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Dual to the death

So lenders are being “greedy and unfair” again? All lenders are out to rip off the consumer and do so shamelessly?

The recent ombudsman ruling on dual pricing has sparked off the usual round of pejorative stories from some sections of the press regarding their great “Satan” – the financial services industry generally and, in this particular instance, mortgage lenders.

For years, the mortgage industry has competed for new business through incentives to attract new borrowers to the point where these loans even on the most optimistic assumptions were likely to generate little or no return on capital.

The obvious question was, why do it, then? The simple answer was, what else would you do with balance sheet and processing capacity?

So this “rip-off” product does not make much, if any, money. In that case, how have these products been paid for? Simply by lenders relying on inertia among customers who do not move and who do not remortgage and effectively by charging those customers more. The reality has been that lenders have tended to penalise the most loyal to stay in the race for the least loyal. Not a very sensible approach from a long-term business perspective, nor very sustainable given the increasing level of remortgaging in the market.

Lenders, particularly building societies, have wrestled with this conundrum over the years and a number have sought to redress it through various loyalty schemes, inc-luding lower base rates, discounts for loyalty and access to new borrowing products for those considering shopping around. Some have gone further and actively explained to borrowers the options open to them.

Traditional concepts of long-term good value over the life of a mortgage have come and largely gone in the face of consumer and intermediary demand for a competitive price now and “hang the future” bec-ause there will always be a better deal somewhere else.

The reality is that most loyalty schemes have failed to strike a chord with existing customers too and failed to change the underlying rate of churn because the incentive to stay is never strong enough compared with the incentives to move offered in the marketplace.

It may reward the loyal but it is not really recognised to do so, precisely because these borrowers are mostly apathetic in any case.

The main problem with loyalty schemes has been their lack of visibility and this is in part down to a failure by the lender to communicate effectively with the customers inv-olved. It is, however, also a function of how such schemes are treated by the press and the difficulty of looking at the whole life of the loan.

Best-buy tables typically compare the initial headline rates of different products rather than their long-term attractiveness.

It is against this background that both Halifax and Nationwide took bold action on price, which led to the recent omb-udsman findings. Creating a new base rate is certainly a way of getting press attention.

When HSBC changed its base rate in 2000, there was extensive coverage, heralding the start of a mortgage price war.

When Nationwide changed its pricing to remove discounts and start the process of charging customers more fairly, the coverage was positive. I for one had no moral problem with this stance.

If you are being fair, why should someone already benefiting from one incentive also gain advantage from another?

Unfortunately, the ombudsman disagreed and the net result is the price on a considerable number of mortgages has gone up rather than down.

Is the ombudsman wrong? That depends on the stance you take. If you accept the morality and fairness argument, then the answer is probably yes. A sane business would want to reward its loyal customers more and the base rate approach gives the coverage and visibility necessary to justify it.

Unfortunately, we live in a world of consumer protection regulation, which often does not have the effect that its proponents anticipate. We live in the world of unfair contract term regulations designed with the best intentions to protect consumers. In this inst-ance, however, the net result has been to disadvantage loyal customers.

I am convinced that if those drafting the regulations had been asked if this was their intention, the answer would have been a resounding no.I believe they would also have supported the idea of trying to rectify unfairness between customers but rules are rules and the law can be an ass.

Perhaps the ombudsman needs to consider more than the facts of the case and the specifics before him. Is there not a need for a more holistic interpretation? I suspect, however, this is not open to him under his constitution, nor may his funders and sponsors see this as desirable.

He decides on the facts of each individual case rather than in general for the class which would have considerable risk attached. On balance, therefore, the ombudsman was probably correct, given the limitations of his mandate, but I am sure he finds the result of the finding as unpalatable as I do.

Let us go back to the good old days. Bring back the cartel, do away with competition and consumer choice and no one will be treated disadvantageously. Or just maybe, whoever is drafting consumer protection rules might try to think through how business will react to regulation rather than assuming that the effect will actually be what they want.

As for the lenders involved, top marks for effort and keep trying to find a way to be fairer to the loyal and valuable customer.

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