The past two years have been a time that many at the Royal Bank of Scotland would no doubt rather forget.
Previously, it was one of the most bullish firms in the market under the directorship of Sir Fred ’The Shred’ Goodwin. But when global credit markets collapsed as a result of the sub-prime crisis in the US, RBS was brought to the brink and only a government bailout saved the day.
On the back of record losses of £28bn in 2008 taxpayers ended up taking a whopping 84% stake in the company to ensure it didn’t collapse.
As a result, with the exit of Goodwin and the injection of a new management team under chief executive officer Stephen Hester, RBS continues to be a significant player in the UK mortgage market.
Along with Lloyds Banking Group RBS has been a key contributor to government lending targets, providing some £12.7bn in net mortgage lending last year.
But despite being one of the few firms to come up with the goods lending-wise in one of the worst periods in living memory for the mortgage market, many brokers have been critical of RBS.
Simply put, this is down to the fact that the lender had better products available direct to consumers than via its intermediary arm Royal Bank of Scotland Intermediary Partners.
Difficult times then for Graham Felstead, who took over the reins as head of intermediary channel at RBS in February last year, initially on a temporary basis while the division’s previous head, Chris Pearson, was seconded to the role of head of telephony strategy within the group.
When Pearson’s role was made permanent in July Felstead’s appointment as boss of the broker channel was made permanent and one of his first big changes was to give the division a new name. At the beginning of this year it was announced that RBSIP was to be rebranded as NatWest Intermediary Solutions.
And the change was not merely cosmetic – internally, the company was also making important changes to its services and systems.
Previously, RBSIP operated a multi-brand strategy whereby individual product types sat with specific brands. So RBS was for house purchases and home movers, First Active handled remortgages, NatWest dealt with buy-to-let and the One account – prior to being pulled in 2008 – offered current account mortgages.
All this went out the window with the advent of NatWest Intermediary Solutions, and rather than having a number of service centres, intermediary mortgages are now offered via a single brand and serviced at one centre in Birmingham.
So the first and most obvious question to ask Felstead has to be – after the torrid two years the RBS brand has experienced and its propping up by government monies, was the rebrand an attempt to shed the RBS name?
“No, it was an attempt to link in with what Hester announced last year, which was that in England and Wales NatWest would be the hero brand focussed on providing helpful banking and playing to our core strengths,” he says. “RBS obviously remains in Scotland but we didn’t want to differentiate Scotland from England and Wales.
“NatWest is the hero brand so we wanted to link all the advertising and synergy that goes with that. And, of course, it’s also good for employees to feel they a part of the hero brand.”
Discussions had been ongoing about the rebrand since early 2009 when Felstead took over the division from Pearson.
“I started thinking about the rebrand at the end of Q1 2009,” he says. “But keep in mind that at that point I was looking after the operation while Pearson was elsewhere. So we had discussions but until he came back we didn’t know if our ideas fitted in with what he wanted to do.”
When Pearson’s appointment as head of telephony strategy was made permanent Felstead could put his plan to streamline the division intoaction.
While RBSIP had already simplified its product structure and sales teams to a degree, a multi-brand strategy meant there were still a variety of systems in operation at the lender.
In fact, Felstead says the name change was secondary to the alterations he wanted to make to the division’s service, products and overall proposition.
“We had a multi-brand strategy in place whereby purchase deals went through RBS, remortgages via First Active and so on,” he says.
“That’s one reason we wanted to simplify the process for brokers and make it clear to them that we have a single brand with one broker service centre in Birmingham.
“Previously we had several service centres, Birmingham being one, so all we’ve really done is use that operation.”
The biggest thing that has riled brokers about RBS has been dual pricing, whereby products offered direct are more competitive than those offered via its intermediary arm.
A letter, published in the February 15 2010 issue of Mortgage Strategy, is a prime example of the type of complaint made by brokers.
“We are seeing a situation whereby RBS is dual pricing at various LTVs,” says Stuart Francis, director of BlueSky Mortgages, in the letter.
“Under this arrangement it seems brokers will benefit from a couple of products and RBS from a couple of others, so inevitably another slanging match is destined to break out between brokers and the lender. All most brokers want is a level playing field – no exclusives for us and no lower priced direct deals.
“So please RBS and the rest of the lenders that are dual pricing – make things easy for us so we can all get along and build strong relationships in these tough times.”
Obviously, RBS has not been alone in this strategy and all the main lenders have made similar decisions in terms of the products offered direct and via brokers.
But do Felstead and NatWest Intermediary Solutions have much input about the types of products that go direct or via brokers, or is this out of their hands?
“The latter has always been the case with lenders, and certainly with RBS as we are multi-channel outfit so we have to feed various channels at the right times,” he says.
We can assist brokers not only by offering them different products, but also by helping them market their services
“I have little input to the global strategy. We’ve always understood that it’s about customer choice. Investing time and money in the rebrand and improving our service and products is our way of showing that the intermediary channel is important.”
“Meanwhile, figures show that the sands of dual pricing are shifting in favour of brokers again marginally,” he adds. “Some of our products have either closed the gap or are not available through branches – it’s about trying to get the balance right between products and service, and it depends on how much business you get in and your rates. You have to manage that.”
Something that provoked controversy when the division was rebranded was the change that was made to the portability of products, which meant existing customers under RBSIP brands would have to contact RBS directly if they wanted to port their rates.
This caused an uproar among some brokers but Felstead says he spoke to the division’s top distributors in the run-up to the launch. He says it was widely seen as a natural consequence of everything that Felstead and his team were trying to do.
“Porting under the four brands was clunky and manual,” he says. “It wasn’t a great process so we’ve drawn a line under that to make life easier for intermediaries and clarify the process.”
And he adds that it’s not necessarily the case that brokers lose out because they can still be involved with customers.
“It’s not ideal but it’s a consequence of what we’ve done and most brokers are happy – they never quite got the process before but now it’s a lot clearer,” he says. “If you look on the positive side, we’re trying to listen to our customers and make life easier for them.”
NatWest Intermediary Solutions is looking at offering brokers a range of products rather than focussing purely on mortgages. Felstead says pilot schemes to offer standalone savings products linked to first-time buyer mortgages have gone well. The first was the First Home Saver deal through Legal & General and the firm is now looking to offer this more widely.
“Like all lenders we’re testing the water to see what works,” he says. “We’re looking at diversification not only in terms of other products can brokers sell. We’ve also told them we can help in other ways – through marketing or looking at sectors such as bridging finance, commercial loans and offshore deals.”
Felstead says the goal is to offer brokers a portfolio of savings investments products in addition to mortgages.
“It’s a case of trying to find the sweet spot for everyone,” he says. “Linking deals to mortgages seems sensible because that’s the first sale most brokers do. This is likely to work better than just saying – here’s a bond. But it’s a competitive market. We were about to launch a few bond products last year but it turned out that what we had planned was not competitive enough.
“There’s no point saying to brokers that we are supporting them with a bond if it isn’t competitive, so timing is crucial,” he adds.
The move towards diversification is also being driven to some extent by the wider RBS group. With the wholesale funding market dead, getting deposits in is vital.
“All lenders are looking for deposits at the moment,” says Felstead. “We know the mortgage market has contracted so if you’re still trying to make a living purely as a mortgage broker it’s got to be debatable whether you’ll be able to survive.”
With taxpayers being the majority stakeholders in RBS its lending targets are dictated by the government. While there was some controversy over its failure to hit its small business lending target last year, Felstead says that on the mortgage side RBSIP achieved its target and will do so again this year. In fact, in terms of size Council of Mortgage Lenders figures show RBS in fifth place.
Interestingly, Felstead says much of the group’s growth in lending has been in a sector most lenders have steered clear of – first-time buyers. He adds that the bank has maintained a healthy appetite in the 90% LTV market with both regular mortgage products and shared equity schemes.
“We’ve done a lot of work on shared equity with brokers and at professional forums in the past year,” he says. “We’ve even organised sessions on how brokers can get into the market.
“For us, it’s about maintaining a presence at the first-time buyer end of the market so we are offering 90% LTV deals with government shared equity and we’re going to support that offering heavily this year.”
Part of the reason why lenders have been reticent to offer loans at high LTVs is that it’s expensive to do so. In terms of capital adequacy the amount lenders have to put by to do certain transactions is more costly at the 90% LTV end of the market – for three loans at 60% LTV they would have to put aside the same amount of capital as for just one loan at 90% LTV. But although high LTV loans are an expensive business RBS has stuck with them.
With regard to whether rates in the 90% LTV sector will come down or increase, Felstead says there is some margin in the sector.
“The big challenge all lenders are facing is at the 90% LTV level and that’s why many are not playing in that market,” he says. “With capital adequacy requirements, the cost is punitive which presents a challenge in terms of where you price deals. If you price business too low you struggle with service, volumes and everything else. It’s all about getting the right price point.
“For us, it has worked out well with the pricing we’ve had in place but the fact is that capital adequacy is the biggest challenge when it comes to high LTV deals.”
Looking at other products NatWest Intermediary Solutions might offer in future, Felstead says offset is an obvious hole in its current range. So could the One account make a comeback?
“It’s an interesting question,” he says. “We’re currently looking at NatWest One, which is an offset product available through branches. RBS used to sell it a few years ago through brokers under the NatWest banner. I’m not saying we’re getting close to bringing it out but for me it would seem to be a natural synergy for us to do NatWest One rather than a current account mortgage.”
The One account was one of the first brands to be chopped by RBS two years ago at the beginning of the credit crunch. At the time, funding problems were cited as the primary motivation behind the move.
“Variable rates presented us with a challenge in terms of the cost of funds,” says Felstead. “We maintained a small presence in the direct-to-customer area because it’s a good brand but in the past two years I’ve only had a handful of brokers ask when are we going to bring it back because it never did huge volumes of business. It was a great product but it seemed to attract direct customers through recommendation.”
But he says there’s still a place for such a deal.
“There’s a hole in our portfolio and that’s why I’d like to see an offset in there,” he says. “As you can see with Woolwich, it’s a product that brokers like to sell. So there’s no timetable but it’s something I’d like to add this year if possible.”
Apart from dual pricing the other big issue facing lenders is the Mortgage Market Review, so how does Felstead feel about the Financial Services
He says he is in the same place as most lenders – he believes there should be some changes but overall he’s worried about the effect the review could have on costs.
“My worry with changes such as this – whether it’s individual registration of brokers or prudential reforms for lenders – is that if you go too far the burden becomes onerous and the cost ends up coming back to customers,” he says.
And finally, with regard to the rebrand to NatWest Intermediary Solutions, does he see this as an opportunity to rebuild the brand’s reputation among brokers – a reputation that has been tarnished as a result of the dual pricing controversy?
“It’s a great opportunity for us and I’m hoping that what we’ve done so far has shown we are committed to the intermediary market,” says Felstead.
He adds that some people questioned RBS’ commitment to the broker market but ultimately the rebrand is a clear sign to intermediaries – the firm would not be making such a big investment in the sector if it wasn’t committed to it.
“Internally, everybody understands we are a multi-channel lender – you have to be to survive as a bank, these days,” he says. “The conversation now is around customer choice.
“There will always be challenges when capital is king. We’ve only got so much to lend so we have to balance what’s going through our branches, what we are doing with intermediaries and what we can offer small businesses.”
Felstead says the bank will have to perform this balancing act for the next year or so until the market starts to recover and there’s more liquidity in play.
“Then life will change,” he adds. “Right now we’re focussed on supporting the intermediary market.”