Whether it\'s Michael Bolton airing his views on packagers or lenders responding to claims about unreasonable exit fees, the mortgage industry prides itself on being a dynamic community that enjoys a healthy debate about the future of the housing market.
A number of issues have had their time in the spotlight since Mortgage Day, in particular the length of Key Facts Illustrations and the Financial Services Authority’s Treating Customers Fairly initiative.
But one of the most eagerly awaited clashes has not taken centre stage until now. It involves the question of who owns the customer, and the combatants are in training.
In the red corner are brokers who say they are the owners because lenders would not have customers unless they introduced them. And in the blue corner are lenders that say brokers would not have any products to sell to clients without them. They argue that a mortgage sits on a lender’s balance sheet and that it is the lender that takes the risk for that mortgage.
Also wanting to step into the ring are those that say nobody owns customers. They claim customers are free to do what they want – whether this is to go direct to a lender or go through an intermediary.
It’s a hotly contested issue and one that has prompted calls for regulatory intervention. Brokers insist there is no reason why lenders should withhold information about borrowers from brokers – after all intermediaries give them the data in the first place. And they accuse lenders that withhold client information of hiding behind smokescreens such as the Data Protection Act and TCF.
Kevin Paterson, national sales director at Park Row Associates, says that under no circumstances can a lender consider a client introduced by a broker as theirs. He argues the customer must belong 100% to the introducing broker.
“Brokers introduce clients to lenders and brokers are responsible for the advice,” he says.
Ownership of the customer is an important issue because a customer is an asset that produces revenue for any business in terms of sales. The distributor – in this case the intermediary – and the product provider or lender face a conflict of interest if they don’t agree on who has ultimate ownership.
Unfortunately for brokers, product providers can also distribute their products whereas distributors can only distribute them.
And some product providers may look to cross-sell products to clients, even, it has been suggested, when a no cross-sell agreement is in place.
One solution would be for lenders to ring fence introduced clients to keep them separate from their normal marketing activities.
“Lenders should avoid cross-selling if they value their relationship with brokers,” says Paterson. “TCF is a convenient smokescreen that lenders use to gain marketing access to our clients and it should stop.
“I am not na enough to believe that a lender will not make contact with my client on the expiry of their deal. If I am doing my job properly I should already have dealt with that problem. But undercutting, dual pricing and consistent marketing of other financial products is open abuse.”
Brokers fear lenders are deliberately withholding client information in an attempt to cut them out of the loop. But brokers are fighting back, saying they will be in a powerful position if enough brokers call for no cross-selling agreements.
“Lenders that are serious about operating in the intermediary sector will comply or at least they will start a dialogue with us,” adds Paterson. “Those that dismiss it out of hand as jointly owned are massively arrogant. With more than 60% of mortgage lending coming via brokers, lenders must wake up to the fact that they should work with us, not against us.”
Thomas Reeh, chief executive of blackandwhite.co.uk, agrees, saying if a broker puts a client on a two-year deal, the lender should let the broker and customer know that the deal is coming to an end.
“But the reality is that the lender does little to inform anyone because it is hoping the customer will go onto its standard variable rate – as 60% of the market is,” he says. “Lenders factor in the inertia of customers and that’s where they make their money. They want to play their cards close to their chests because they don’t want customers to move.”
This is an issue that is particularly evident in the sub-prime market where there can be a conflict between credit cleansing a borrower and lender securitising their books because of their run-off rates.
BM Solutions has responded to this by offering brokers renewal commissions if they successfully credit cleanse customers. Brokers approve of the move and have called for other lenders to follow suit.
Matthew Grayson, public relations manager at BM Solutions, says proc fees for product transfers make sense for brokers, customers and lenders.
“Brokers are rewarded for giving best advice and everyone involved has a viable option when it comes to remortgaging,” he says.
“For a balance sheet lender, there’s always the drive to retain customers over the longer term. It will be interesting to see if securitisers adopt the same approach and pay proc fees for product transfers.”
Regarding the main question of who owns customers, one suggestion is that nobody does as they are free to choose where to go for their mortgages. Jeff Knight, head of marketing at GMAC RFC, believes this is the case.
“Everyone has a choice and this is not a black and white issue,” he says,
Knight says a lender’s responsibility lies in product design – for example, not offering products with onerous overpayment charges to help provide clients with greater flexibility.
“Intermediaries have relationships with a customers that we, as lenders, do not. We are not the ones giving advice,” he says.
“We’ll do everything to ensure we lend responsibly and do credit checks but it is the intermediary that has the relationship with the client and we’re not going to tread on their toes.”
Regarding the credit rehabilitation of borrowers, Knight says it is impossible for lenders to know when that is going to happen as they don’t have the information.
“It would be easy for a client to switch from a sub-prime product to a mainstream one if they are offered it by a lender,” he says. “But there’s no guarantee that the prime product is best advice so it’s always important the broker revisits their client’s circumstances to make sure they have the most suitable product.”
He adds that while lenders do everything possible to ensure they lend res-ponsibly – such as doing credit checks – it is brokers who have the direct relationship with clients.
But Carl Wright, managing director of Cartel, describes this argument as a red herring, saying it is a na way of approaching the issue.
“A distributor or intermediary pays a lot of money in marketing and working with – and ultimately selling to – consumers,” he says. “For a provider whose product has been sold to then suggest that they are either part or sole owners of these clients is an infringement of the product provider and distributor relationship.”
He goes on to suggest that lenders that don’t agree with this should find their own clients.
“If they want to be distributors, let them set up their own distribution networks and distribute their products through those,” he adds. “But they must make their minds up – they are either providers or distributors in the mortgage marketplace.”
Lenders are being warned against trying to compete with the distributors they depend on for the provision of their products to the public.
“There is only one thing that matters – a distributor will ultimately have the final say in what products are sold,” says Wright.
“Product providers can jump up and down all they like and talk until they are blue in the face but if a distributor doesn’t like what it hears it can sell a competitor’s products instead.”
Wright’s solution is for distributors to be tied to product providers – a trend that was last seen in the 1980s. He suggests the market is heading towards product provision and distribution being linked once more.
Indeed, most markets are cyclical. The market was tied in the 1980s and was independent in the 1990s. Wright believes that now we are halfway through this decade it is reverting to being tied.
“Some people think consumers buy products, but I don’t think they do,” he says. “They buy into who they deal with, who they trust and who they have the best relationship with. The product has to be competitive but it’s also down to the service consumers get from advisers.”
He draws an analogy between lenders and BMW dealers.
“A customer does not go to a BMW dealer for an independent view. They go into a BMW dealer for a BMW,” he says.
“If the BMW is more expensive than the Ford on sale down the road, they don’t complain about it because a BMW is what they asked for.”
Wright predicts that within five years, less than 15% of the market will be independent.
Working out who owns the customer is complex, but perhaps equally challenging is working out who should have the final say. Many pundits are calling on the FSA to help clarify the issue while others believe trade bodies such as the Association of Mortgage Intermediaries and the Council of Mortgage Lenders are better placed to publish guidelines.
Paterson calls for a mutual agreement to be reached and for this to be driven by AMI working with the CML.
“It’s not a regulatory issue, it’s a commercial one,” he says. “We need to make sure clients are not disadvantaged in any way.”
He even throws down a challenge to lenders saying that if they were happy to absolve brokers of any responsibility at the point of completion, that might provide the basis to drive forward the debate about client ownership.
“But if clients complain in future about a mortgage they have been given, it comes back to the broker,” he says.
The FSA says its rules place certain duties and responsibilities on lenders and intermediaries when it comes to their relationship with customers. These duties cover areas such as advice when the sale is on an advice basis, and financial promotions.
It says there will be differences between borrowers using intermediaries to obtain loans and customers going direct to lenders.
“In no branch of economics do customers belong to suppliers because customers have feet which they can use to move on,” says Robin Gordon-Walker, spokesman for the FSA.
But Chris Cummings, director- general of AMI, disagrees.
“Morally, it’s the intermediary’s client first,” he says. “The intermediary finds the client and chooses which lender to place the client with. So it’s the intermediary’s client before the lender is involved.
“But I’m not saying the client is solely the intermediary’s for all time because if the broker doesn’t manage the customer, then the customer has the right to vote with their feet,” he adds.
What AMI refuses to accept is lenders that try to cut brokers out of the equation or ride roughshod over intermediaries’ attempts to manage their clients.
Until lenders and brokers can work out an agreement or there is official clarification on who owns customers, the problem will not be resolved. But dialogue taking place now brings the possibility of a resolution that much closer.
Letters from clients could improve brokers’ access to information
Rob Griffiths is associate director at the Association of Mortgage Intermediaries The Association of Mortgage Intermediaries recently unveiled wording to be included in a letter and signed by a client that should allow members to access information from a lender on a client’s mortgage after completion.
Our members have long had problems obtaining information on clients’ mortgages from lenders following completion. Lenders have often cited the Data Protection Act as restricting them from supplying clients’ personal data.
In research conducted by AMI, 87% of intermediaries said they had experienced problems obtaining information from lenders. Examples of these difficulties include trying to get:
Payment information (for example, the amount of the first payment or the date the first payment is due).
Redemption figures or mortgage balance.
Confirmation of the repayment method.
Information to respond to complaints.
Information on follow-on special schemes/interest rates after the end of special rate period.
Additional loan requests/further advance information.
Mid-term queries and problems faced by clients.
Some 97% of intermediaries told AMI they would support wording which could be signed by their client to give the lender authority to supply them with information about the client’s mortgage after completion.
AMI sought legal advice on this matter and this concluded that provided an intermediary has the appropriate authority from their client they are entitled to ask for information on their client’s mortgage. AMI also consulted the Information Commissioner, the independent public body that regulates and enforces the Data Protection Act. Guidance from the Information Commissioner highlighted certain issues. It felt:
Intermediaries should only seek access to information about their clients when and to the extent that it is necessary.
Authorisation should be restricted so as to only allow intermediaries access to the information they reasonably require to fulfil their obligations in relation to the client unless the client is happy to allow unrestricted access.
The client must be given a choice as to the level of access they grant their broker.
The length of the agreement should be defined and the agreement should clearly state how long it will last. This should be agreed between the broker and the client.
If it has received no client authorisation, the decision whether or not to disclose information rests with the lender. AMI is therefore advising its members to produce a letter including the recommended wording which their clients can sign. This can be sent to the lender to confirm the client is happy for the broker to be provided with information on their behalf, and confirm what level of access they grant.
Brokers are often frustrated in their quest to access information about their clients’ mortgages. The wording we have made available not only provides them with the necessary client permission to continue dealing with their mortgage affairs but also satisfies the Data Protection Act.
It’s hard to imagine any lender refusing to divulge the information a broker needs when their client has requested it and the instruction meets data protection requirements. AMI urges members to redraft any authorisation given by clients to include consent for the lender to provide information after their mortgages have completed.
Lenders and brokers should work together
Joe Rabbitt is head of intermediary development at Nationwide The broker channel is important to lenders. Even though we have a large branch network, more than 60% of our business comes through intermediaries.
Borrowers are increasingly recognising the value of intermediaries in helping them choose the right mortgage deals for their circumstances from the myriad of products available. So it is not surprising that the debate about who owns the customer has escalated recently.
In the past, Nationwide has been criticised for its retention strategy and accused of not recognising the value that brokers add to our business. We appreciate that without an intermediary’s advice, the customer would not have chosen Nationwide in the first place. But once the mortgage is up and running the relationship between the lender and the customer naturally builds. It is the lender that typically deals with everyday issues such as the administration of the account and more sensitive, personal issues.
But lenders must also recognise that brokers regularly meet their clients and review their needs. It’s also true that this activity is likely to expand under the regulator’s Treating Customers Fairly requirements.
Nationwide is keen to show that it values the role played by intermediaries by developing partnerships that allow brokers to offer our products with confidence.
But this is not enough on its own – intermediaries also need to know that they are valued, and in an increasingly competitive environment that means recognising that the relationship between the intermediary and the client is of central importance.
Halifax has decided to offer retention fees to brokers but it is interesting to note that as part of its strategy it has indicated it will still speak to clients directly within six weeks of maturity of deals. It clearly thinks of the lender and broker relationship as a partnership.
We are keen to offer the framework for intermediaries to continue to offer our products once customers have come to the end of their deals. We have yet to make a decision about our retention fee strategy, but with a strong retail proposition we believe that at some point lenders should be allowed to contact customers directly to ensure that they are aware of the product range available, especially if a reasonable period of time has elapsed in which their brokers could have contacted them.
It is in everyone’s best interests for customers to belong to both lenders and brokers. The relationship must be on a joint basis to be effective. After all, in a world where it is becoming easier for borrowers to shop around and make informed decisions about the mortgage deals that are right for them, does anybody really own customers any more?
It’s becoming apparent is that consumers can and will vote with their feet much more these days, and if they are unhappy with their lender or broker they will quickly head elsewhere.
Brokers are primary custodians of customers
Bob Sturges is director of communications at Money Partners Customers are valuable. Once obtained, often at considerable cost, organisations are understandably keen to retain them. Mortgage brokers rely on customers as the raw material that feeds their businesses. Without them, they cannot function so keeping their loyalty beyond the completion of transactions is important. But those transactions will necessarily involve another party – a lender.
At one end of the broker and lender relationship the two parties cooperate to ensure the customer receives the product they need with minimal fuss. For the lender this includes a requirement to adequately service the needs of the broker, who is also their customer. Failure to do this causes a breakdown in the relationship and a consequent loss of business for the lender.
But at the other end of the relationship there is potential for disagreement over the ownership of the customer. Both broker and lender have a claim as both have provided a service and, in the lender’s case, a product. But in the world of intermediary relationships, life is not that simple. Brokers argue with much justification that it is their expertise that sources the customer who is introduced to a lender to match a need with a product. Beyond this, the broker feels free to nurture the client relationship to ensure their mortgage and related requirements are catered for. For their part, lenders feel an equal right to work directly with the customer. Herein lie the seeds of dispute.
Mainstream lenders and some corporate specialist players have at least two things in common. First, their mortgage assets are retained on the balance sheet and need constant replenishing. Second, their multi-product offerings require them to retain customers to sell them as many of their products as possible. In this regard, they are aware that the average UK customer has just over one financial product per provider compared with nearly seven in the US and five in Europe. The potential for growth is enormous, as is the temptation to cut intermediaries out of the process.
By contrast, smaller specialist lenders tend to securitise and offer only mortgages, secured loans and, indirectly, insurance. Their business models are also more likely to be structured around the expectation of early redemptions. Customer retention therefore becomes less important than new business. They understand this is best fulfilled via brokers and are disinclined to jeopardise this relationship.
The question of customer ownership has been brought sharply into focus by two issues – retention commissions and broker access to lenders’ borrower data. These issues reveal the strength of feeling surrounding the issue and are bound to create further debate.
I believe the broker is the primary custodian of the customer. My company subscribes to supporting brokers’ efforts to maintain long-term relationships with their clients. We believe this works in the best interests of our own distribution model while meeting the requirements of best advice and Treating Customers Fairly.