Promise fee _ fair cost policy August 23

Document Reference: PM-FFC-001 Version: V1.2 Owner: Compliance Team — Promise Money Next Review Date: [To be confirmed]

---

Promise Regulated Fee/ Fair Cost Policy

Summary

In a small business with few advisers and access to directors for discussion and sign off of unusual cases our published fee policy and process is considered fair and effective in accordance with the reasoning below.

Advice is signed off by a Director to further check advisers rationale and fair charges

An application fee of £125 will be charged once a decision in principle is obtained. This is ordinarily paid upfront

A completion fee will be charged based on the loan size between £995 and £2660 as per the fee scale.

Advisers have discretion to reduce fees to represent fair value on non standard cases. Similarly scenarios which could cause hardship to the consumer they might add the application fee to the loan. Sign off must be obtained from a director and recorded on the case with a brief rationale for the amendment. Compliance will monitor adherence to this process.

Target Market

Promise does not target a specific market. Having evolved from a packaging organisation the company aims to offer products to as many customers and brokers as possible. It therefore has a very wide and varied panel of products and lenders with many products retained on a “just in case” basis.

Rather than target clients or sectors the aim is to try and fulfil the needs of all comers across the range of secured and unsecured loans. The appropriateness of any products will be considered against the needs of the borrower at the time. consideration will also be given to referring customers to third parties where we do not have a suitable product or expertise - eg equity release lending

Rationale

The company exists to provide a quality service to brokers and consumers but also to make a profit and invest in a suitable infrastructure to operate in a regulated market. Such an infrastructure comes at a cost and a fee structure needs to exist which takes into consideration the financial needs of the business, the cost of providing an efficient and compliant service work and is also fair to the customer.

The type of the business the company typically receives falls into two distinct areas.

Broker introduced which by nature has high management costs as brokers are very often looking for a sounding board or research on a loan product before ultimately recommending a mortgage. Much of the business is also of a complex nature having been declined for a remortgage which results in more work being carried out, lower acceptance rates by lenders and lower take up rates by customers due to higher rates than the comparable mortgage market. Brokers are responsible for the costs of acquisition and charge additional fees to cover this.

Direct from Consumer business is a different business model where the company speculates to generate enquiries through marketing / advertising. As well as there being a greater risk to the company of losses on advertising expense, the cost of converting each enquiry is even higher than broker introduced business with conversion rates from enquiry to completion of around 2%. Unlike the broker introduced channel the company bears the cost of acquisition and the risk of losses on speculative advertising

The firm aims to make a 15% profit on turnover in order to remain liquid, pay shareholders and fund growth.

In order to deliver on the service standards and regulatory expectations, with the current overheads and volumes, the firm needs to earn around £1900 per case after paying introducer fees, direct marketing costs and third party fees such as valuation, references etc.

The target of 15% should be kept under review and in a year where the company has consistently exceeded 10% consider if the average fee per transaction can be reduced

To reduce the firms reliance on earning an income per completion of £1900 it can consider alternatives such as:

Reducing costs (mainly headcount) which would detrimentally affect the service consumers and introducers receive and could affect the company’s ability to achieve ongoing profitability.

Increasing turnover by driving higher volumes through a similar cost base.

A combination of both of the above

Fair value — what does it mean?

In relation to the fair value outcome of the Consumer Duty, the FCA is looking for firms to assess whether the total price paid is reasonable in relation to the benefits. The FCA says that it wants to set out a clear and consistent expectation of how firms should assess whether the price of products and services offers fair value. However, it has not provided detailed guidance on the matter. It has simply indicated that firms can consider many factors, including costs, benefits, and utility to customers, as well as market rates for comparable products.

What does the FCA say about we arrive at our fees?

*“Advisers need to provide their clients with a clear charging structure and clear information on their charges. We do not set rules for what your charging structure should look like. Examples of charging methods include hourly rates, a fixed fee, percentage charges or a combination of these. You shouldn't charge different rates for different providers that could both be suitable for the customer’s needs”. *

https://www.the-fca.org.uk/adviser-charging-rules?field_fcasf_sector=236&field_fcasf_page_category=unset

Further FCA guidance is provided as follows:

“If you are unable to answer 'yes' to the following questions, you may not be meeting our requirements:

Can your clients understand your charging structure?

do you disclose your initial and ongoing charges in cash terms?

if your charge is a percentage, do you provide cash examples?

if you charge an hourly rate do you provide indicative examples?

do your clients receive your charging structure before you provide any advice services?

where your initial charge for regular premium business is paid in instalments, have you made sure they are not open-ended but end when the initial charge is paid off?

Can your clients understand what they will pay and how they will pay the charge?

do you disclose the total adviser charge specific to the client as early as practical (for example, at the end of the first meeting or shortly afterwards)?

do you disclose it before the client incurs any charges?

is it in cash terms?

is it in writing and in a ?

do you record the client’s agreement to the specific amount to be charged?

do you ensure the client has agreed to the method to be used to pay the charge? For example, if you normally use facilitation, is this agreed with the client?”

What is the FCA definition of TCF?

There are six consumer outcomes that firms should strive to achieve to ensure fair treatment of customers. These remain core to what the FCA expect of firms.  

“Outcome 1: Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.”

No further FCA guidance on TCF in regard to fee levels has been found. To be fair to each customer it is clear that they need to be aware of the costs at an early stage in order to decide if they wish to proceed.

Good value - cost of delivering the service V income derived

The business should aim to make at least a 20% profit on it’s activities to reward shareholders and reinvest.

This is low compared to averages quoted by the FCA of 36%

Based on June - Dec 22 the costs attributed to regulated activity were higher than the income generated

Regulated revenue was £95000

Gross profit was £77000

Estimated salaries attributed to regulated business - £70000 - 42%

Share of fixed costs - £11900 42%

Loss £4900

Clearly the business is achieving well below 20% ROI so must overall be providing services at an acceptable and fair cost given the time and effort expended

Supplying services on an hourly cost plus basis - including abortive time

This is very hard to quantify and make acceptable to applicants.

Based on the numbers above it would also cost them potentially 20% more

Overall our costing structure given the cost of providing the service represents very good value

A number of options for structuring the company’s fee scale exist:

Differential charges based on the case complexity

This could include charging applicants less if their application is simple and more if it is complex and will require more work. For example customers with poor credit or requiring debt consolidation may require extra work. Also some customers ask the company to pay the valuation on their behalf which incurs greater risk and could justify a higher fee. However this may not be known at the outset and is very subjective. It is therefore difficult to establish a fee structure which can be relied upon. Also this would result in customers who are potentially most vulnerable paying more for our services.

Flat rate fee

This would mean charging all customers the same fee of £1900

As a result borrowers looking for smaller loans would pay proportionately more to arrange their loans which would breach the lenders fee caps. They would not be able to borrow. Once additional costs such as valuation fees or introducing broker’s fees are added the problem would be exacerbated. It is difficult to see how charging fees of this level on the lower loan bandings would be fair.

Sliding scales based on loan amount

There is some justification for this approach as the firms costs can vary by loan size in two ways. Where customers don’t wish to pay for the valuation, the company is taking the risk by paying for the valuation. Typically larger loans have larger valuation costs and therefore a larger risk. Also larger loans result in higher turnover and therefore higher regulatory fees and PI costs. However the valuation impact doesn’t apply every time and the impact is not known at the outset when likely fees are discussed. Therefore a sliding scale based solely on loan amount may not accurately reflect the risks, costs or work involved.

Charging no fees

Given the level of commissions paid by lenders this is not an option as the company could not meet its regulatory obligations from the commission income generated. If a combination of lenders paying higher commissions, volumes increasing and the business reducing costs came about, the option to consider lower / nil fees could be considered and this is a goal the company should work towards.

Preferred fee structure and disclosure timings

Fairness

In order to be fair to more customers the sliding scale approach seems the fairest option as the amount of fee is proportional to the loan amount and will not unfairly make loans unaffordable for borrowers seeking a lower amount. This approach also best reflects the likely costs and risks the company may be exposed to without charging higher fees to known vulnerable customers. The structure also enables customers to be informed of the likely fees at an early stage.

A fee structure which is based on loan amounts and percentages can disadvantage some borrowers when the bandings are too wide. This can result in the fees varying significantly at each point the banding changes and customers paying a significantly higher fee on a smaller loan amount eg £29000 loan at 4% = £1160. A £30000 loan at 3% = £900.

Therefore the sliding scale fee structure should have many increments to minimise the impact on consumers

Clear and not misleading

In order to treat customers fairly the fees must be communicated accurately, clearly and at an early stage in the process. This means disclosing the fees as soon as we think we may be able to help and have established the type of product the customer is applying for  (eg a regulated second charge or mortgage) ideally before a detailed fact find is done, it is not possible to be sure which product type is suitable. However, an indication of fees across all products is provided in the IDD from the outset. As soon as possible after the fact find has been completed and potential products identified, indicative terms should be provided in writing which include fees specific to the application in question.

Broker introduced versus clients applying direct

When brokers wish Promise to give the advice on a loan to one of their clients, they typically charge a fee on completion of the loan to cover their acquisition costs up to that point. This will include the cost of them generating leads or paying another introducer down the line. When a client applies direct to Promise, Promise takes on the cost of acquisition including mailings, telesales or website / marketing costs and pay per click advertising.

Whether the loan completion is generated by a broker or directly by Promise, the cost of acquisitions needs to be reflected in the remuneration structure whilst remaining fair to consumers who may apply through either channel. Promise fees to consumers on direct cases should be broadly similar to the total fees they might pay if applying via a directly authorised broker. However we should be mindful that mortgage brokers generate repeat business from their clients and will reduce their fees on a second charge loan as it could form part of an overall strategy to remortgage the borrowers at a later date or be supplemented by other business they transact with the borrower

The current fees scales on regulated second charges and mortgages can be found in the fee policy library

Caps and costs

Whilst the company can control it’s own fees it has no control over the fees of third parties.

Broker fees, valuation fees and other third party costs can all be added to the loan but are not normally known at the outset.

They should be disclosed to the borrower in good time before the client decides to proceed and will be shown on the mortgage illustration. However the mortgage illustration does not always provide enough detail on how the total fees are being split.

To ensure greater transparency, the breakdown on the fees and any other remuneration should be provided to the borrower in writing in the “reasons why letter” in good time before the customer is bound.

Second charge V First Charge

With second charges, every case involves detailed packaging of the application including obtaining third party references and valuations. Second charges also often contain an element of debt consolidation which brings extra work and compliance.

First charges are generally a simpler process and there is less work. Also, the loan amounts are larger creating opportunity for larger commissions. Therefore the fees should reflect that fact and be generally lower than secured loans

As every case is different, particularly regarding broker fees and valuation costs, where Promise is responsible for the loan it will be the advisers responsibility to ensure the total fees are appropriate in regard to the size of the loans and the borrowers needs.

We are aware of the FCA’s concerns over second charge fees and have seen data showing a high % of second charges havings fees in excess of £3000.

Our fee structure has not allowed fees of this size since the MCD

Refinancing with no / small amounts of cash in hand

In this scenario the work involved is the same as a capital raising application. Therefore in the pursuit of fairness to all, the fees should be the same.

However, the fees could be disproportionately high compared to the amount of additional money raised.

Similarly the benefit that extra amount may bring to the client could be disproportionately high compared to the additional money raised.

Therefore, our policy is for individual advisers to determine this as part of their overall advice process looking at the cost V benefit.

In the case of product switches where no further work has been carried out, our completion fee will be capped at £995. This is to reflect that whilst the same amount of work is involved in researching and justifying the advice, there is less work in liaising with lenders and solicitors. In the event that other works have been carried out or other costs incurred in addition to advising on a product switch, any increase above £995 must be referred to a director for sign off.