Alexei Garan, Head of Business Funding at Shaw & Co, explains why brokers are conflicted in the way they are incentivised by lenders.
"The majority of brokers are remunerated via fee sharing arrangements with lenders."
The broker landscape covers a variety of activities and individual brokers have a wide range of industry backgrounds. While some brokers may look to earn fees directly from a client, the vast majority of brokers are remunerated via a fee sharing arrangement with the lender.
The problem here is that different lenders pay different percentages of their fees across to the broker.
While there is a duty to disclose such arrangements, so the client is fully aware of who is getting paid what, it does not address the key concern. This is where a lender, who may not be presenting the best terms the market has to offer, is happy to share a disproportionate element of their fee to secure the opportunity.
In the normal course of business, brokers will deal with lenders where they have a pre-agreed fee sharing / introducer arrangement. Rarely do brokers undertake a ‘whole of market’ review to include lenders where no ‘introducer agreement’ exists.
In some cases this could lead to clients taking on funding which may not be the most appropriate, or indeed accepting onerous conditions such as, among other things, the provision of personal guarantees. And, finally, while brokers can provide a useful conduit to lenders, it is always worth asking how many lenders have been approached during the process. A handful would suggest a less than rigorous approach…
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