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Churning curve

Guy Anker asks whether churning is threatening the mortgage market

Premier Mortgage Service managing director John Malone last week claimed that churning is as big a problem in the mortgage market as it is in the long-term savings market.

He said a number of lenders had stopped doing business with certain brokers they identified as deliberately remortgaging clients – often after only nine or 10 months into a deal – for the sake of earning extra commission rather than doing what is best for the client, although he does not reveal any names.

The issue has been hotly debated in the pensions arena in recent weeks, most notably when FSA chairman Sir Callum McCarthy claimed last month that the financial services business model is failing because of excessive churning caused by the lure of commission.

Many commentators express the same sentiments as Malone, saying that the trend towards short-term mortgage deals that encourage switching is causing friction between lenders and brokers.

Others, however, dismiss the issue as irrelevant, particularly with the advent of retention schemes that help prevent churn.

Malone says: “Some brokers will only support products without redemption fees so they can churn. Some of it is being done for periods as short as nine or 10 months, and it mainly applies to big ticket lines that often involve London brokers.

“I know some lenders have stopped doing business with those brokers. Some advisers may say it is justified, but you can’t keep using lenders as a dumping ground. The FSA is looking at it, saying, if you keep churning, you could have a loan that is larger than you started with that is still being paid into your retirement.”

Money Marketing has yet to uncover firm evidence to support Malone’s claims that lenders are not doing business with some brokers, despite contacting many of the large lenders, although it is unlikely that any would publicly admit to such a practice, while the brokers affected are hardly likely to confess either.

Alliance & Leicester head of intermediary mortgages Mehrdad Yousefi says: “The market needs to get away from two-year fixes. It creates tension between lenders and brokers.

“In other markets the degree of competition is less than the mortgage market – after food retail it is the most competitive business sector in the UK. That means the life cycle of the mortgage is two to three years whereas it used to be about seven years.”

Abbey spokesman Joe Wiggins adds: “We are not rejecting business from people that churn – it is difficult to identify that sort of activity, but it would be a serious issue if brokers were deliberately switching clients simply for the commission.

“We have a few products with no early repayment charges, but it is difficult for us to plot a significant trend on churning.”

What may appease those concerned by churning is the recent growth in longer-term fixes, such as the seven-year fix launched by Skipton Building Society earlier this month, though some brokers stress that churning is not a problem if the customer is getting the best deal.

Association of Mortgage Intermediaries associate director Rob Griffiths says: “There is an issue for lenders when people are switching but I would not call it churning, more advisers highlighting the options for the client.

“The mortgage intermediary has a duty to get the best deal for their client, so if a two-year deal is up, brokers need to search for the best deal, which may involve switching.”

Griffiths argues that lenders may well have brought churning upon themselves by devising products that are ripe to either switch from after an introductory deal or are so attractive to someone on a competitor’s deal that they are better off switching.

“These issues have come about because lenders provide that type of product and intermediaries and clients take that up,” he adds.

Lender Nationwide does not see the issue being a serious problem. Head of intermediary markets Tim Hughes says: “The industry should not beat itself up but continue to focus on ensuring that customers are given best advice.”

Other lenders see churning as simply a function of a competitive marketplace, as Association of British Insurers director general Stephen Haddrill told the Labour Party conference in September when responding to McCarthy’s speech.

Cheltenham & Gloucester head of marketing Ian Whittaker says: “Churning is simply a function of a strong remortgage market. Low interest rates, rising consumer awareness and increased lender competitiveness have all led borrowers to switch more frequently.

“Remortgaging is now a key feature of the market and the fact that intermediaries work hard to ensure that their customers have the right mortgage deal is unquestionably a very positive thing.

The main weapon used against churn is the retention schemes employed by the likes of HBOS, Woolwich, Accord and First Active.

HBOS intermediary distribution and specialist banking managing director Philip Grant says: “There have been dynamics in the market that increase switching, but we are entering a period of increasing stability and intermediaries will need to look at what they are providing to clients.”

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