Most people can negotiate a decent deal with their mo-bile phone provider by threatening to switch to a rival when their contract comes up for renewal.
It’s easy to do and more often than not reaps rewards for customers, al-though sadly not for the thousands of phone store employees who work on commission. And this is the predicament shared by mortgage brokers who are struggling to compete with lenders’ retention strategies.
A letter in the May 14 issue of Mortgage Strategy from Bob Adams, director of Kent-based brokerage Adams Newman, is a case in point.
Adams describes the frustrations he suffered when a friend contacted him after his lender Abbey notified him that his deal was about to expire.
This meant his mortgage payments would revert to Abbey’s SVR and would rise substantially. Adams advised his friend to call Abbey’s customer help-line for details of what it could offer him to stay.
Adam explains how Abbey offered his friend a good rate, although the broker felt he could get a better deal for him on the wider market. He was right and arranged to meet his friend to discuss the options.
Meanwhile, the friend had gone back to Abbey, which resulted in him being offered a more competitive rate than had previously been suggested, providing he accepted the offer that day, which he did.
So how can brokers cope with such competition, particularly when it in-volves lower rates negotiated at the point-of-sale?
Abbey refused to comment on the letter or its retention strategy. And the situation for brokers is likely to get worse.
Last November, the Council of Mortgage Lenders revealed that remortgaging levels had hit a five-year low. The figures showed that remortgaging acc-ounted for 30% of the market’s value – the lowest level seen since August 2001.
As Mortgage Strategy reported in December, a spokesman for the CML said the drop was indicative of lenders ramping up their retention efforts.
This contrasts starkly with the situation just a few years ago. Lending figures published by the CML in 2003 confirmed the dominant position of re-mortgaging within the industry at that time. The gross value of remortgaging during the year was 50% higher than in 2002, topping £120.8bn compared with £80.6bn.
Since then, retention has changed the picture, with most lenders believing their retention strategies are fair.
For example, Paul Chapman, head of sales at Halifax Intermediaries, says retention is par for the course in a competitive marketplace.
“For us, retention means creating a level playing field,” he says.
And brokers don’t object to retention strategies if they are transparent.
“I believe most lenders’ retention strategies are fair and transparent,” says Darren Pescod, managing director of The Mortgage Broker. “As long as brokers can see the products that existing lenders will offer clients to stay, we have all the facts and figures at hand to advise consumers of the best route in their cases.
“If the correct choice is the existing lender, so be it. But I don’t believe len-ders should offer discounts on rates and fees that brokers don’t get to see as this is underhand and causes mistrust.”
Jonathan Cornell, director of Hamptons Mortgages, agrees that it is sneaky retention, not retention itself, to which brokers object. “I think lenders offering good rates to existing customers and rewarding brokers for their efforts to give custom-ers the best advice are fair,” he says.
“Lenders offering poor deals then changing their minds and refusing to reward brokers are not.”
Lenders that fail to treat both borrowers and brokers fairly in their re-tention strategies risk jeopardising their long-term relationships with the latter.
“Lenders must be careful not to create undue channel conflict with brokers as they risk biting the hand that feeds them,” says Rob Clifford, chief executive of mortgageforce.
The retention debate is fuelled by the client ownership issue. Lenders feel little obligation to discuss their rate ne-gotiations with brokers, particularly when they concern existing borrowers.
In his recent column in the May 14 issue of Mortgage Strategy, market commentator Rob Griffiths highlighted the problems many brokers face when attempting to access client information from lenders.
“This issue of client ownership is a running battle and one that some len-ders seem frightened to lose,” he says.
“But there are persistent calls from brokers for more client information, which will allow them to do their jobs and provide a fully professional service. Something must be done.”
Thomas Reeh, chief executive officer of blackandwhite.co.uk, says len-ders will not share customer information with brokers because they benefit financially from client apathy.
“Like it or not, lenders and brokers are going to have to work closely together to satisfy the Treating Customers Fairly initiative’s guidelines,” he says.
“Brokers will find it amazing that fundamental client information is not shared on completed mortgage sales.”
But both lenders and brokers are increasingly cognisant of the fact that neither can lay sole claim to mortgage customers.
Mark Gordon, head of product de-velopment at Platform, says it is up to customers to decide who they want to deal with.
“It would be arrogant of lenders or brokers to describe themselves as owning the client,” he says. “Customers will decide for themselves who to deal with, based on their experiences with each party. I think it is fine for both len-ders and brokers to deal directly with the consumer.
“The challenge is that each must be able to demonstrate they can and will add more value than the other to influence customers’ decision-making.”
In the battle for business, it is im-portant to ask who is acting in the customers’ best interests. But whatare these interests and who is best placed to meet them?
A major plus for lenders in winning existing clients’ new business is the fact that, as Reeh acknowledges, most people don’t like change. For example, ask anyone if they would like to change their phone provider. Despite the innovative new offers pushed their way, most will prefer to stick with their ex-isting company.
“Most clients like an easy life,” says Clifford. “Staying put means they can Andrew Strange is a policy analyst at the Association of Mortgage Intermediaries Retention mortgages and practices are a positive step for the industry, potentially offering better value for clients and improved product ranges and access for advisers. Transparency and increased product innovation is healthy and should be praised. However, brokers are crucial to this development.
avoid having to think too much about alternative options.”
This view was given extra credence when many people took the plunge in the 1990s and moved from their familiar gas supplier British Gas to rivals that entered the market following de-regulation. However, before long many were heading back to British Gas in their droves.
But client inertia is not the only factor. Many customers are likely to re-main with their existing lenders as they believe the continuity of a relationship with one company looks better on their credit records.
“Many consumers believe having a track record with one bank or building society is a positive and helpful feature,” says Clifford.
“In reality, consumers’ track re-cords can be irrelevant in the mortgage market and the loyalty clients show their lenders is rarely repaid.”
But perhaps the most common de-terminant for whether customers re-main with their existing lenders or remortgage through brokers is lack of time.
In a society where time is of the ess-ence, remortgaging tends to fall to the bottom of people’s to-do lists.
“When customers stay with their lenders, it is often down to inertia,” says Clifford.
“People tend to be time poor but often the processes lenders have for re-taining customers are slick, even im-mediate in some cases.
“Nevertheless, the imagined complexity, confusion and expense of re-mortgaging is often enough for customers to persuade themselves that their existing lender is the right choice and it’s best to stay put,” he adds.
“The level of paperwork involved in a mortgage is horrendous. Even when brokers offer to fill out the forms for clients, there is still a bewildering array of signatures needed,” he says. “The inherent complexity of the process en-courages many clients to stay with their existing lenders.”
So it seems that brokers’ advice be-comes irrelevant if customers are comfortable and therefore reluctant to change from their existing lenders.
That is, of course, unless lenders’ prerequisites for their offers are too restrictive.
For example, time is often of the essence for lenders too. Pescod says len-ders will sometimes give customers a tight time frame in which to make their decisions, as in Bob Adams’ case.
“Customers are often pressured into taking on new deals by lenders,” he says. “They often use sales pitches, claiming that they need an answer within 24 hours to guarantee a rate or it will disappear.”
Stunts like this make it difficult for brokers to compete.
So what can they do to fight back ag-ainst such tactics? The biggest feather in their cap is that they have access to the whole market.
“Existing lenders will have a limited range compared with the thousands of products whole of market brokers can access,” Pescod says. “Clients’ needs change over time and often an existing lender will not be able to meet those needs.”
Even lenders can’t deny brokers’ advantageous position.
“Brokers have the advantage of se-lecting deals from the whole of market, which means they can usually deliver significant additional value to customers compared with that offered by individual lenders,” he says.
Brokers’ access to the whole of market enables them to offer clients unbiased advice. Clifford says this level of impartiality is a major plus.
“Brokers offer advice that can be relied upon morally and legally,” he says.
“They have professional indemnity insurance, offering clients financial protection should their advice turn out to be negligent.
“Lenders also have PII, but are not typically seen as impartial or independent, so choosing from a lender’s product range is usually at the consumer’s own risk,” he adds.
Brokers are also well positioned to establish long-term relationships with clients, unlike lenders.
The sheer size and complexity of lenders means that consumers can end up speaking to a different person every time they call.
By contrast, brokers are able to build up an in-depth understanding of clients’ personal circumstances and monitor their financial requirements more easily and more appropriately.
However, not all brokers grasp this opportunity, and if they fail to exploit the personal touch, competing with lenders’ retention strategies becomes tougher.
“I think it’s easier for brokers to build good relationships with clients, rather than lenders,” says Cornell. “But a lot of brokers don’t bother doing so and simply move on to the next customer, leaving their existing clients at the mercy of lenders’ SVRs.”
So where does this leave brokers, and more importantly their clients, in the tug of war for business? In an ideal world, there’s work for everyone.
But with the furore surrounding the topic, you could be forgiven for thinking there was no possible solution. Yet it seems lenders and brokers alike be-lieve there’s an answer – it just re-quires them to cooperate.
“Brokers and lenders must work together as one team to build effective relationships with customers,” says Chapman.
“It’s all about the customer experience, and the service provided by either brokers or lenders can impact on consumers’ perceptions of the other.”
Cornell agrees, insisting that brokers needn’t have to compete with len-ders’ retention strategies. After all, they have the whole market to work with. •
Transparent retention benefits everybody
Andrew Strange is a policy analyst at the Association of Mortgage Intermediaries
It goes without saying that high quality brokers have established relationships with their clients and as a matter of course will review their mortgages towards the end of any preferential rate or tie-in. And increased competition from lenders’ retention strategies potentially represents a bonus for clients and brokers as it provides further solutions to meet consumers’ needs.
However, the lack of consistency with regard to retention is a potential headache for brokers. Strategies vary between lenders, from blanket refusal to entertain existing clients to open and transparent product ranges available through brokers, with varying shades of grey in-between.
While we can commend lenders that publish clear and transparent information and encourage brokers to consider retention products for their clients, the same cannot be said for lenders that refuse to deal with brokers or even worse, those that negotiate with clients on an individual basis to keep their business.
The decision of whether to accept retention products or remortgage is one that brokers and clients should make together as a result of the advice process. There may be occasions when staying with existing lenders is the best option, while on other occasions better value might be sourced from the wider market. What this underlines is the value of advice. Offering retention products to clients without context is meaningless.
In Bob Adams’ letter, which is cited in the cover feature, the involvement of the broker in contextualising the initial offer from Abbey led to an improved offer by the lender with a demonstrably lower rate. I can think of no better example of the value added by brokers – it’s a shame their involvement isn’t encouraged by all lenders.
We would welcome a world where all lenders publicised their retention ranges and encouraged brokers to engage with them. If a broker originally introduced a client, it only seems fair that the broker is then able to act as an intermediary for any subsequent remortgage – it is both contrived and potentially dangerous to encourage clients to call lenders directly.
Surely if the client engaged the services of a broker in the first place, there is an expectation of advice in the future. Stripping away the mediation role of brokers leaves open the possibility of misunderstanding and even consumer detriment.
Retention mortgages have their own issues for brokers too. Depending on the wording of the original contract, some pre-Mortgage Day mortgages can remain non-regulated when it comes to amendments of the interest rate, while others can be caught by Financial Services Authority regulation, as with new contracts.
Brokers may need to issue illustrations rather than Key Facts Illustration documents and also amend initial disclosure documents in light of FSA regulation.
Overall, the most important point to remember is that clear and transparent retention offerings from lenders are of benefit to both consumers and brokers, as they allow brokers to offer the most comprehensive ongoing advice to their clients.
Statistics show the customer relationship belongs to brokers
Martin Reynolds is director of corporate accounts at edeus
Most established lenders have always had retention strategies in place, although they preferred to win new business.
This has had an enormous effect on the market, with the average lifespan of mortgage terms falling from seven to about three years. Lenders’ margins have shrunk, with many of them unaware of where their volume-determined business style was driving the market.
But bitter long-term implications were assuaged by the sweet taste of short-term gains, to the point that lenders today face a market in which consumers constantly hop around looking for the best rate. This has hit lenders where it hurts – in their pockets.
The logical response to this situation is to try and reverse the trend by keeping hold of customers, thereby turning initial cheap rates into profit at long last.
Historically, lenders’ retention strategies were directed at consumers in general, irrespective of how they were introduced to them. These tactics were partially successful, but now lenders have had to embrace the broker market to plug the growing holes in their pockets.
This in turn has led to new questions, one of the most pressing ones being who does the client relationship belong to – lenders, brokers or neither?
The first scenario is straightforward. If customers belong to lenders, they can offer them whatever they want to. The second scenario is trickier. If a broker introduces a client to a lender and the client returns to the broker after a few years to get more advice, then the relationship belongs to the broker.
A lender writing or calling with new products when the initial mortgage period is coming to an end is interfering with the broker’s relationship and ultimately aims to take it over. But if the existing lender offers the most suitable option for the client, they should stay put, but only after being advised by the broker. The broker should in turn be rewarded for the work.
Of course, in a competitive market like ours there will probably be better deals available in the wider market compared with the existing lender’s retention product.
Ultimately, retention deals rarely offer clients the ideal product, which means that retention fees are a tactic lenders employ to generate profit.
And if a broker returns to the same lender for a client’s deal rather than source it in the wider market, they run the risk of clients thinking they might as well go direct to the lender and cut the broker out of the loop altogether.
We are not that far along in the evolution of retention strategies to have seen this happening yet, but human beings are creatures of habit, after all.
The third scenario, where the relationship belongs to no-one, is lazy thinking. You don’t deny that your partner belongs to you, do you? Equally, you cannot deny that someone owns the business relationship – and this someone, in my opinion, is the broker.
Why else would 80% of today’s mortgage business be introduced by brokers? Quite simply, it means that customers have already made their decision about who they belong to.
Lenders must treat clients and brokers fairly
Danny Lovey is a sole broker at The Mortgage Practitioner
The argument about client ownership and retention continues but only a few lenders seem to have got the message, which is simple. Brokers are lenders’ non-salaried sales staff and provide a substantial part of their mortgage books. They source clients, offer recommendations and ensure they are compliant. Most want to work with lenders to enhance the market and improve its public image.
We all need to make money so lenders and brokers need each other, but at times lenders forget this. For example, lenders will not give out any information about brokers’ clients even when brokers have introduced them. It is easy for them to hide behind data protection excuses but I think the real reason goes deeper than that. Once lenders have taken on brokers’ clients they don’t want them to have any control or information about them – in their eyes, the clients belong to them.
Unsurprisingly, this causes frequent arguments, yet some lenders have become more enlightened and talk about cooperation rather than confrontation with brokers. Accord Mortgages is a case in point and is finalising its scheme to provide early warnings to brokers who wish to know if one of their clients is getting into arrears. It offers them good access to information when clients’ current deals are running out. It also offers competitive retention rates and pays brokers fees if borrowers stay with it.
Halifax has also been a revelation over the past year with its retention scheme and provision of easy access to clients’ and even potential clients’ mortgage details. I hope it continues to do this, if only to show other lenders that working with brokers pays dividends.
Some lenders appal me when they treat clients as though they’re in an auction. Like many brokers over the years, I’ve had current and potential clients asking for their existing lenders’ best offers and then come to me to see if I can source something better. But when you find better deals, the lenders then offer better terms.
I’ve even known cases where a client’s remortgage is almost complete, only for the existing lender to try and persuade them to stay by offering them an exclusive deal. If the client accepts the offer the broker loses out. When will the dinosaur lenders in the market get the message and treat both customers and brokers fairly?