HSBC is a global banking giant with a major presence in every area of UK retail banking, from credit cards to personal loans.
But with a low market share of around 2% to 3% during the boom times it seemed like it was missing a trick on mortgages.
While banks such as HBOS and Northern Rock reaped the profits of the mortgage upsurge, HSBC kept a low profile that is until 2007 when it sensed an opportunity in the beginnings of the financial crash to make inroads into the market.
Since then its share has grown and currently stands at 11% in the second half of 2011. In the first half of the year it revealed it was the only bank of the top eight to increase its lending by a whopping 35%.
Frustratingly for brokers it has done it all with direct-only distribution through its branches, telephone and online. But Martijn Van der Heijden, head of lending at HSBC, says the lender has no principle objections to brokers.
“I’m happy there is more than one business model in the market,” he says. “We have a large footprint, including 1,300 branches, a large call centre estate and a growing online channel. We don’t need to use intermediaries to get a larger reach or scale. We can get the volume we want to lend from our own channels.
“Being direct-only also has two upsides we don’t have to pay proc fees and we get better retention and deeper relationships.”
Clearly, developing relationships with customers on its own is the key reason behind HSBC’s choice to avoid brokers.
“If you source customers yourself you have the right to talk to them, whereas if you are introduced it is harder to get a conversation going with them,” says Van der Heijden.
“Looking at the churn figures in the industry, we are performing better at keeping our customers for longer and, even as we have grown, we haven’t seen that change. We are getting loyal customers and the kind of lending that fits our risk appetite and ambition.”
He admits the bank could lend more if it used brokers and it faces challenges if it wants to attract more customers. “We have to shout louder to get ourselves known,” he says. “The shift towards more telephone and online sales has helped us. We have seen some channel shift to these areas even though our branch channel is firing on all cylinders.
“We are pleased with the quality we are seeing but it’s good to see a healthy broker market too.”
Van der Heijden accepts that to complete lots of lending business in a short space of time needs brokers but HSBC is more stable because it is primarily retail funded.
It would not consider using brokers for a short spell and would only offer its deals via intermediaries as part of a major strategic change.
“If we were going to do broker sales, we’d have to do it well and set up a separate arm,” he says. “We’d have to hire people who know how it works, build good relationships, get our sampling right because not every broker is the same, and convince the FSA that it’s all working.”
It has run pilots with brokers in the past with limited panels at First Direct and says it may do so again in the next few years.
“It is our biggest strategic decision in the UK so you want to validate it from time to time to check it’s working,” he says. “Maybe three years from now we’ll run another pilot to see if there is anything we’re missing but so far we are getting deeper customer relations, good credit quality and the right volume.”
In 2009 HSBC felt it wasn’t able or willing to offer more niche products such as near-prime or self-cert. But it didn’t want to lose customers who wanted such products so it formed a partnership with John Charcol in March that year.
John Charcol’s brokers worked in HSBC branches to offer all lenders’ products, including HSBC’s, for which they received a proc fee. “We basically acted as a broker where we sold our own products but also other lenders products too,” says Van der Heijden. “First, we always want to learn how brokers operate and become more customer-friendly and, second, we wanted to see if we could scale the business up in this way.
“The first success was that we learnt how to make our customer experience better. We applied these lessons and have now made those changes to our own channels. But we felt that in the current market our distribution was better so we didn’t continue with it.”
But the market slowly changed and by the end of the year few lenders were operating outside the prime sector and HSBC’s products were topping the best buy tables.
It was effectively paying brokers to advise on its own products so the partnership was ended in December 2009.
The Dutch national joined the bank as head of mortgages in 2007 having worked at HBOS in retail banking and spent time designing products at Santander.
Late last year Van der Heijden was promoted to head of lending with responsibility for mortgages, personal loans, overdrafts and credit cards.
He is proud to have spearheaded the bank’s growth into a significant mortgage lender, saying it was small prior to 2007 considering the size of its current accounts, branch footprint and global ambition
“In 2007 we had a strong balance sheet and strong capital provision which most banks didn’t have,” he says. “We felt we could do more mortgage business and since then we’ve be running at levels above 10% of market share whereas previously it was more like around 2% or 3%.”
But its gross lending slipped from £14bn in 2009 to £11.3bn in 2010 while its market share dipped below 10%. Yet it says this is not a test of its ambition but was due to a poor Q4 2009 that lagged into early 2010 whereas its sales throughout 2010 remained stable.
The rogue quarter is put down to a combination of factors, such as the snowy weather and people not coming to branches, which it says skewed the figures.
“It wasn’t a sign we didn’t want to do more as we’re an ambitious mortgage lender,” says Van der Heijden. “We haven’t had to change much in our policies after the crisis. We have always checked borrowers’ income and affordability on a stress test basis. It meant we could just continue with our policies and we haven’t seen much change in our approval rates.
“What has changed is that we are doing bigger campaigns and more press activity because we want to be known. We feel we have to shout a bit louder since we’re a direct-only lender. It was hard to do that but we feel we are now established as a good alternative.”
In terms of HSBC’s ambition Van der Heijden says there is not much change between 2011 and 2012.
“I don’t know the aims of any other lenders but I suspect it has lots to do with our asset-deposit ratio,” he says. “We have 85% and others have far in excess of 100%. “We are proud to be an old-fashioned bank and proud to get our deposits in before we lend them out. It hasn’t changed and we can continue to lend.”
Van der Heijden says the majority of HSBC’s funding comes from retail deposits and has never relied on the wholesale markets.
“We do some mortgage-backed securities that tend to stay on our own books and we do some covered bonds but nothing major,” he adds. “We use a little for mix of funding but the majority is nice, sticky retail deposits. We’ve been doing it for 100 years and it works.”
He points out that some bigger banks are under pressure from government and regulators to reduce their balance sheets.
Meanwhile HSBC has been able to develop its notoriously impressive rates and focus on first-time buyers.
Across its First Direct and HSBC brands, the bank estimates 28% of its mortgages are for first-time buyers. While it is unsure whether it is the largest first-time buyer lender in the market, it is certainly the largest in direct sales.
But it has no plans to introduce a 95% LTV deal its highest LTV remains at 90%.
“I’m not religiously against 95% LTV and we do have a number of plans for innovation but I don’t think our credit criteria or LTVs is the first place to act,” says Van der Heijden. “We can give people security in uncertain economic times such as a cap on the base rate going up. These are areas we will look at first.
“I have no doubt that 95% LTVs will come back. I don’t think there is going to be a massive return to 100% LTV mortgages that wouldn’t be a good idea.”
While 100% LTV mortgages may be wrong for first-time buyers, Van der Heijden praises lenders offering help with negative equity problems or small building societies offering family mortgages.
HSBC’s product innovation has taken the form of cap and tracker deals to put a limit on the rate borrowers can pay.
“At First Direct we have a cap and tracker that gives borrowers the benefit of low base rates with the security it will never rise above 3.99%,” he says. “It’s going well and we’re giving borrowers lots of flexibility in terms of fees and whether they want an offset.
“Lots of our innovation centres on making it easier to get a mortgage in terms of process. We have new online tools that make it easier to compare mortgages because we have a large amount of mortgages to choose from.”
“Similarly, consumers can apply online and if they are already a mortgage customer they can switch to a new rate in 10 minutes,” he adds.
“Taking out a mortgage is a big decision so we don’t want the process to get in the way of talking about the financials and we can focus on human interaction.”
Van der Heijden also believes it has been doing more remortgage business than other banks and making inroads into that area.
“The remortgage market has shrunk enormously but from last September we have been offering eye-catching and innovative deals to get people to remortgage,” he says. “We think we have grown the remortgage market and taken a good share of it.
“In the past month there have been more lenders active in the pricing game but if you want growth you need a sustained presence and consistency of offers. With the HSBC brand we often lead on our tracker range with low or zero fees and this has worked well in the first half of 2011.”
Leading the CML
Van der Heijden was appointed chairman of the Council of Mortgage Lenders’ early last month after Colin Walsh, former head of mortgages at Lloyds Banking Group, quit.
Having been deputy chairman of the CML for two and a half years he was a natural choice for the chairman’s role. At a time of unprecedented change at the organisation, the CML has had both a new chairman and a new director-general in the space of a fortnight.
“I’m proud to become chairman of such a good organisation and am looking forward to it,” he says. “My first priority is making sure Paul Smee, recently appointed director-general, gets off to a great start as he is the first new director-general in 17 years.”
His other priority is to ensure all regulation from the Mortgage Market Review to the Independent Commission on Banking comes to a satisfactory conclusion in the next six months. Van der Heijden says the MMR, European credit directive and Independent Commission on Banking means every rule will change in the next few months, and that coping with the changes and influencing the debate are huge challenges for the industry.
“There is going to be change and we’re comfortable with it,” he says. “It’s perfectly within the politicians’ and regulators’ rights to change the rules all we can do is show them the consequences and be as helpful as possible. It’s good to see there has been a little bit of traction on the MMR and it is to be implemented later on the basis of a good cost benefit analysis.
“What we are trying to show regulators is how all these rule changes add up to affect areas such as near-prime borrowers and new home owners trying to access the market. If we are going to invest in making things better, then we must make sure it does improve rather than turn retrograde,” he adds.
He believes that when regulators are changing so many things at the same time it is difficult to see the cumulative impact. In terms of Europe the key is ensuring national and European regulations don’t clash.
“We are happy to play by the rules but it needs to be one set of rules and we want to make that process as smooth as possible,” he says.
Challenges of regulatory change
The changes set out in the European directive are vast and there are also many concerns for Van der Heijden in his HSBC role.
His number-one concern is rules governing advice, an area championed by the Association of Mortgage Intermediaries.
The directive suggests advised sales require several mortgage options to be offered to borrowers, even some from other lenders. This means lenders could be required to offer rivals’ products.
“I am most worried about advised and non-advised sales from Europe and the MMR,” says Van der Heijden. “In the MMR it is not clear what we are trying to achieve with non-advised changes. In the European directive there is a section which advocates what I would describe as advised-plus, stating that products from more than one lender must be shown, if you read it literally.
“There is no way you could do fewer than four products in a comparison and that worries me.”
He says the industry should define the meaning of advice and avoid having the mix of advised and advised-plus sales.
“On a non-advised basis we should be careful not to strangle the telephone and online channel which is just taking off as a source of competition,” he says.
“Players such as the Post Office, ING Direct and ourselves are creating more competition in the market than 20 years ago when it was dominated by big building societies. Lack of clarity about non-advised sales means the industry will be in a difficult position.
“If it’s what customers want, that’s great, but it could mean I get nervous about non-advised sales because I’m not sure it is enforceable later on,” he adds “My regulator may say advice was implied and we should have checked other products just in case, so I wouldn’t be comfortable with non-advised and I’d have to go all advised.”
The move towards advised sales would have drastic consequences and leave HSBC branches resembling a mini-brokerage. Such a scenario may leave many brokers with wry smiles but it is far from clear that such a move will be made.
Among the trade bodies AMI stands alone in its support for advised sales, with the CML, Intermediary Mortgage Lenders’ Association and British Bankers’ Association all opposed to them.
“Many of these problems can be solved by the quality of the final EU regulations so it is not a foregone conclusion that there will be a straight divide between advised and information-only,” he says. “I’m not against disclosure on whether sales are tied or multi-tied.”
The deluge of regulations could shake the mortgage industry in many different ways. Van der Heijden is set to be at the heart of the debate as CML chairman and will still be there when the dust starts to settle.
HSBC’s lending is growing, its market share is up and its products are super-competitive, but all this good news is frustrating for brokers since the bank and Van der Heijden show no sign of using them yet.
Martijn van der Heijden CV
1991-1997 MMSc Business Economics, Erasmus University, Rotterdam 2002-2003 MBA, Judge Business School, Cambridge
1998-2002 Consultant, Accenture
2004-2006 Various roles, HBOS 2006-2007 Head of mortgage development, Santander 2007-2010 Head of mortgages, HSBC 2010-present Head of lending, HSBC
Hobbies: Skiing, music
Favourite film: Monty Python’s Life Of Brian