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Grail or trail?

Britannic Money&#39s decision to introduce trail commission as a way of reducing churning could kickstart other lenders into similar action but the industry remains undecided over whether this will really address the problem or stir up a whole set of new ones.

The current account mortgage lender hopes trail fees will build broker and customer loyalty and go some way towards stopping brokers swapping clients from product to product.

Future Mortgages head of marketing and sales Brian Pitt is not convinced. He says he is strongly opposed to trail commission: “I think it is a brave move on their part but I do not think it will work. Customer loyalty is a holy grail and I do not see trail commission changing that at all.”

Pitt makes a distinct difference between customer relationship and customer retention. He says: “Clearly, churning is being overplayed. Customers are suffering information overload from advertisements and fliers but half still choose to take financial advice. They want choice but look for endorsement of that choice from an adviser. If that is a churn then we are prepared to live with it. Customers need to be offered the best possible deal.”

Brokers are painting a picture of increasingly well informed clients well aware they have a variety of options but slightly bewildered by the number of mortgage choices available.

Pitt supports this view and says: “Why is it unhealthy to look at remortgaging? It is not unreasonable to expect people to shop around. I do not believe that anyone is going to stay with their mortgage for 25 years anymore. Why would they if they can get a better deal elsewhere?”

He says it is the broker&#39s task to offer the most cost-effective product and if that means remortgaging every two years then so be it. “They prefer to fill the silo from the top rather than stop the customers escaping from the bottom. They are reactive, not proactive, only interested in getting clients on their book rather than retaining them because they know it is unrealistic to think they will be loyal,” says Pitt.

He does not see any real solution to churning and thinks a provider just needs to have a service proposition that is second to none, with more proactive selling to existing customers. He thinks the money used for trail fees would be better spent if it went straight back to the client.

“It is a bit rich for high-street banks refusing the &#39one in four&#39 customers a mortgage to complain about customer loyalty. If lenders want to keep borrowers they will have to do their own work,” he says.

Intelligent Finance has used trail commission since its launch two years ago, inheriting the idea from Standard Life, the other big advocate of trail fees.

Intelligent Finance spokeswoman Jennifer Blackwood says: “It is not just to keep advisers working hard. Using trail commission reflects the ongoing relationship with the client and building this is something everyone in financial services should be striving to do.

“I think it is significant that Britannic Money has made its move now. It is certainly an interesting development and I think more lenders will follow.

Intelligent Finance has around 10 per cent of the market and three-quarters of its business comes through brokers. Blackwood says the trail commission option has been a successful strategy for the company.

Riach Independent financial advisers owner Bob Riach says the theory behind using trail commission to prevent churning is good but it will never work in practice unless adopted across the board.

He places it alongside other “gimmicks” offered to IFAs by lenders, such as the 5,000 Air Miles he has accrued from Cheltenham & Gloucester over the past four years.

Riach says: “A broker should always refer to the best option for their customer. I have to ignore the trail when I review a client&#39s mortgage, I just tend to think it stinks of buying business.

“Clients might quite often be better off moving lenders. But if the option of trail commission was there then it is clear that the most unscrupulous IFAs would keep their client with the lender paying them the commission.”

He believes the only way that big players will increase loyalty is by offering existing customers deals as good, if not better, than those available to new customers.

Charcol senior technical manager Ray Boulger thinks he may have a compromise, saying: “It is a broker&#39s duty to be faithful to their client, not the lender, but trail fees create a conflict of interest. It is a dodgy road to go down if trail fees start unduly influencing broker decisions.”

Boulger suggests one alternative method to trail commission would be a second procuration fee paid out to brokers when a deal is renewed – if it is decided that this is the best option for the borrower.

He says: “Although lenders are clearly looking to avoid churn, they are going to have to start striking a better balance between products offered to existing and new customers to do this. Brokers should be on the client&#39s side and that is where trail fees come unstuck – it could be very difficult indeed to square that circle.”

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