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Own goals

The tug of war over ‘ownership’ of borrowers could have TCF implications

The vexed question of who owns the customer is raising its ugly head in the mortgage market and it seems that lenders want it both ways. Since regulation was introduced in October 2004, lenders have shrugged off most of their responsibilities for giving advice to homebuyers and left intermediaries shouldering this particular burden. Fears of misselling claims are the biggest single reason for this dramatic shift.

Figures from the Council of Mortgage Lenders show that intermediaries account for some 60 per cent of all new business and at some of the big lenders it is as high as 80 per cent. Buy-tolet and sub-prime business is almost exclusively 100 per cent introduced.

Intermediaries are rising to the occasion and seem to be doing an efficient job. The mortgage effectiveness review carried out recently by the FSA came up with broadly favourable conclusions that regulation of the market is working well.

But as competition increases among lenders, the big institutions seem to want their cake and eat it. They do not want the responsibility for giving advice, happily abdicating this to intermediaries with all the attendant risks of compensation claims for misselling or bad advice.

However, when it comes to remortgaging and offering an attractive deal to an existing borrower, where all the lender has to do is offer something suitable from its existing range, the homebuyer suddenly becomes the lender’s client, not the intermediary’s.

Outspoken as ever, Michael Bolton, chief executive of new online provider Edeus, has no doubt about lenders’ intentions. “I think it is slowly but surely dawning on the market that the lenders with retention strategies are out to kill off the remortgage market and drive brokers out of business,” he said in a recent interview.

This is strong stuff since remortgaging is around 50 per cent of the market and intermediaries go to great lengths to maintain contact with their clients, getting in touch when they are nearing the end of a concessionary deal to rebroke the business, often in the face of opposition from the lender.

Bolton believes that those lenders which have announced retention strategies, most notably HBOS and Nationwide, have designed them to “take the broker out of the equation”.

The battleground will be who owns the client. Bolton believes it is the intermediary but he points out: “This is not what HBOS believes. They have clearly stated that the client relationship is theirs, as has Nationwide. You have an obvious area of disagreement which, frankly, can never be reconciled.”

Other lenders which have introduced retention strategies include Alliance & Leicester, Woolwich and Accord, the intermediary arm of Yorkshire Building Society. All pay commission where an intermediary advises the client to stay with the lender, albeit on a new deal.

But it is easy to see that if the lender gets to the customer first with a special offer, the business may never return to the intermediary. In any case, the average 0.2 per cent retention fee still falls short of the typical 0.3 per cent new business fee.

There are other problems for intermediaries. If lenders are paying commission to intermediaries to retain existing business, someone has to pay for this and it is likely to be the homebuyer, who could find an extra 0.2 per cent or more on their mortgage rate.

The upshot will be that the intermediary will have difficulty recommending staying with the existing lender because the remortgage product may not be the most competitive in the market. There is therefore a big incentive for the lender to lock in the customer first.

Any alternative creates a difficulty with treating customers fairly. If lenders are offering special deals to existing clients which are not priced in the commission paid to intermediaries, this is likely to be subsidised by other existing customers. Does this comply with TCF?

Cross-subsidy has always been rife in financial services, not just mortgages. It will only be resolved when the legacy of direct business in lenders’ loan portfolios, which has been subsidising commission paid to introducers for decades, is finally off the books and all existing customers are advised by intermediaries.

The simplest solution is for lenders to have one price for their products for existing and new customers and to pay intermediaries the same fee whether they have brought new business to the lender or have advised the client to stay where they are. Money Marketing

50 Poland Street, London W1F 7AX


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