Brand new plan

Lending Strategy March 2010 | By John Murray

JM: I suppose we’re all stakeholders in the Royal Bank of Scotland now but ahead of this interview I found it hard to get an overall picture of the group and where the intermediary mortgage offering sits within the empire.

You’ve done some interesting rationalisation work with the group’s intermediary brands comprising RBS which was for house purchases and home movers, First Active which handled remortgage business, the One account which dealt with current account mortgages and NatWest which predominantly managed buy-to-let cases but before we go into that, a word about context.

Is NatWest about to become the mortgage arm of RBS in the same way that Woolwich is for Barclays?

GF: Last year our chief executive Stephen Hester was explicit about NatWest being what we call the hero brand. He put the focus on helpful banking and core strengths. So in England and Wales NatWest is the main brand while RBS is the main brand in Scotland.

We operate a multi-channel distribution system and the aim of the restructure is to bring our broker businesses under a single brand, NatWest Intermediary Solutions. This proposition shows our support for brokers through diversification. We’re offering more than just mortgage products.

Our new range emphasises the multi-channel approach but also ties in with our desire to offer wide customer choice. The important thing is that if customers want to come to us online, through a branch or via an intermediary we can support all those avenues.

JM: So is it true that we’re going to see the disappearance of brands such as First Active and the One account, and that NatWest will become the mortgage arm of RBS as Woolwich is to Barclays?

GF: Yes, it will be pretty much the broker channel. Whereas previously we had three or four brands everything is now under one roof. The important thing is that this gives clarity to brokers.

JM: Staying with the rebranding theme, you were appointed director of NatWest Mortgage Intermediaries and direct brands in July last year so is the creation of NatWest Intermediary Solutions something you initiated?

GF: I actually took over in early February last year. Chris Pearson, my predecessor, was moved to another role which became permanent in July.

At the time of the change the brand thing was secondary. I thought - we can change the name but we’ve got to make sure we’ve got a proposition that supports brokers in the longer term

It was something we debated regularly even in Pearson’s time, both internally and with our corporate and strategic partners. But once I took on the role I thought the time was right. Basically, customers were telling us this was what they wanted so it progressed from there.

Then it was a question of - was it right to have a three or four-brand strategy, or should it be one or two? It turned out that our customers favoured a single brand and so did we.

But at that time the brand thing was somewhat secondary. For me, it came down to service and products. I thought - we can change the name but let’s make sure we’ve got a proposition that supports brokers in the longer term.

JM: So was it a big management exercise including systems, processes and even staff training?

GF: From a service perspective, yes. From a sales perspective we kept the change under wraps for quite a while but it’s true that a lot of work goes on behind the scenes at times like this.

Our processing used to be done at various centres but now we’ve brought it under one roof in Birmingham. Most of the individuals involved were already underwriters or processors. Now they are only dealing with brokers, not with branches or directly with customers.

JM: It’s early days and obviously you’re pleased at the way the rebrand is going but even so some of the changes you have initiated have resurrected old grouses.

For example, I know one broker has described the rebranding as a new bottle but the same old wine while Ray Boulger, senior technical manager at John Charcol, has raised the old chestnut of dual pricing. He says RBS has been the biggest culprit in recent years so it’s important for you to get back into the market with a sensible range of products priced appropriately. Is such criticism unfair?

GF: Yes, I think a lot of the criticism is unfair. New products, pricing and our investment in service all address the above issues.

Also, for the past couple of years we’ve been investing in our service proposition with initiatives such as Live Talk. And we have tried hard to offer a variety of products. We’ve been looking beyond mortgages and considering how brokers can generate revenue from various sources
On the subject of mortgages, shared equity deals were big for us last year with regard to continuing 90% LTV lending.

Regulation is moving in the right direction but the worry is that it could become too onerous. Take the debate around fast-track and self-cert - we shouldn’t band them together. There’s still a place for fast-track

I understand the dual pricing question but hopefully brokers can see we have narrowed the gap. A recent Moneyfacts survey shows that average rates on two-year trackers and two and five-year fixed deals are now better in the broker sector than in May 2008 and we’re on top of that. Things are swinging back in favour of brokers.

JM: Following on from that, when you went public with your rebrand you effectively said - we’ve got a single brand, a single application form and a single phone number.

It sounded good but within days our sister magazine Mortgage Strategy was reporting that mortgage customers had to go direct if, say, they had taken out a two-year fixed rate deal and wanted to move house and keep to their existing terms. As I understand it, borrowers who have already reverted to the SVR or are willing to pay early repayment charges can still port their mortgage via brokers.

Is it fair to attribute this to the law of unintended consequences rather than a deliberate strategy to exclude brokers?

GF: It is an unintended consequence from the point of view of the change, but if you saw the porting challenges we had before we changed things you’d know it was pretty difficult - a lot of manual processes were involved.

Becoming a single brand gets rid of all that for us so now there’s much more clarity. Brokers can still be involved in any way they want but before the change I can tell you our processes were pretty cumbersome.

JM: So is there a customer benefit?

GF: Yes.

JM: But isn’t it true that brokers lose out?

GF: Not necessarily. Brokers can still be involved with customers. It’s just that if borrowers don’t want a break in the rate and conditions of their deals and want to come back to us directly, they can. So to some extent it’s a question of customer choice again.

JM: You obviously recognise that brokers have had a hard time in the past two years because their income streams have suffered as business volumes have contracted - that’s why you’re offering savings, protection and investment products for them.

But is it true that your advantage here is that the RBS group includes a range of providers that can deliver these deals?

GF: Yes. And we can also piggyback on the NatWest brand.

This is an important aspect of our diversification programme. We have a portfolio of products internally but it is also within our gift to design products specifically to fit the broker market. We’ve had a certain amount of success with pilot projects and the main thing now is to find where these fit in the broker sector.

For example, our First Home Saver deal through Legal & General has done quite well. Business is trickling in nicely, which goes to show we can sell this kind of product. But to be really successful this sort of product will have to be linked with mortgage process.

JM: I suppose another problem is that many of these products can be easily purchased over the internet where they are likely to be competitively priced. Is that true?

GF: Yes. Some products are highly price-sensitive so we’ll balance what we offer with care. In the past we have looked at certain products we wanted to go to market with but decided not to because they would have been uncompetitive.

Basically, with things like this you’ve got to pick your moment.

JM: So far we have focussed on your broker business because it’s topical but how important is it to you compared with your direct channel, and how do you see this developing in the next few years?

GF: All our channels are equally important to us - as I say, we’re a multi-channel distributor. What we’ve done with the rebrand and the investment in NatWest Intermediary Solutions service and products shows we are committed to the broker sector.

For me, customer choice is king. If consumers want to go through brokers we will recognise that.

JM: Looking at the broader picture, in your time you have seen RBS mushroom under Sir Fred Goodwin to peak in the autumn of 2007 as the world’s fifth largest bank posting a record profit of £10.3bn. Then, just 18 months later Sir Fred set another record when the bank reported a loss of £28bn - the biggest in UK corporate history.

I’d have thought this would have affected your mortgage business but according to Council of Mortgage Lenders figures, in 2008 RBS became fifth largest lender behind Lloyds Banking Group, Santander, Nationwide and Barclays so am I wrong?

GF: We have made gains while maintaining a healthy appetite in the 90% LTV arena which most lenders have steered clear of.

We’ve done that with normal mortgage products and also shared equity schemes - in fact, we have become something of a leader in supporting these. We’ve done a lot of work on shared equity in the press, with brokers and at forums in the past year. We have even organised specific sessions on how brokers can get into get into the market.

For us, it’s about maintaining choice for customers across the board. But it’s the first-time buyer market that has really helped us write a high volume of business.

JM: Your support for the government’s HomeBuy scheme together with it’s stakeholding might suggest to the cynical observer that Big Brother is having an influence on your lending targets. Would that be unfair?

GF: It won’t surprise you to hear that I’m asked this question regularly. We have close links with UK Financial Investments as you would expect but the government has always said that it will leave us all to run our own businesses.

We are commercial firms and all the government has said from afar is that we should support the mortgage industry. We’ve chosen to do this in our own way, and have continued lending to the first-time buyer market.

JM: These days, the top five lenders account for around 75% of all mortgage business. On the other hand building societies - with the exception of Nationwide - are haemorrhaging business despite the fact that they fit the definition of safe, so-called narrow banks.

The charge is that state intervention has created an unfair advantage for some. It that unreasonable and are the big players really doing us all a favour as they are the only institutions with enough clout to regenerate the market?

GF: To me, the most important thing is that there’s a wide range of choice for customers. It’s important that there’s healthy competition and I’d like to see societies continue to provide a service both locally and nationally.

We just support the market where we can. We are all constrained in the same way with regard to capital adequacy and liquidity ratios.
But it’s not true to say we have an unfair advantage - it’s just a question of economics.

JM: Is it fair to say that you are a big player in the buy-to-let market - a place where Bradford & Bingley and a number of societies have come unstuck in a serious way?

GF: I wouldn’t say we are a big player but we have been active in the buy-to-let sector, especially at the amateur landlord level where borrowers may have just one or two properties.

JM: And have you had a B&B-style experience with buy-to-let?

GF: No, we’ve never been exposed to what you might call the commercial end of the market with massive portfolios. We have always seen buy-to-let as a core part of our business but not the main part.

It’s an important element in supporting brokers and there are signs in some areas that brokers are starting to think buy-to-let could be a good investment again, especially now property values appear to have bottomed out.

It could be that this is the right time to get into the market and we’ll continue to support it. We’ll be watching how the sector develops and matures in the next 18 months.

JM: It’s clear that the government wants to see the private rented sector move forward strongly. Do you have a vision for that market? GF: It will inevitably grow because individuals are having such a tough time getting on the housing ladder.

Of course, this situation was already becoming apparent two or three years ago when we saw aspiring first-time buyers being unable to get a start, along with an influx of workers from Europe. The latter obviously tended towards renting.

I think we may see a shift towards institutional investors looking to purchase buy-to-let portfolios because values have always increased over time.

JM: I suppose almost everyone who’s anyone in the mortgage business has submitted their responses to the Financial Services Authority’s Mortgage Market Review by now but broadly speaking do you think regulation is heading down the right path? Or is the bigger risk political uncertainty at the moment ?

GF: Regulation is moving in the right direction. The only worry is that it could become too onerous - I think all lenders share that view. Take the debate around fast-track and self-cert - we shouldn’t be banding them together. There’s still a place for fast-track.

Also, with regard to capital adequacy initiatives and prudential reforms we’ve got to be sure we don’t go too far and slow business volumes while increasing costs.

As for political uncertainty, if there’s a change of government will all uncertainty disappear? I’m not sure but I do know the worst scenario is a hung parliament in which case everything could stall.

JM: At the moment the top five mortgage lenders seem to be moving towards expanding lending but the economic recovery is by no means guaranteed.

Where does that leave you? Presumably, you don’t want to be left exposed should the recession continue but on the other hand there must be pressure to expand lending from the government.

GF: It’s a delicate balance and last year was probably the worst in this regard, but we are more positive this year. We are cautiously optimistic and will build our business accordingly.

I can’t see what the future holds but I think NatWest Intermediary Solutions will continue to support the market at the right volumes, for the right customers and with the right quality of business.

Of course, we’ll also strive to deliver the right quality of service. For the past two or three years we have maintained that service is paramount, even if it means slowing volumes.

JM: Finally, where would you like to be this time next year?

GF: I’d like to see the market in slow recovery. For us, my hope is that we will be continuing to support the market as we have done for the past 12 months and will do this year with both mortgages and diversified products. In fact, I’d like to see the diversification side of the business expanding quite quickly to give brokers more opportunity to earn income.

I also want to maintain our service levels, and more than anything else I’d like to see the initiatives we have just unveiled firmly embedded. I’d love to be able to say - our plan is working and our customers like it.