                                   8%


     5%



     0%
                UK                NL        ES   DK     IT    DE   F

      Source: EMF / MOW (2003)




More complex systems with higher intermediation shares AND risk-adjusted
  returns.
Product Complexity drives Demand for Transparency




                                 Issues

                                    Rate structure
                                    Repayment structure
                                    Price/fee structures
       Financial Sophistication Varies Significantly, Drives
                           Distribution




Note: depends on distributor type, e.g. emerging Europe and
developers as distributors not a sign of financial sophistication.
(Perceived) Need for Advice vs. Price as Demand Drivers
Changing Search Behaviour
3. Implications for Lenders
    These changes in distribution present some new
               challenges for lenders


How can banks ensure that the branch is effective in mortgage and cross-
sales?
What can be learnt from intermediary markets such as the UK and the
Netherlands?
Which models are most effective in managing the relationship with
intermediaries?
How can the use of remote channels be optimised in sales or lead
generation?
What tools and processes can help retain customers in a more aggressive
environment?
How can lenders maintain price control in a more transparent, more
intermediated market?
What strategies are available to defend pricing against downward pressure?
How can mortgage operations be leveraged into new markets, and what
restrictions does distribution place on expansion?
What business models will be successful in the future?
          Branch-based lenders are improving sales processes to
             increase mortgage sales efficiency and cross-sell
 There are wide differences in branch process efficiency       Post-sale follow-up is widely used to increase cross-sell
 and effectiveness                                             rates
                                                               After you applied for the mortgage did the
 Time taken for                                                company/advisor get in touch with you over the
 the mortgage application in branch                            following weeks or months?

100%                                                           80%


80%                                                            60%

60%
                                                               40%
40%
                                                               20%
20%

 0%                                                              0%
                                                                           Yes, but just on mortgage  Yes, they offered me
           France Germany Spain Sweden                    UK
                                                                                specific issues      other banking products
                  < 1 hour        1h < < 2h   > 2 hours
                                                                           France        Germany   Spain   Sweden    UK
 Source: Oliver Wyman lender survey                            Source: Online customer survey
            Business models to maximise intermediary share are
                developing as indirect channel share grows
Lenders are managing intermediaries via differentiated           . . . and using alternative intermediary incentive models to
service . . .                                                    attract volumes


    Provision of                                                  100%
   education and
     IT support
                                                                   80%
    Segmentation
    based on size
     and quality                                                   60%


 Products/pricing                                                  40%
  that you offer


                                                                   20%
    Fees that you
        pay
                                                                     0%
                       0%      20%        40%   60%   80% 100%            Application Completion Ongoing       Volume-
                                                                             fee         fee    retention fee based
                                                                                                             commissions
                                      Yes         No
                                                                                        Yes         No

Source: Oliver Wyman lender survey 2006
       Some lenders are seeking to extend the use of remote
       channels for search purposes into the sales part of the
                              process
Remote channels are now a major part of the mortgage
                                                            Alternative models
research process
100%

                                                              Lead generation with face-to-face
 80%                                                          closure
                                                               Combines the strengths of
 60%                                                             technological advancement and the
                                                                 need for face-to-face mortgage advice
 40%                                                           Cost management and pipeline
                                                                 management e.g. diary management
 20%
                                                                 critical
                                                              Integrated fulfilment
                                                               Lowest cost model
  0%
        France   Germany     Spain      Sweden      UK         Branding and pricing critical

                                                               Attractiveness and feasibility
         I went to someone physically
         I visit websites
                                                                 dependent on regulation and
         I get in touch with specialists/advisor by phone
                                                                 technology access
         I use specific press and articles
           Case Study – Postbank – Towards a lion’s share of the
                         Dutch mortgage market?
Four years after the launch of the
Mortgage offensive . . .                                                     Summary
  Market share1 (%)
                                                     Start of
     10%                                            Mortgage
                                                    Offensive                  In 2002, Postbank launched the
     8%
                                                                               Mortgage Offensive
     6%
                                                                                  Now Postbank is the largest
     4%
                                                                                    mortgage provider in the
     2%
                                                                                    Netherlands
     0%
           1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005              Success built on intermediary and
. . . Postbank has become the second                                           remote channels (internet, phone, post)
largest mortgage provider in the                                               supported by:
Netherlands                                                                       An agile, low cost, back-office
  Market share (%)
25
                                                               2003               Advanced customer
                                                               2004
20
                                                               2005
                                                                                    information/contact management
15
                                                                                  Lead generation
10
                                                                                  Focus on conversion via
 5
                                                                                    incentivised specialist mortgage
 0
       Rabobank       Postbank     ABN AMRO    ING Bank         SNS                 advisors
 CAGR        -6%             24%          4%              7%          -12%
1 Market share based on gross advances
      Customer retention is receiving much greater focus among
                          mortgage lenders
Proportion of customers shopping around and switching
mortgage provider

80%                                                        Greater tendency for customers to shop
                                                           around
70%
                                                            Increased financial sophistication
60%                                                           and awareness
                                                            Growth of intermediary segment
50%
                                                            Greater price transparency
40%
                                                           Significant investment in customer
30%                                                        retention by lenders
                                                            Better pricing
20%
                                                            Reactive retention teams
10%
                                                            Customer tracking and proactive
0%                                                            retention offers
         France Germany          Spain   Sweden    UK       Prepayment modelling
            Get a mortgage offer besides their main bank
            And selected another lender


Source: Online customer survey
  Greater price differentiation by value driver allows lenders to
    react to margin pressure but these practices are not yet
                            widespread
   Existence of differentiated pricing across                                    Pricing techniques for margin
              mortgage lenders                                                            management
    Distribution channel

               Loan size
                      LTV
                                                                                 Risk premiums
          Customer risk

             Product risk
                                                                                 Offer versioning
                            0%       20%           40%   60%    80%       100%   Improved price negotiation at point
                                 Differentiation           No differentiation    of sale
          Do you allow price negotiation on a                                        Link with incentives
                    customer level?
                                                                                     Measure and monitor
                       No
                      20%
                                                                                 Customer screening/analytics to
                                                                                 evaluate price elasticity
                                                                                 Customer self-selection
                                                                                     e.g. fee vs rate trade-offs

                                                         Yes
Source: Survey results and interviews                    80%
       Lenders are also more optimistic about cross-border
     expansion opportunities suggesting that barriers to entry
                            are falling
Lender plans regarding
cross-border expansion




                   No
               intention
                                                             Over 80% of lenders surveyed are
                  14%                                        considering expansion outside of
                                               Cross-        their home market
                                                border   1
                                                              Market growth opportunities
                                               lending
  Green-field                                                 Growth of remote and indirect
                                                 37%
     entry
     21%
                                                                channels
                                                              Margin compression in major
                                                                European markets
                         Acquisition
                                                             Obstacles restrict cross-border
                           28%                               activity
                                                              Tax and regulation

                                                              Access to distribution
Source: Oliver Wyman lender survey
Note: 1 Includes holiday home lending abroad                  Access to information
  At the same time, these changes are making those
     markets more accessible to foreign entrants



Growth of third party distribution provides a turn-key distribution channel
Remote distribution provides a direct alternative to the branch for a niche customer
segment
Outsourced servicing and mortgage systems providers increasing coverage and service
quality
EU regulatory pressure driving better access to credit information
   e.g. access to bureau data

Secondary funding options provide capacity for balance sheet or capital constrained
lenders
     We see six models that will be successful going forward


A. Branch-focussed lender: Leverage advantaged local distribution and
      customer relationships to get increased cross-sell and improve economics
B.    Scale originator: Focus on mortgage origination, leveraging intermediary
      distribution to get scale benefits
C.    Direct lender: Exclusive use of remote channel distribution to deliver a
      customer segment specific proposition and achieve aggressive management
      of the cost base
D.    Giant all-channel lender: Deliver scale across all channels (technically a
      combination of the above)
E.    Branded distributor: Focus on winning customers via advice, best product
      and price
F.    B2B Platform: Service providers adding value to the mortgage value chain
                                     Linking Intermediaries with Lenders
                                   - from Consolidation to Platform World
                Past                                           Present                                                     Future
       Rise of intermediaries                         Intermediary consolidation                                      ‘Platform’ world

   Lenders                                            Lenders                                               Lenders

                                                           A              B           C             D
        A            B            C            D                                                                A             B            C             D

                                                        Packagers      Packagers   Packagers    Packagers




                                                                                                                                               B2B platform

                                                         Sourcing system            Sourcing system




                                                               Network                    Network                   Network                    Network




   Intermediaries                                     Intermediaries                                        Intermediaries



Characteristics
  Limited number of intermediaries – rapid entry of    Intermediaries organise themselves in                  All value-added services along the mortgage value
  new parties                                          networks/clubs                                         chain are integrated in one platform
  Many intermediaries tied to individual banks         Increased number of independent agents                 Providing a technology platform for all participants
  No or limited technological interface between        Lenders outsource parts of the mortgage process
  parties                                              Advanced sourcing systems provide matching role
4. Issues for the Ukrainian Market
5. Regulation of Mortgage Intermediaries
     Disintermediation means More and More Complex
        Relations between Consumers and Industry

                            Application, Interest & principal            Lender
                            Closing, Financing



                                    Service mandate, Fees                           Fees    Delivers
           Consumer                                                                        (product,
                                        Fee discounts                                         client)

                                                        Fees
                                                                    Intermediary



                                              Sales force
                Information & advice                               Introduces
                                                                (product, client)




Branch distribution = 1 contract
Stationary intermediaries (internal sales force) = 3 contracts (C-I, I-L, L-C)
Non-stationary intermediaries (external sales/introducers) >3 contracts
Risks for the Consumer in the Presence of Intermediaries

 Conflict of interest
     „Fee gravitation‟ to lenders and/or products generating the highest fees may reduce the
      independence of intermediaries.
     Unfair competition between „dependent‟ and „independent‟ intermediaries.
 Regulatory arbitrage
     Lenders may use intermediaries to reduce the overall consumer protection level or shift the
      regulatory burden to intermediaries (frequently not or undercapitalized).
 Distortive and unfair pricing techniques
     Intermediary fees may be hidden and/or hard to compare and aggregated with lender fees,
      especially if the relevant effective interest rate legislation is incomplete or confusing.
     Intermediaries may charge fees to both consumers and lenders without sufficient disclosure
 Insufficient professional standards
     Intermediaries, frequently new and/or small companies, may not deliver the proposed services
      accurately or comply with regulations due to lack of expertise.
 Absent or unfair contracts
     No contract is given to the consumer by the intermediary that allows enforcement of the
      proposed services.
     Unfair terms may exist where contracts are given: e.g. payment of fees despite non-
      performance (i.e. consumer able to close a loan) and the waiver of the intermediary‟s liability for
      providing proper information and advice
      Can Pricing Models Limit the Conflict of Interest?




   Three main pricing models can be distinguished:

 Lender pays a fee to the intermediary, no consumer commission is paid


 Lender pays a fee and consumer pays commission


 Lender pays a fee and consumer pays commission with 'rebasing', i.e. a part
   of the lender fee payment is passed through to consumer once the loan
   closes
   Pricing Options: Lender Profit and Consumer Utility

         Profit, utility                 Intermediary                      Consumer
                                         profit                            utility



                                                              with consumer fee payment




                                                              only lender fee payment



                               1%                       50%                    100%
                                                                        Number of lenders

                           lender fees            consumer and                 regulatory
                           only                   lender fees                       target

                             Intermediary profit maximum         Consumer utility maximum




Utility of consumer rises with completeness of products/lenders offered. However marginal
utility (=willingness to pay for fees) highest in a mid-range.
Without consumer fees, intermediaries will suffer from „fee gravitation‟ to a single lender.
Even with consumer fee payment, intermediaries will optimally offer a mid-range (10-30
lenders, <100 products) REDUCED CONFLICT OF INTEREST, NOT ELIMINATED
  Note: Risks for Lenders in the Presence of Intermediaries


  Higher credit risks through „adverse selection‟ of the lender by the intermediary:
    in the typical risk-insensitive but volume-sensitive fee structure environment the
      intermediary has an interest to „ride the credit curve‟, i.e. delivering higher risks to
      the lender, in order to maximize volume and market power.
  Fraud risks:
    Intermediaries with small opportunity costs of bankruptcy have incentives to
      defraud lenders by delivering high risk clients or even inexistent clients.
  “Churn” market risk:
    lump-sum fee structures do not provide intermediaries incentives against
      motivating a borrower just delivered to a lender to prepay and choose another
      lender.
  Other operational risks:
    independent (multiple-lender) intermediary systems may not lend themselves
      easily to standardization of underwriting practices & documentation, which
      produces operational risk for lenders in the underwriting process.
B2B platforms between intermediaries and lenders may create public goods by fostering
  standardization.
Consumer protection initiatives need to consider side effects on lenders.
      Consumer Protection Approaches Compared




EU Insurance Mediation Directive of 2002 (EU IMD), transposed to apply for
credit intermediaries in the important Dutch market,
EU Consumer Credit Directive, unconsolidated proposal of 2005 (EU CCD),
EU Forum Group on Mortgage Credit, report of December 2004 (EU FGMC),
UK FSA “M-Day” rulings of 2004 (UK FSA), and
German Civil Code of 2002 (DE CC), into which the Consumer Credit Act of
1991 has been integrated.
Regulation Detail
Regulation Detail
Regulation Detail
Regulation Detail
                             Costs of Regulations

Direct compliance costs (bureaucracy costs) „M-day‟ in the U.K. suggests introductory costs
    IMLA survey “reflect an almost unanimous view amongst intermediaries that regulation had
     increased firms' costs. The FSA contends only gradual increase in costs for the industry
    Intensity of supervision, permanent compliance costs. The intermediary de Hypotheker (NL)
     states permanent compliance costs of 5-10% of its total cost base.
Litigation risk costs
    Economic capital requirements for intermediaries or equivalently professional indemnity
     insurance costs. Issue is regulatory assignment of duty to advise. (UK)
Customer retention risk costs
    UK: regulatory prohibition of „trailing‟ fee arrangements that share margins between
     intermediaries and lenders in order to keep intermediaries from inducing clients to prepay
     (“churn”) shortly after a loan has been arranged.
  Significant retention-related costs on lenders. Lenders develop instititutional – rather than
     contractual – ties with intermediaries, use opaque side payments, or use less intermediary
     distribution at all, in order to retain consumers nevertheless. IFRS to worsen situation.
Lump-sum intermediary-lender fee structure without risk differentiation
    Additional risk factors – such as adverse selection risk for the lender, and
    Scale effects in the intermediary-lender relation may not be addressed directly through the
     price mechanism (UK regulations).
                            Benefits of Regulations

Market consolidation and improved professional standards
    Trades vs. greater competition. Problem in emerging intermediary markets.
    UK initially few exits, however cost factors and more aggressive FSA may speed up.
    In the Netherlands 10% of intermediaries have left the market after licensing requirement.
Providing maximum transparency to consumers
    Intercepting direct ownership of intermediaries by lenders - most obvious conflict of interest.
         In the Netherlands, after the introduction of the WfD several mortgage lenders had to sell
           their participations in intermediaries, e.g. Aegon, Delta Lloyd, and SNS bank.
         Absent regulation, lender ownership is a widespread phenomenon; e.g. in Germany two
           of, GMAC-rfc and HVB.
    Independent of ownership, regulators need to accept some degree of dependency of
     intermediaries, i.e. define a „still acceptable‟ market structure. See conceptual framework.
    Intervention into fee structures – benefits in general doubtful
         Flat intermediary-lender fees not be in the interest of the consumer.

         No regulatory demand for a consumer fee payment option necessary, as empirically
           typical offer size is a market result.
    Linking a payment duty only to the event of loan closing (Germany) counterproductive.
Monitoring of representativity of the intermediaries’ offers directly (UK FSA) - establishes a
directly observable reputation risk metric for consumers, but costly.
                    Intermediaries as ‘Advisors’?



Intermediary businesses have no empirical focus on advising consumers
   except UK where with regulatory requirement (litigation, capital costs).

   In Germany advisors are a separate niche business.

Intermediary economics differ from contradict the very nature of advice, which
should imply helping the individual consumer under his specific circumstances to find
an optimal financing solution, i.e. regardless of the marginal utility level of the
representative consumer that determines the output of intermediaries.
The solution to ensure proper advice to consumer of course lies in proper development
and specialization of a separate financial advisory industry, and simultaneously
limitation of the mortgage and intermediary industry to the provision of transparency
about the products they offer.
Since financial stability of consumers is in the public interest, there could be arguments
made for lenders and intermediaries -- as a group, or the government, sponsoring the
mentioned industry, at least in part.
        END




 Hans-Joachim Duebel

    Finpolconsult.de
    Esmarchstr. 15
     D-10407 Berlin
aduebel@finpolconsult.de
  www.finpolconsult.de