I read with great interest a recent poll that suggested 93 per cent of mortgage intermediaries felt they should be paid commission by lenders for their work retaining rather than remortgaging borrowers. It seemed only 7 per cent disagreed. These straightforward statistics shed some light on a huge issue – and one which will only grow as the impacts of regulation, and VAT, make themselves felt.
Let’s be honest. The two sides of the industry have never really seen eye-to-eye on the subject of retention. Historically, it has been one of those issues that has been the ‘elephant in the room’ of any discussion of strategic business relationship between lenders and intermediaries. There are natural tensions that need to be recognised before constructive solutions can be put in place.
Margin’s too tight
Let’s examine why some of those tensions exist. First and foremost, many lenders state there is now no money to be made in mainstream mortgage business – the margins are too tight. In fact, they state that money is lost on standard mortgage business in its first years and that its only when borrowers stay on that they make a margin. In many ways, this has led to the growth in niche and specialist parts of the market. We all believe lenders margins have shrunk but that is the way of the world as any insurance provider will testify. Are most mortgage products loss-making? Well, as Shakespeare stated, “Brutus is an honourable man”, and lenders will have to report their financial performance to their Boards.
So the temptation is to cling on to borrowers and make remortgaging as difficult as possible. We have seen exit fees and the like increase significantly since ‘Mortgage Day’. Another route has been to try to exclude mortgage intermediaries from advising their clients on their remortgaging options. This is less than helpful as, after all, they were the clients of the intermediary first and it was the intermediary who selected the lender.
Regulatory position
I wonder just how many lenders consider the regulatory position of the intermediary in remortgage issues? First and foremost, we are the agents of our clients. It is our legal, ethical, and regulatory duty to obtain the most suitable mortgage products for their needs. Further than that, when any special deal is coming to an end, we have that ongoing regulatory responsibility to do the right thing by our clients. Indeed, I have heard it argued that failing to search the market for the next most suitable offer would be to risk FSA and Ombudsman censure – not a happy position when some lenders refuse to share any information on our joint clients.
To put it in stronger terms, I heard a particular lender say that no mortgage intermediary could ever do their job fully as most lenders will refuse to provide advisers with full details of retention products. What a missed opportunity for our sector to work together for the benefit of its consumers.
Future proof
In addition to the immediate needs of mortgage intermediaries to meet the regulator’s requirements, there is also the need for them to ‘future proof’ their businesses. Let me explain what I mean. Let us say that an intermediary selects what looks like an ideal product for their client with lender X, but fails to take into account that particular lender’s attitude to existing borrowers at the end of any special offer term; what is the longer term position of the intermediary? For example, a good two-year fixed rate, where the borrower’s only choice is to move onto a standard variable rate – or retention products that are uncompetitive with high fees attached. The argument may be that no intermediary can second-guess a lender’s retention plans and that even a lender with currently good retention deals can change their offers later.
I am sympathetic to this argument as the mortgage market is fluid and new competitors rise and fall. But the essential fact remains that in making a recommendation, a good intermediary will at least consider the lender’s approach at the end of any special offer being recommended. Not to do so is to invite Ombudsman complaints. It’s the simple, harsh truth.
My next article will consider the ways in which lenders and intermediaries can work together for the common good of borrowers – and stay compliant. My hope is to show that the world has moved on and that, with the pressures of regulation, mortgage intermediaries must look after their own interest and their clients – because in the regulator’s view they directly coincide.
