Copy article

Adverse fees - fair or a farce?

ended 11. September 2023

A Newspager has alerted us to the fact that some brokers — often those that market themselves as ‘adverse specialists’ — are charging this demographic of borrower fees of up to £3k or 1% of the loan to arrange a mortgage and non-refundable cancellation fees of up to 0.5% of the loan if a borrower decides not to proceed and cancels the mortgage after submission. What are your thoughts on this? Can these kinds of fees and terms be justified as long as fully disclosed up-front and if the broker is genuinely doing a lot of legwork? Are they in line with Consumer Duty? Any other thoughts, send them across.

12 responses from the Newspage community

Copy all

Star Quote
Copy

Steven Morris
Advising Director at Advantage Financial Solutions
When it comes to the size of fee, drawing a clear line between fair and unfair is basically impossible, as value for money is different for everyone. However what is abundantly clear is that charging percentage fees is clearly nonsense, with no exceptions. If the same client raises a mortgage twice the size, they get charged double? For the same application with the same level of effort to the broker?! Consumer duty is abundantly clear: firms have to have a 'fair value assessment'. That means there must be some tangible reason, such as effort and weeks of admin, underpinning charging a client a higher fee than you would otherwise. Charging more for the same thing, just because the client is asking for more money, would only work if the 'fair value assessment' was written by a 5-year old. Needing FCA regulation to tell you not to charge percentage fees, is like needing a religious text to tell you not to murder. It's axiomatically wrong and the very definition of profiteering.
Copy

Editor
Ranald Mitchell
Director at bad credit mortgage specialists Charwin Mortgages
We deal with a lot of credit-impaired applications. This section of the market is wholly underserved by lenders and brokers alike. Customers by default are in a vulnerable position and there is no doubt that some firms exploit this, which is completely wrong. Following on from Consumer Duty, there would be immediate questions around fairness on charging a 1% fee on all applications. A customer borrowing £200,000 pays £2,000 and one who borrows £50,000 pays £500 - same level of work, so why does one pay four times as much? Many credit-impaired applications are a lot more work than the vanilla end of the market so charging more is fair, as it takes a lot more time, resources and care to get these through. Lastly, market position for "adverse brokers" is key. The inclusion of second charges in product offering is important as this gives the ability to preserve existing, good lending terms, while solving the problems the customers have.
Copy

Editor
Darryl Dhoffer
Founder at The Mortgage Geezer
I agree with fair pricing on fees from the broker and the lender. That said I have extensive experience working within the adverse world of mortgages and these cases are not as straightforward as vanilla cases. There is much more work involved. As long as broker fees are transparent from outset, then there should be no issues.
Copy

Editor
Justin Moy
Managing Director at EHF Mortgages
Specialist mortgage broker firms often charge these extra fees to cover the cost of additional administration and their knowledge, especially for those who need assistance with complex needs, such as adverse and buy-to-let borrowers. The level of fees, though, can be excessive, and those deemed as potentially vulnerable clients could be taken advantage of. Ultimately, most brokers will have access to a similar range of mortgage lenders so there should be no reason to pay high fees to access specialist lenders. Some brokers charge little or no fees and are still excellent at helping those same clients. This should be more about their experience and not aggressive fee charging.
Copy

Editor
Craig Fish
Director at Lodestone Mortgages
Charging those in greater need and, often in this scenario, with much less money than most, is morally wrong, and should not be allowed. Whilst I agree with fee charging, some brokers/ firms use adverse as an excuse to charge more, when often a transaction is no more complicated than one without adverse. I also feel it is wrong for cancellation fees to be charged. It's far better to charge a small administration fee for handling the paperwork and application, and then a fee on a formal offer, than to charge a large fee if the client cancels, often for reasons beyond their control. Ultimately, fees should always be transparent and disclosed at the outset in detail to avoid any uncertainty and negative feelings, but fee charging should be scrutinized in far greater detail by the FCA to stop those who are just trying to 'get away' with it.
Copy

Editor
Rohit Kohli
Director at The Mortgage Stop
Often adverse or poor credit cases can be more complex than standard cases and that means spending more time working on them to get the right lender and product for the client so there is an argument for being able to charge a higher fee in these circumstances. I don't believe that charging a percentage of the loan is right or fair to clients in similar scenarios who want to borrow different amounts. This doesn't feel like it would be in line with Consumer Duty. I also don't think a cancellation fee is unreasonable given the amount of work or effort that goes into submitting an adverse application so if the clients change their minds this seems fair. It would be interesting to see if the same advisers offer a refund policy on any fees paid if they fail to get a mortgage through after submitting.
Copy

Kundan Bhaduri
Property Developer and Portfolio Landlord at The Kushman Group
Whether it comes to prepayment energy meters or mortgages for people with poor credit history, these dirty tactics hurt those at the bottom of the social hierarchy the most. Consumer Duty or not, these unfair practices must be fully scrutinised by the FCA, just as they stopped the payday loan pest. I am all for lenders covering their bases by charging these customers a risk premium for lending to more risky borrowers, but overtly greedy fee structures are a strict no-no. It all goes against the ethos of offering fair financial services to all.
Copy

Charles Breen
Founder at C B
While those fees are high, if a broker is providing a specialist service and the client is informed clearly upfront before they engage with the broker's services then I see nothing wrong with this. If you get an electrician to start doing a rewire to your house and halfway through the work you change your mind, you still would pay the electrician, and the same applies to the mortgage adviser. As an industry we are trying to provide good customer outcomes and service levels. In my opinion the fee-free model fails to provide this as you are unable to give the clients the quality of service that they deserve and the only way to do so is by charging fees. I do not, however, agree with a percentage of loan model. If advisers work predominately in the specialist market, then these cases take a far greater amount of time, effort, knowledge and expertise and the client is paying for all this. They are paying a fee not just for the adviser's time but also for his or her years of experience.
Copy

Graham Cox
Director at Bridging Hub
Adverse broker fees can be very high. There's undoubtedly more work involved for the broker, but often the poor credit is not that severe, perhaps a few missed credit card payments or a low-value default or CCJ. In those circumstances, the case isn't that hard to place and doesn't justify such lofty fee structures.
Copy

Richard Campo
Founder at Rose Capital Partners
I have always thought the practice of charging borrowers with poor credit larger broker fees 'because you can' to be a very distasteful practice. I have even seen firms add large percentage fees to the loan, which are already on higher interest rates and only debilitate the client further. That said I do think it is important that brokers charge for their time and experience but it should always be clear from the outset what clients will pay. Researching a case with adverse credit isn't more complex than most other mortgages. I feel there are some brokers out there preying on more vulnerable clients who may be embarrassed about the situation and therefore do not look around as much as they could do. It will be interesting to see how this practice stands up post Consumer Duty as surely that is the type of behaviour the FCA is trying to stamp out? We would always encourage clients to look around as there is no need to pay a large fee just because you have had issues in the past.
Copy

Gary Bush
Financial Adviser at MortgageShop.com
With Consumer Duty, transparency on charging consumers is vital. It's clear that percentage-based charging for some mortgage sizes isn't good value, but for others it's competitive. Good outcomes for clients is an important assessment that needs to be taken seriously.
Copy

Philip Dubberley
Managing Director at Belvide Finance
I am all for charging fees and believe that the time we spend on cases should merit a reasonable fee. However, there is a minority of brokers who do take advantage of these "vulnerable clients" with regards to the fees they charge. I am not a great believer in percentage fees but then proc fees are generally paid as a percentage, so how do we police this? Fees have always been contentious and I think consumer duty will highlight the disparity as we have to be seen to offer good value customer outcomes. Another area that needs to be looked at are the extortionate fees that second charge master brokers are charging as these are tantamount to daylight robbery. In most instances, we don't have access to a lot of these lenders as you are subject to minimum business levels and generally they have to be packaged, but the business model doesn't ring true with "consumer duty". Some charges amount to almost 10%. How can this be justified?