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Wake-up call

Lenders pay intermediaries to kill off remortgage market

The debate around retention fees being paid by some lenders is hotting up.

As well as client ownership issues, we are hearing arguments such as: retention fees discourage the temptation to churn just so brokers can earn another proc fee; instead brokers are being rewarded for putting the client’s interests first and telling them to stay put.

Wake up and smell the coffee – lenders aren’t paying retention fees to be nice to brokers. Lenders are protecting their own business. Lenders are paying intermediaries to kill off the remortgage market. And that has nothing to do with helping brokers – or treating customers fairly.

The logic is simple. Mainstream lenders’ business is increasingly unsustainable.

So they start paying retention fees to brokers. They beckon you to enter their web of sin, but as the song says, don’t go in. The tactic they tout as a solution is to flash a bit of cash, and persuade brokers to collaborate. Then the two sides collude in stopping customers from remortgaging elsewhere and protect the lenders’ huge, and overpriced, back books. TCF goes out the window.

Once they have done that, the average life of loans will improve, mort-gage lending will be profitable for the lenders again, and the rules of supply and demand take over. With less demand for remortgages, lenders will start asking themselves: “Do I really need to pay this much to brokers?”

In the short term, a juicy fee for doing nothing may seem an attractive offer, but it’ll come back to haunt you. Retention fees are a tactical tool that creates an immediate impact – but the retention issue is a strategic one.

It scares me to see how easy it is to lead intelligent people up the garden path. I would advise all mortgage intermediaries to look at the longer-term impact of such a move, rather than the quick fix it provides today.

If these retention fee strategies succeed in all but killing off the remortgage market, the impact on intermediaries will be serious indeed.

Fifty per cent of mortgage lending in 2006 will be remortgages – between 140 and 160bn. Any contraction in that volume will mean curtains for many brokers.

Scare stories? Not a bit of it. One major distri- butor, who shall remain nameless, told me that 10 per cent of his volume has already disappeared with one major lender since it introduced retention fees for brokers.

And before people say to me, “well you would say that, wouldn’t you”, let me remind you that the FSA is keeping a watchful eye on this. Remember TCF.

If, having examined the huge array of products available in the market, staying put is in the customer’s best interests, the duty of the intermediary is clear. He must recom- mend the borrower stays with the same lender – fee or no fee. Otherwise, the borrower should vote with his feet.

Alan Cleary is managing director at EdeusCustomer retention is a vital aspect of anyone’s business, no matter what industry you are in. From the local corner shop to the global manufacturer of automobiles, a successful business wants to establish a satisfied, loyal customer base who will come back for more – and pass on recommendations to their friends as well.

Given that a mortgage product is delivered over a long period of time, it may be surprising that lenders have lacked any real strategic approach to keeping their customers satisfied and retaining them. In the case of mortgage customers introduced via brokers, this may be partly attributable to the, at times, quite lively debate over ownership of the customer relationship.

But one thing is certain. In the mortgage industry, looking after customers and treating them fairly not only makes good commercial sense, but it is also a regulatory imperative.

In the regulated environment, TCF is and must be at the heart of what we do as distributors. The number one priority is making sure the customer gets the right deal and the right product, having regard to their individual circumstances and the choice of products available, and at the right price. That is why distributors are required to conduct a detailed assessment or factfind on each customer prior to providing best advice on suitable products.

This may be all very well for large network distributors such as Personal Touch which has well-established compliance and TCF procedures and infrastructures. Many smaller firms, however, tend to look to lenders to give them a steer.

If a lender’s retention strategy is aimed to be a shortcut to delivering the wrong product to the client, for example a more expensive one or one that is not fully suited to their needs, this is an issue of concern for the industry and FSA.

Manufacturers of mortgages need to understand the compliance and TCF obligations that are core to the business and responsibilities of distributors. Everything we do revolves around delivering what the customer needs.

Given the substantial percentage of business lenders generate from the intermediary market – estimated to be about 70 per cent – lenders must work closely with distributors over this retention issue. They can’t divorce themselves from the realities of dealing with the customer face to face, or ignore TCF obligations.

It’s not as simple as throwing them a few quid to retain the business. Retention needs to be handled on a much more strategic basis, bringing in all the stakeholders, while ensuring FSA and TCF compliance. This is how to achieve a Win-Win-Win solution for lenders, distributors and customers.

A backdoor, piecemeal retention strategy of paying a fee to intermediaries for each loan that stays with the lender may seem like an easy fix, and may appeal to some intermediaries. But it may not be the right long-term solution. We need some joined-up thinking within the industry.

Mike Allison is managing director at PTFS


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