Brokers are ahead in the tug-of war with lenders over the payment of retention procuration fees. The recent news that Santander and some other lenders will start paying such fees this year has been a cause for celebration among intermediaries.
At 0.2 per cent, however, the average fee paid by lenders is around half what a broker would receive for a new mortgage case.
In addition, some are questioning whether an estimated £100bn retention market should even be transacted on a largely non-advised basis.
So while brokers rejoice at their recent victories, is their pull mighty enough to drag the remaining non-payers over the line, or could a bigger game of push-and-pull be looming?
Mortgage Strategy asks which lender, if any, will be the next to submit on the issue, and whether there is a good case for increasing the amount of retention proc fee paid.
Santander, the UK’s third-largest mortgage lender, announced in January that it intended to pay brokers a 0.2 per cent proc fee for retention business, starting in March for networks and by July for the rest of the market.
John Charcol senior technical director Ray Boulger thinks the non-paying camp is under pressure to follow suit.
He says: “I wouldn’t go so far as to say other lenders have to do the same but I think Santander’s move will be a significant factor in influencing their decision.”
Since Santander’s announcement, a further two lenders – Coventry Building Society and TSB Bank – have also revealed plans to offer a proc fee for retention business this year.
Of the UK’s 10 largest lenders, at the time of writing only three are standing their ground with no plans to pay a retention fee: HSBC, Nationwide and Royal Bank of Scotland/NatWest.
A Nationwide spokeswoman says the lender’s proc fees are constantly under review but it has “no plans to change its current model at this time”.
Meanwhile, a spokesman for NatWest Intermediary Solutions says it regularly reviews the topic and will continue to “monitor the market and consider its position”.
In HSBC’s case, very few customers have reached the end of their initial incentive period since its launch into the intermediary market in 2014. As such, its retention proposition for brokers “will be reviewed in due course”, according to a spokesman.
Santander suffered a broker backlash last year when it wrote to clients six months before the end of their respective deals, offering a lower rate and a waiver of ERCs if they were to go direct.
Santander managing director for intermediaries Brad Fordham says the decision was taken to write to customers early to help the lender “capacity wise”. He says networks had been informed of the plan before Santander sent the letters, which gave the borrower the option of contacting the lender directly or seeking advice from their broker.
The lender regained brokers’ favour in January when it revealed its proc fee paying plans, following a pilot with London & Country last year.
Fordham says the change in policy is due to broker sentiment and the commercial viability of offering such a payment.
He says: “Within the industry we are fully aware of where our competitors are in this space and the feeling among brokers around receiving a fair proc fee for that distribution.”
Nationwide has been criticised also for encouraging borrowers to go direct by offering existing customers who switch to a new deal a 0.1 per cent discount on the new-customer rate and £250 cashback.
Paradigm Mortgage Services mortgages technical director Christine Newell welcomes Santander’s decision but thinks some lenders’ retention strategies have dented a number of relationships and reputations.
She says: “We believe the actions of lenders in seeking to directly retain clients introduced to them by intermediaries are simply not taken in the best interest of those clients.”
Although in these cases the borrower is given the option of taking advice, Newell feels certain incentives push clients down a non-advised route.
“In time, if lenders continue with such strategies, we believe brokers will be less likely to consider them in their overall advice for mortgages,” she says.
Newell adds that, currently, competitive rates from lenders or add-ons such as free valuations and legal assistance play a large part in influencing the choice of product for clients. However, if brokers considered the longevity of the mortgage and what would be the best outcome for the client in the long run, such strategies might have the effect of “reducing the new-business pipeline to these particular lenders in the future”.
Spicer Haart and Just Mortgages group operations director John Phillips believes lenders are conflicted.
He says: “On the one hand they are desperate to court brokers to persuade us to introduce business to them, but on the other hand they will then switch the client to another rate without telling the broker who introduced them.”
London & Country associate director of communications David Hollingworth says brokers expect lenders to be in contact with clients prior to their deal’s expiry and in general they do not object to that. However, “where brokers take issue is when lenders offer clients a certain deal or rate that brokers cannot access”.
Fordham says he cannot rule out Santander from running a similar scheme in the future but that is not in its immediate plans and it will not be offering incentives for customers to go direct.
In Boulger’s opinion, although it is good news when a lender pays a proc fee for retention business, brokers must ask themselves whether, for the long term, the amount being paid by certain lenders is adequate.
“Is 0.2 per cent the right level of proc fee, bearing in mind there is quite a lot of information gathering brokers need to do on a product transfer and the advice is similar to that of a remortgage?” he says.
Newell says advisers put the same effort, if not more, into their consideration of retention products.
“The broker needs to review the client’s circumstances, reassess the criteria of lenders, look across the market, consider second charge versus further borrowing, detail their findings and make the relevant recommendations,” she says.
Currently, Lloyds Banking Group is the only lender that pays a full proc fee for retention business. Halifax Intermediaries head Ian Wilson says: “We’ve demonstrated our commitment to the market and mortgage professionals by offering proc fees on product transfers for over a decade.”
Distribution, not advice
So why can’t other lenders do the same? Fordham argues that the proc fee pays the broker for their distribution service, not for advice.
He says: “If the broker decides the best advice is to stay with the existing lender, there will be no underwriting, no affordability assessment, no solicitors involved and no valuation.
“So, once the deal is done, from a post-sale perspective there is less work for the broker.”
The days when a broker’s decision was swayed by the proc fee on offer are, hopefully, behind the industry.
However, the Financial Conduct Authority plans to explore the issue as part of its current market study on competition in the residential mortgage market.
Building Societies Association head of mortgage policy Paul Broadhead says the regulator has been looking at the increasing adoption of proc fees for retention business.
“Done right, it can clearly be beneficial for the broker, the lender and, most importantly, the customer,” he says.
“However, if it results just in encouraging order taking, this is something that needs to be addressed.”
Also as part of its study, the FCA is likely to focus on the way retention business is advised upon – or is not.
The Association of Mortgage Intermediaries estimates the retention market to be worth between £80bn and £100bn. However, no official figures are collected from lenders on the types and volumes of their product transfer business.
Boulger says: “There’s a lot of pressure on the FCA to get more information on product transfers. It has clearly taken the view that a mortgage is important enough to have to be advised upon, and I think that should apply to product transfers just as it does to remortgages.”
Broadhead welcomes the move by the regulator to assess whether consumers who receive mortgage advice are better served than those who do not.
He says: “Is there a difference in suitabil-ity of product between customers who go execution-only and those who get advice? If the total cost of products was more transparent and easily understood by customers, would there be less need for advice? These are all questions worth exploring.”
Brokers are rightly celebrating the change of heart on retention proc fees by a number of lenders. However, with an FCA review under way and not all lenders’ strategies aligned, the retention saga appears to be far from over.