Alternative model of advice may be better for everyone

7 June 2010

It’s been busy few weeks for changing terms and conditions. For example, although other lenders have broached the idea in the past Lloyds Banking Group has imposed a penalty for taking an interest-only mortgage.

It has hiked rates by 0.2% for clients who do not take their deals on a repayment basis.

Obviously, Lloyds group has quantified the risks involved in interest-only deals.

It clearly thinks repayment is safer for many customers, yet some on irregular commission incomes are arguably at less risk if they take an interest-only deal and overpay while others have adequate alternative repayment vehicles in place.

Lenders have differing motivations for their criteria changes as they face their brave new lending targets. Some are obliged to learn from mistakes that cost them dear and left them owing a big debt to taxpayers while others are consolidating their brands and will benefit from streamlining their systems.

Lloyds group, struggling with the fallout of an SVR capped at 2% above the Bank of England base rate, has changed the terms of its rate for new borrowers to a managed variable rate with no cap, set at 3.99%.

The virtues of offsets are pretty much unsung because shorter term deals are cheaper to price

Taking an alternative view, Alliance & Leicester has brought its reversion rate into line with Santander’s by changing it to a term tracker at base rate plus 3.74%.

Regulation has now moved beyond responsible lending as a concept and is looking at how firms operate, with guidelines and capital requirements. But with such deep involvement by the regulator is it not time for some carrot to go with the stick?

At the moment, how the Retail Distribution Review and Mortgage Market Review will be applied to the sector still seems largely undecided.

It seems to me that impartial advice from a whole of market source - and preferably an expert with qualifications - is the obvious answer to improving the market yet lenders are still under no obligation to structure their propositions so they are financially rewarded for promoting this service.

Also, certain products provide a high level of flexibility and protection for borrowers, such as offsets and long-term rates. These promote long-term relationships between lenders and clients but their virtues are pretty much unsung because short-term deals are cheaper to price.

I would consider receiving my proc fee on the drip if it shifted lenders’ models towards intermediary distribution. If this became the norm brokers’ motivation would be to retain clients on their current deals and communications with them would involve providing a worthwhile service.

We are already voluntarily taking much of our life commission on this basis.

This is the Australian system and I remember Standard Life once doing it to a small degree.

Of course, lenders are already at liberty to offer this commission structure but I know for some it is a matter of technology restricting their options.

So I’m open to changing my practises if we can find a way to improve the client experience at the same time as boosting lenders’ profitability.

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