Cover story: Openwork on changing the mortgage game

What do computer games and mort­gage networks have in common?

More than one may think, according to Openwork, which has big plans to revolutionise its methods of operation.

Openwork managing director, mortgages and protection, John Cupis acknowledges that the firm has been rather quiet in recent years but says it is ready to “get a bit noisier”. In this profile, Cupis and his colleague, proposition director for mortgages, protection and general insurance Paul Shearman, tell Mortgage Strategy about Openwork’s plans to future-proof its network model, grow market share – and gamify the advice process.

Cupis, who is soon to celebrate his first anniversary at the network after joining from rival group Sesame Bankhall last February, says Openwork has been growing strongly, having turned a profit of £4.9m in 2015. It is now looking to make better use of digital solutions to help advisers improve both their service and earnings. Cupis sees the potential for using graphics and interfaces similar to those in computer games to make the fact-finding process more compelling for customers.

“Why would we not want our customer experience of the fact-finding process to be as interactive as shopping on Amazon or playing a video game?” he asks.

Shearman has worked at the network since its inception in 2005 and he highlights the
advantages of taking a digital approach to some of the more sensitive areas of financial services.

“It works particularly well with protection when you have customers with medical issues,” he says. “That’s often a difficult discussion for an adviser – so, if you can ask a client to pre-complete some of those parts of the fact-find, rather than have to go through some quite intrusive personal questions with them, that makes a lot of sense. It’s more efficient all around and you probably get better and more accurate data as a result.”

Openwork is majority owned by its 3,000 adviser members and therefore positions itself as ‘the John Lewis’ of the financial advice world. However, as those with long memories of the industry will know, Openwork has its origins in the life insurance sector.

Its roots go back to Hambro Life, which became Allied Dunbar that in turn was acquired by Zurich. When Zurich Advice Network became Openwork in 2005, it represented a new business model for the sector. Zurich still has a 25 per cent stake but 67.5 per cent is owned by advisers and the remainder by the network’s employees. The insurer has confirmed it will sell its shareholding completely by 2020, leaving the network owned 90 per cent by advisers and 10 per cent by staff.

“This has always been part of the plan,” explains Shearman. “From the moment that Openwork was founded, the intention has been for Zurich to gradually decrease its shareholding.

“What happened almost immediately after we were created was that the mortgage market collapsed [due to the financial crisis]. We then had the RDR on the wealth side and the MMR in mortgages, so the process of transitioning gradually away from Zurich has been longer than anticipated.

“But we are now in a really strong position to move forward. We expect profit for 2016 to be significantly ahead of the previous year’s.”

The network has plenty of events in its calendar to keep members in the loop on regu­latory and market changes. It is part-way through a series of 25 protection masterclasses, which began in December and will continue through the first quarter of this year. In addition, there will be 20 adviser roadshows and around 30 smaller workshops throughout 2017.

Shearman says: “They will cover areas like buy-to-let, making sure advisers really understand the implications of all the tax changes but also recognise the multitude of changes that lenders are putting through in terms of affordability as the PRA changes take effect.

“As a network that is growing, we have a lot of new advisers and we need to ensure we get close to them. And also as a network that is profitable, we can provide investment into training and development, as well as into technology, to make sure they’re doing the right thing for clients and to support growth.”

Shearman adds that 100 new advisers are in the process of joining the network.

Protection innovation

Perhaps understandably, given the group’s heritage, protection remains an important area of business. A recent innovation in the firm’s advice process has dramatically increased sales: advisers are able to generate a personalised risk report for every mortgage customer, which shows both the cost of protecting their loan and the likelihoods of either developing a serious illness, losing their job or encountering other life events that may jeopardise their financial security.

Cupis says: “It’s been a phenomenal success with our advisers, who helped to build this. Just in the first month, November 2016, our sales of protection grew by over 25 per cent; and that continued in December, which was our most successful month of the year for protection, during what is traditionally one of the quietest periods.”

Shearman adds: “A really hot topic at the moment is big data. And this is a perfect example of using different data sources to aid both advisers and clients. It takes data from claims and the propensity to have certain conditions from insurers and reinsurers, alongside integration into iPipeline’s solution-builder system to generate this personalised risk report.

“Many advisers still struggle with having that dialogue around protection. This report cuts through that and the feedback so far has been fantastic. Clients have been coming to their advisers and saying: ‘Based on this, I really want a fully protected mortgage.’

“That had been almost unheard of and it is really driving our numbers.”

Product transfers

Looking at the mortgage market in more detail, Cupis and Shearman share concerns over the amount of product transfer business that lenders are still carrying out on an execution-only basis. They believe it runs contrary to the aims of the MMR.

Linked to this is the issue of retention proc fees, payment of which both men believe will soon be the market norm.

Shearman says: “In another 12 to 18 months, all the lenders will be recognising the value of brokers in managing ongoing client relationships, and paying for that. A number of lenders have moved during 2016, a number have plans to do so relatively soon and some of the others, we believe, will follow. We just think it’s the right thing to do.”

He adds, however: “What we are very uncomfortable about is where a big proportion of the market, which is outside the CML’s figures, is being done as product transfer by lenders directly with clients on an execution-only basis.

“The whole raison d’être of the MMR was to put advice at the heart of the mortgage process, yet you’ve got umpteen billion pounds-worth of lending where clients are just ticking a box and saying: ‘My circumstances haven’t changed in the past two years. I’m going to go for another two-year fixed.’

“But actually, is that what the regulator intended? Our belief is that it is not. I don’t believe it is in the best interests of clients.”

Shearman thinks product transfer business may comprise up to a third of the market, but there are no official figures because lenders do not report this data.

Another big challenge for the industry is how to increase adviser numbers in line with requirements. Rising demand is welcome, of course, but for some reason the financial advice world is failing to promote itself as a good career for newcomers, the pair admit.

Cupis explains: “At the depths of the credit crunch in 2007/08, the mortgage market was roughly 50:50 direct versus broker business. It’s now 70 per cent-plus through intermediaries. I think this share will be maintained, or maybe even grow.”

The changing face of the market means the purpose of the network model is shifting, he says.

“Networks need to be profitable to fund development and growth and they need to have strong capital to meet their regulatory requirements. Traditionally, networks have provided good compliance oversight, regulatory guidance and cover for brokers; but the model we will offer is as much a business partner as a provider of cover.”

He continues: “One of the big challenges is that the number of advisers is fixed and capacity is not rising quickly enough to meet thedemand from customers, with the increase in numbers coming via the intermediated channel. Firms need support to help them grow their capacity to serve more customers and be more productive.”

Combined solution

For Cupis and Shearman, the solution for helping adviser firms to grow sufficiently to meet demand lies in a combination of recruitment of new staff, greater use of digital tools to bring efficiencies and cost savings, and the facility to refer clients to specialists in other areas and earn a fee for doing so.

But how will all these issues play out against the housing market backdrop in 2017? Will conditions be favourable for firms that are primed for growth?

Shearman is optimistic that UK mortgage lending will avoid a downturn.

“If you look back at 2016, given what thegeopolitical situation has thrown at us – whether that be Brexit or Trump, among other things – actually we’ve ended up in a pretty good place with around £240bn of lending, and most brokers have had a pretty solid year,” he says.

“We’ve got a plan for growth but, at a market level, our expectation is that this year will be broadly flat for gross lending. Certain sectors will do better than others. We anticipate remortgaging will carry on very strongly in 2017.”

He adds: “I wouldn’t be surprised to seebase rate drop further to 0.1 per cent given the prevailing winds and what may happen as we get closer to Brexit. If it does drop, you could see further stimulus in terms of the remortgage market depending on what lenders do.”

Mixed fortunes

Buy-to-let will continue to be tough, Shearman warns, as landlords deal with the multitude of tax changes and tighter lending conditions.

He is more positive, however, about the new-build sector.

“From a political perspective there is a head of steam – from both an economic and social viewpoint – that we really need to get going on housebuilding. It’s been very solid in the past year and I think it will carry on.”

On the purchase side, which was slow in 2016, Shearman believes that there could be movement.

“People have been sitting on their hands because of all the uncertainty,” he says. “I think there will be a period where people do nothing,but then they will get fed up with waiting.

“I wonder whether, actually, 2017 maysee people decide that they have to get on with life – at which point, hopefully, the purchase numbers may be stronger than people are forecasting.”